“Natural rubber has already hit around INR 200 rupees per kg, which is up from around 150, 160 three months back. So, we expect overall raw material basket to move up by about 5% to 5.5% by the end of quarter one, vis-a-vis end of quarter four,” says Arnab Banerjee, MD & CEO, Ceat.
Why do not we begin by setting up the context in terms of how the overall demand environment is, what kind of volumes and pickup are you expecting or seeing in the various segments, whether it is passenger, whether it is two-wheeler, truck, bus, etc.
In OEM segment two-wheeler is doing well. We expect two-wheeler to grow in close to double-digit kind of terms and still coming to the volume of pre-COVID days. So, it has gone down and coming up. Passenger had a large base. They grew very well last year and so it will be kind of expected to grow in middle single digit. And M&HCV, the commercial segment, has not done so well in the first half so far and during the first half of the year, it will come up better in the second half of the year to, again, middle single-digit level. In replacement market, both commercial and passenger should grow in strong single digits and the two-wheeler could go into double-digit range in terms of volume.
But I wanted to shift focus and talk about the raw material side of things as well, because we were just going through reports how the rubber prices, at least the natural rubber has shot up quite a bit. But I am sure there is an impact on your raw materials as well. And crude too has remained pretty much sideways. Overall, with the kind of raw material prices that are moving around, what is your expectation as to how margins will really move and even for raw materials?Natural rubber has already hit around INR 200 rupees per kg, which is up from around 150, 160 three months back. So, we expect overall raw material basket to move up by about 5% to 5.5% by the end of quarter one, vis-a-vis end of quarter four.
Fortunately, the crude-based derivatives will move in a range-bound manner, but still there is a 5% to 5.5% escalation in raw material cost and along with EPR which has also come in as an additional input cost we would need a total price change to around 4% odd in the market, out of which around 1.5-2% has already been effected at the beginning of the quarter and we would like to cover up the balance by the end of this quarter.
So, you are anticipating another price hike, let us say by the end of June. Is that what you are anticipating, 2% thereabouts?
We have not zeroed in on the exact percentage, but we foresee definitely a price hike very soon.
Does that mean that your margins will remain stable around the current level or despite taking some of those price hikes, there could be some pressure? Which way do you think the margins will head from here on?Quarter one is a strong marketing spend quarter for us because we advertise on the IPL, we are there on the World Cup as well, we have launched a new campaign for higher rim size premium tyres. So, there will be some pressure on the margin, but we will try to manage it in a narrow band across the quarter.
But, I understand and this is one of the tailwinds where a lot of analysts have been talking about that the entire tyre industry has gone through that capex cycle and now is the time when the returns will start showing in and perhaps in the next two to three years there is not a big capacity addition plan. Would you concur with the view and what about Ceat? Are you expecting a bit of an improvement on your ROCs, etc?
Based on existing capacities on the ground, we are good for about INR 15,000 crore turnover today and we will not have a capex cycle as such in the future. So, we have decided to go and invest every year, bite size capex, which is not a one project end to end which brings the capex cycle into play. So, we will keep investing in various parts of various projects every year. Last year, we had invested total capex of 860 odd crores.
This year, the plan is INR 1000 crores. So, it will go in a very steady way. Hence, we should look at a healthier ROC going forward.
It also depends on the margins, of course. We have hit many teens in terms of post-tax ROC and we are focused on maintaining a healthy ROC going forward.
A word on the exports as well, because you have set a tall target for yourself in terms of increasing the overall export contribution. Where will it come from? What are the various products that are seeing a bit of a traction?
We have been maintaining that we are focusing on the EU, the US, as well as the Latin America. These are the three focus markets. And the focus categories are passenger car radial, agri radial, and as well as truck-bus radials.
So, three into three, you can call it so. And we want to, yes, increase our saliency of international business from 19% to 25% in two to three years, which means doubling the turnover of international business in two to three years and this is margin accretive at an EBITDA level, so it should be positive in terms of altering the margin profile of the entire organisation.
