The strong comeback in demand after the lifting of the lockdown, which is expected to continue into FY22, has led tyremaker Ceat to hike its capital expenditure (capex) for the coming fiscal year by 40 percent to Rs 700 crore.
The Mumbai-based company is running all its plants at full capacity, seven days a week, but is still falling short of supplies. Speaking to analysts, senior executives at Ceat stated that the capex for next year will take care of capacity expansion.
“We have done about Rs 250 crore of project capex in the first nine months and the balance of Rs 250 crore will be happening this quarter. Over the next couple of years we will continue with our capex plan of Rs 700 crore per annum. This will involve completion of our Chennai plant expansion,” said Anant Goenka, Managing Director, Ceat.
A maintenance capex of Rs 150 crore will be done over and above the Rs 700 crore lined up for FY22. In FY18 Ceat had announced a capex of Rs 3,500-4,000 crore till FY24. Company officials said that about Rs 2,300-Rs 2,400 crore of this have already been spent.
The escalation of capex for next year comes after the company cut capex for FY21 by 33 percent following the freefall in sales in the June quarter due to the lockdown. Several other auto ancillary and vehicle manufacturing companies are expected to follow suit and hike capex for FY22 as business is largely back on track.
Ceat reported 167 percent growth in its standalone net profit to Rs 128 crore for the quarter ended December 2020 as against Rs 48 crore in the same quarter of the previous year. The EBIDTA margin improved 430 basis points to 14.7 percent.
Demand comes roaring back
After going through various stages of the unlocking process prescribed by the government, pent up demand for tyres, especially from the replacement segment, has been robust.
“People have been wanting to go out on drives after the lockdown was lifted. Demand for goods pushed movement of trucks. All our plants have been operating at very high levels of utilisation throughout the quarter and inventory levels are uncomfortably low right now, below one month,” added Goenka.
During the December quarter, Ceat partnered with Nissan for the Magnite compact SUV and with Hyundai for the Elite i20 hatchback as the official tyre supplier. It also bagged a contract to supply tyres for the Royal Enfield Meteor.
“Our OE (vehicle makers) and export market grew by 15 percent while the replacement segment grew by over 35 percent. Overall volume growth was over 28 percent,” Goenka added.
Replacement segment demand makes up the bulk of the demand for Ceat, with a share of around 70 percent while the balance is made up of OE supplies and exports.
Be ready to shell out more
The ramp-up in production, though, has not evaded cost inflation. There has been a consistent rise in the cost of raw materials over the past few months and the trend is expected to continue into the June quarter.
Ceat carried out a price hike of around 3 percent in December and a further 3 percent hike is expected this quarter. The hike was brought into effect across categories except the two-wheeler segment.
“We had two price hikes in December to mitigate some of the cost pressure. Natural rubber prices have gone up to Rs 160/kg from Rs 130/kg. Crude oil has gone up from $42 to over $50/barrel and both these raw materials are key for us,” said Goenka.
“From Q3 to Q4 we can expect an average increase of around 10 percent on the entire raw material basket. March-exit raw material prices will be even higher so you can expect another price hike from us in Q1 of next year,” he added.
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