CEAT to fund Rs 4,000-crore capex through internal accruals

Mumbai-based tyre company CEAT will bank on its internal accruals to fund the new capacity addition program spread over the next three to four years.

With an estimated share of 30 percent in the two-wheeler space, CEAT is aiming for improvement in other segments such as passenger cars and specialty tyres. For this, it has outlined an investment plan of Rs 4,000 crore between this year and 2021.

This will be used to increase capacity by 50 percent by FY21. About Rs 1,500 crore will be spent this year itself, which will be much higher than the average of its previous few years' spending.

Speaking to Moneycontrol, Kumar Subbiah, chief financial officer, CEAT said: “We had indicated an investment of up to Rs 4,000 crore in a three-to-four year period. About 30 percent of that would be from our internal accruals. We would be looking at a ratio of around 2:1 (debt:internal accruals). But if we go by our past transactions, we go more by our internal accruals.”

“Last year, we did close to Rs 400 crore of capital expenditure and all of that we manage to do it from internal accruals. We were able to repay Rs 160 crore of debt leading to improvement in debt-equity ratio”, added Subbiah.

The RPG Group-controlled company has already made an investment of Rs 200 crore out the Rs 4,000 crore outlay as of March 2018. “Some more would come in this quarter and all of this will come from internal accruals”, added Subbiah.

The net debt on a consolidated basis of CEAT is around Rs 900 crore while that on a stand-alone basis is it little less than Rs 600 crore. The debt to equity ratio is 0.33 at the consolidated level while at the standalone level is 0.25.

With an average of Rs 1,000 crore capital expenditure per year, the company has accelerated its growth plans in the coming years. It did Rs 1,400 crore in capital expenditure between 2015-17. This was used to start Phase 2 expansion of Halol, Gujarat facility and for expanding Nagpur plant and also for work on specialty tyre capacity.

Passenger car radials are one of the key focus areas for the company. CEAT is investing about Rs 2,000 crore towards new capacity addition in this segment, which would lead to its capacity increasing from 500,000 tyres per month to 700,000 tyres per month.

New capacity is expected to be on board by 3QFY20 with full ramp-up by 3QFY21. CEAT aims to double its car radial market share to 16-22 percent over the next 3-5 years from the current level of 8-10 percent.

Market share data is based on management expectation and is not accurate since a few tyre companies have stopped reporting data to their apex lobby body the Automotive Tyre Manufacturers Association.

In the two-wheeler category, CEAT commands a share of 30 percent. It is targeting an investment of Rs 400 crore in two-wheeler tyre production spread over the next couple of years. This is hopes would push market share to 34 percent. CEAT’s overall capacity utilization in the two-wheeler tyres in 80-85 percent.

The two-wheeler tyre space has seen renewed interest from players recently. Taiwanese company Maxxis Tyres set up a new two-wheeler plant in Gujarat while JK Tyre and Industries strengthened its hold with the acquisition of the two and three wheeler tyre division of BK Birla Tyres. Apollo Tyres too entered the segment a few years ago.

The categories of Truck and Bus Radials (TBR) and Off The Road (OTR) tyres will witness a combined investment of Rs 1,500 crore (Rs 1000 crore for TBR and Rs 500 crore OTR) towards new capacity addition from CEAT.