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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good day, and welcome to the Ceat Q1 FY '23 Earnings Conference Call hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Jay Kale from Elara Securities Private Limited. Thank you, and over to you, sir.
Thank you, and good evening, everyone. On behalf of Elara Securities Limited, I welcome you to the Q1 FY '23 Results Conference Call of Ceat Limited. From the management side, we have Mr. Anant Goenka, Managing Director; and Mr. Kumar Subbiah, Chief Financial Officer of Ceat Limited.
I would now like to hand over the call to Mr. Anant for his opening remarks. Over to you, sir.
Thank you, Jay, and good afternoon, everyone. A very warm welcome to Ceat's Quarter 1 FY '23 Earnings Call. And thank you, everyone, for your interest in Ceat. I'm Anant Goenka, and we have our CFO, Kumar Subbiah, with us on the call. As usual, we will start with brief remarks from me and Kumar, post which we'll be happy to take questions and answers. For Q1 FY '23 on financial performance, the quarter saw strong demand in the auto segment as some of the supply constraints eased out.
As a result, we saw some strong demand uptick in the OEM segment. In the replacement segment, too, we saw some good demand uptick with some improvement in the macroeconomic situation. Replacement volumes for Ceat recovered largely led by passenger segments. Most of the surface mobility trends remained above pre-COVID levels in the quarter. Tractor demand saw strong growth versus last quarter, while truck and [ bus ] was flattish on a relatively higher base.
Overall, replacement volumes grew at about 8% quarter-on-quarter. OEM demand remained strong across segments and volume grew by about 16% on a quarter-on-quarter basis. Tractor segment here too saw the highest increase, a part of which was seasonal followed by last mile and passenger car segment. Export volumes were flattish because largely on a higher base. Our focus geographies of Europe and North America continued to show strong growth. Overall, our volumes grew at a healthy 7.5% on a quarter-on-quarter basis and more than 30% versus quarter 1 last year, which was a COVID-impacted quarter. Current demand environment remains positive with normalcy returning across most segments. Monsoon also has been satisfactory so far, which we hope will boost rural sentiments, which has been under a little bit of pressure. Inflation has, however, continued to hurt our bottom line.
Our raw material basket cost further increased by about 4% on a quarter-on-quarter basis, which was towards the higher end of our guidance, primarily led by crude derivatives and a little bit price increase of rubber as well. Crude has shown some signs of stability since the last few weeks.
However, we will see some inflation spilling over to quarter 2 as oil prices remained well over $110 per barrel throughout quarter 1. We expect a further increase of about 2% to 3% in our raw material basket in quarter 2. Due to inflation, lower effective price increases as well as some adverse market mix with higher OEM contribution, our gross margin contracted by about 1.6% over quarter 4 levels. We continue to maintain tight controls on our operating expenses.
Marketing costs went up a little bit because majority of IPL matches were held in the quarter and Ceat remained associated as a strategic timeout partner. We also got associated with the women's T20 challenge as the strategic timeout partner, which we signed in the last quarter 2. EBITDA margin for the quarter stood at about 5.9%, partially aided by higher volumes. We ended the quarter with a stand-alone PAT of about INR 2.5 crores versus INR 13 crore in quarter 4 of last year. On CapEx, we are monitoring our cash flow closely. Given uptick in volumes, we maintain our growth guidance -- growth CapEx guidance at about INR 750 crores for FY '23. Priority will be given to the more profitable OHT segment, some amount of de bottle necking that is under planned and profit improvement projects. Our OHT segment is ramping up as per plan. We are currently operating at about 67 tonnes per day, which will go up to 80 tonnes per day by October in our Ambernath plant, which makes primarily radials for highway tires. On the OEM business, our associations with OEMs continue to improve. We have started supplying to the Ola EV scooter. We also had our first EV launch in the SUV category with Tata Ace. We are working closely with all major EV OEMs and expect to benefit from higher volume growth in the segment, especially 2-wheeler EV due to our early mover advantage. Our operations in Sri Lanka showed commendable resilience during the quarter amidst a highly challenging environment. Volumes have declined as expected. However, our factory continues to operate profitably. We got some notable recognition during the quarter. Maruti awarded Ceat for overall performance as tire supplier in the last year. We were ranked 27th by -- Great Place to Work in India for the last year, which is an improvement of 3 places from 30th rank last year. We also got the Jamnalal Bajaj Award for fair business practices for the year in the manufacturing category.
We launched a new passenger platform for Europe called Winter-drive Sport, which is specifically designed to deliver high speed and control in snow conditions. We now have a complete range of winter tires in Ceat. We also commissioned 70 megawatts of solar capacity at [indiscernible], Ambernath, and Nagpur plants. Four of our plants have got enabled for biofuel for boiler operation, and we are implementing this initiative at other plants as well. This substantially increases our commitment towards sustainability and a large share of our power is now coming in from renewable sources. The automotive sector is showing green shoots of recovery after a few challenging years due to multiple headwinds on demand as well as the supply side. On the raw material side, also, we are seeing stabilization of raw material prices over the next few months, along with price hikes in Q2 and some reduction in raw material prices that we expect in quarter 3, we feel this may be the end of the worst in terms of margins for the tire industry.
With this, I will hand over the call to Kumar.
Thank you, Anant. Good afternoon, ladies and gentlemen, and thank you for joining us in our quarter one FY '23 earnings call. I'll share some further financial data points with you all, post which we can enter a Q&A session. First, on revenue, our consolidated revenue for the quarter stood at INR 2,818 crores, a sequential growth of 9% and 48% year-on-year and the growth -- the mix of both volume and price in both cases. Quarter one of last year was also impacted by COVID Wave 2, and hence, the numbers are not fully comparable.
Now coming to gross margin and the pricing hike. The momentum in the raw material inflation continued in quarter 1, impacting our gross margins, which stood at 31.7%. And -- our blended raw material costs went up by around 4% versus quarter 4 of previous year. We could take a blended price increase of about 2% during the course of the quarter and the price increases were largely affected in commercial and passenger categories -- passenger car categories. There were some price increases in exports and OEM as well, neutralizing the impact of raw material costs in those categories. However, the increases were not sufficient to cover our inflation so our gross margin decline quarter-on-quarter. The quarter saw crude oil prices largely hovering around $110 to $120 and mostly on the higher end of the range, impacting the prices of crude derivatives -- the natural rubber prices has remained range bound both in the international as well as in the local market. There has been some correction in crude oil prices in the last 2 weeks. It's currently going around $130 per barrel. And the impact of that could be more great on next quarter as there is always a lag of about 2 to 3 months in terms of raw material prices, reflecting the movement in feedstock prices. The rupee depreciation from around INR 76 to a Dollar to around INR 80 in the last 2 to 3 months, we'll have some adverse impact on raw material costs, but a favorable impact on export realization. As per our current estimate, we expect our blended raw material costs to go up in the range of 2% to 2.5% in quarter 2 versus quarter 1. We will still need to take more price increases in the coming quarter, and I hope for some correction and input prices. Now coming to debt, CapEx, and working capital, we continue to optimize on our working capital. Our working capital came down by about INR 130 crores during the quarter, and we incurred a total CapEx of about INR 250 crores, including the routine, which we largely funded through internal accruals, which is a combination of reduction in working capital and cash profit made during the quarter. Gross debt stood at [ INR 2,039 crores ], more or less a similar level as it was as of 31st March 2012. Our project CapEx outlook remains at INR 750 crores for the year.
In addition to that, we'll have a normal booking CapEx to the tune of about INR 200 crores. We are keeping a close watch on our debt levels, which are still within our internal thresholds. As regarded to operational expenses, we exercised strong controls during the quarter, yielding some benefits of scale. Other than higher marketing costs on account of IPL, increase in other costs were largely linked to higher level of activities. Despite this, our operating cost that is manpower as well as other expenses put together went up by about 7% versus the previous quarter, which was lower than our overall growth and revenue. Coming to EBITDA, our consolidated EBITDA stood at INR 171 crores with a margin of about 6.1%, a contraction of 145 basis points over previous quarter. Depreciation during the quarter was at similar levels. Our interest expenses declined marginally during the quarter due to lower average debt levels maintained throughout the quarter. We are closely watching the debt market situation. While we have managed the quarter 1 without any impact on account of increase in interest rates, however, we expect our interest rate to go progressively from quarter 2 based on the movement in interest rates. In the Annual General Meeting held on 28th of June, the shareholders approved a dividend of 25%, and the same has been since paid in July.
With this, we can now open the floor for Q&A. Thank you.
[Operator Instructions] Our first question is from the line of Ashutosh Tiwari from Equirus Securities.
So firstly, on this placement growth quarter-on-quarter, mentioned 8% growth is there. The truck was flat. That means that other segment would have grown in double-digits. So is it that across the board, there was a double-digits growth in 2 years in the passenger vehicle [ and all ]?
That's right. So we did see very strong growth in passenger car, particularly, and 2-wheeler also saw strong double-digit growth.
Okay. Secondly, if I look at exports growth in last year, there is strong growth in PCR as well for us Y-o-Y. I think in the PCR [indiscernible] expose -- you obviously, you mentioned. So what we are -- what happened over there -- what we have done in the last 2, 3 years? Why the exports go so strong in the PCR segment along with OTR? And secondly, part is that now we are seeing heat waves in Europe the demand for OTR [indiscernible] any views on that.
Okay. So the main thing on the export side that was -- 2 things happened. One is that there is antidumping duties that have been imposed on Chinese tires. And I think -- but more than that, it was our focus on exports because for Europe or U.S., you need to develop an entire range of tires to supply. You cannot just have whatever you make in India and try and sell that in Europe. So you need various platforms of tires, whether it is van tires or all-season or winter, summer, high-performance tires, and that takes some time and a fair amount of investment to grow. So we have been working on that for the last 5 years. Ceat is also a well-known brand in Europe, particularly Italy and Spain. So with that, [ Ceat ] Europe has been a focus area for us, and that has resulted in good growth primarily for us in the passenger segment. Similarly, OTR also, we have been developing tires. The OTR, of course, we have been selling in Europe for a long period of time. But again, with radial tires coming in and range completion makes us very attractive for distributors. And we've seen also overall good growth in the off-highway tire segment. So with that, we've seen good traction on the exports side. With respect to the heat wave, certainly, hotter condition results in good demand. I'd say difficult to say whether that will really have an additional effect because on the other side, there is also talk of recession [ in EU ]. We feel we are well positioned to grow in EU, but difficult to say what will have a larger impact in terms of recessionary impact that we are expecting as well as the heat wave. But we're optimistic about continued growth in the next, say, few quarters. We also announced our, radial tires for Europe in the last quarter. That also will grow over some time.
Sorry, I couldn't hear the last sentence.
Yes. We also launched truck radial tires for Europe, and that will grow over time as well.
So just lastly, one thing. Somebody [indiscernible] mentioned is that Chinese tires, apart from this duty have also suffered both of the higher credit cost increase in China to U.S. and other market freight rates versus India. Is that correct? Like if the freight rates come down, Chinese tire volumes [ are going to ] increase in these markets.
If -- sorry, if freight rates come down from China to these countries?
Yes. That in is probably higher than what we've seen from India to these markets. Kumar, would you like to share anything on this?
Generally, there has been some downward correction and price rate. But specific question, I'm not able to get -- maybe we'll come back to this question later.
Our next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services Limited.
My question is on [ add-on ] costs. So while we see some impact, which ended up 2% to 3%. But as commodity prices remain where they are today, do we expect gross margins to start improving from 3Q?
Yes, we believe so, that gross margins should start getting better from quarter 3. One is stabilization. And then, of course, there's been always a lag of price increase. So we do expect further price increases to come in, in quarter 2. And some amount we have already taken in the month of July, and we are looking at taking some more in August, and September. So we expect improvement in gross margins going forward.
So what kind of price increases were taking in July?
In the month of July, it varies across categories. I'd say about just about 1% or so in motorcycles, scooter couple of percentage points in CUV, over 10% price increase in 3-wheelers, about 2 to 3 percentage points on truck radials and last mile commercial vehicles, et cetera. So these are the approximate price increases taken in July and then further increase is expected in August -- end of the month, August onwards.
Okay. And after the August price increases, this should be largely covering the RM cost inflation that way?
Yes, I think we will surely cover what we are expecting in quarter 2 and some amount of quarter 1, 2 that we fell short of.
Okay. Okay. Got it. And second question pertains to the demand on the replacement side. So how has been the trend on the replacement market, you indicated strong double-digit growth in 2-wheeler [indiscernible] different on a Y-o-Y basis is what you are indicating on the tiles on Q-o-Q business?
Yes. So we're seeing good demand on both. So Y-o-Y, of course, growth has been at much higher levels because of quarter one of last year being kind -- I think it was wave 2 of COVID that was there -- so on that growth level at 30%, 40%. And therefore, that's not really fair to take as a base -- but -- and therefore, I'd say Q-o-Q is more relevant at this point of time. And even on a quarter-on-quarter basis, we are seeing good growth on the replacement side. I'm talking about double-digit in CUV, maybe 20% plus in CUV kind of categories, 15%-plus levels in 2-wheeler. And as I shared earlier, about a flattish truck bus kind of demand on my replacement side.
All right. And in the replacement, you are talking about [indiscernible] primarily or buyers which [ start ] declining or radial still growing or this is a signal for flattish?
Sorry, could you repeat?
So both buyers and radial both are flattish or...
Buyers it is showing a negative trend, whereas truck radial is positive.
Okay. Okay. Got it. And lastly, with respect to the question is for [indiscernible] on the debt side of that INR 2,150 crores of debt, how much of that should be fixed rate debt?
See, I'll broadly break this debt into long term and short term, but nothing is fixed here, except portion, which would be about INR 300 crores kind of a number, which is in the form of NCDs. Others get adjusted because, for example, long-term loan interest rates are linked to revision or subject to revision. So balance amount is all will vary. In general, we have tried to keep it as 6 months kind of a reset, 1-year kind of a reset. So other than that, all the others will undergo a change over a period of time.
Great, right, sir. Got it. And last thing on the IMR side, [ do you really ] have a depreciation, which you're talking of, on next basis it should be negative for us, right, because imports will be relatively higher than exports. Is that the right understanding?
Yes, you're right. understanding it.
Okay. And any number which you can share about how much is direct and direct book content in there in terms of linkages to improve international prices?
Raw material prices on import is linked to U.S. dollar, plus local [indiscernible] also sometimes benchmark our import parity prices. Okay. In terms of effect, I think 70% would be the net effect on our P&L.
Our next question is from the line of Nishit Jalan from Axis Capital.
Sir, my question is also on the RM cost side. Historically, what we have seen is some of the crude derivatives, whether it's synthetic rubber, or carbon black or a nylon [ can ] fabric, they tend to go up with a lag of up to 2 quarters also compared to crude prices. So how is the trend that you are seeing there? And when do you think -- do you think that by 2Q, it will peak out given $100 kind of a crude or we might see further increase over there because given the lag impact that we see? And do you have any -- are there any concerns around the availability of these raw materials because demand is going up? So are we seeing any concerns on the liquidity side? And how are you looking at the [indiscernible]? Kumar, would you like to?
Yes. Okay. See, as of now, direct impact on raw materials is direct with respect to carbon black, where CBF is the feedstock. Largely, the correlation between crude and CBF is almost 90%. So in the event that crude oil prices come down, it tends to come down because it's an output from the refinery. So therefore, it tends to move. But as you mentioned about other derivatives like synthetic rubber, which gets produced from butadiene or Mylan fabric where caprolactones an input, okay. There could be a lag, okay, about 3 to 6 months. Sometimes the demand-supply situation of those derivatives would also play a role. As crude started correcting more from the beginning of July, okay, we will keep observing the market -- and so we expect some correction in the prices of these derivatives in due course of time. It may not be in the same proportion in which the crude oil has corrected. With respect to your second question on whether there is any impact on account increase in the [ month ], we are not seeing any significant increase in demand of these commodities, okay. So therefore, from that point of view, any change in prices on account of demand is unlikely to be there on these products. That is our view. Okay.
Just one follow-up. So obviously, raw material has been a challenge, which has been impacting our margins quite significantly. So it might stabilize or the margins fall might stabilize. But when do you think -- do you think that there is enough pricing power for you guys to go back to the double-digit kind of a margin? And in the past, we had seen some time that when you were taking price increase, some of the other players are not following so and there were some lag and all sort of things. So are you starting to see a price increase from across the players, especially in the 2-wheeler or in the motorcycle segment? Do you think that price increases are happening at a rapid pace now? And do you think that there will be the possibility of we going back to double-digit kind of margin because the industry has enough title power on that front?
No, absolutely. I think we have to go up to double-digit margins. There is always a little bit of a lag that happens as we've seen and we will cover up for the lag going forward as raw material prices stabilizes. The raw mat prices continue to see the sharpness of increase going forward, which we're not seeing at this point of time. There can be continued pressure, but I think things should get better and we will move to double-digit margins going forward in the longer term. I think there is some announcements that we understand are made in the market for price increases. But we will certainly look at it from a raw material perspective. We benchmark different products with different players in the market in terms of our pricing strategy in addition to seeing how our costs are going up. So on a balance basis, we will take a call on some price increases. But certainly, we do expect price increases to happen, particularly on the passenger space in the next month, 1.5 months then.
Okay. Got it. Just one more question. You are doing a very good job in terms of top line and volume growth and all. Where there is no direct industry data was kind of concerned, what would be your sense in terms of a broad market share range that you have across the major segments now, passenger vehicle 2-wheeler to be [indiscernible]. Just a broad range. I know there is no exact data which is available. But compared to, let's say, 2, 3 years back, where you would be now. I would assume that you would have seen a good bit of a market share increase. So if you can give any color on that, that would be great.
Yes. So say, if you were to look at the top 3 most important segments for us, I'd say 2-wheeler, we would be somewhere between a 28% to 30% market share. Passenger car, we would have gained market share, we would be at about, say, 14%, 15% kind of market share that is today. And on the truck side, we would be at about 8% percent on truck radial, maybe about 12% on truck bus kind of category. So that's approximately our guess, but I agree that data is not there and difficult for us to estimate, but [ this is ] estimated approximately.
That's good. Just 2 small follow-ups [ of this kind ]. When you said anti-dumping duties imposed on Chinese tires. Actually, were you talking about the European market? Or you were talking about other markets as well? And secondly, on OHD side, what will be the number of SKUs that we have ramped up to currently? And how should -- how do we see that going ahead?
Yes. I was talking the question was relating to Europe. So yes, it was pertaining to Europe. And on a number of SKUs, I can get back to you on the number of SKUs, if that's okay.
That's perfect. No, problem. Just another small question. If you look at your employee cost has been flattish now for almost 8 quarters, while revenue has ramped up, volume has ramped up and you have added new capacity as well. So just wanted to understand, is it because of the VRS scheme that you have been giving on the high selling revenue. And another collection would be that once you commission the existing capacity is right, where are we in terms of utilization front? What kind of revenue run rate on an annual basis assuming the current pricing or whatever that is, we can do with the current capacity. I just wanted to understand whether we would need to invest on further capacity expansion because the growth is very, strong for us?
Right. So we do have enough upside on capacity. We are currently at nearly about 15%, 18% upside opportunity on the passenger space, truck radial too, we just completed a de bottle necking of [indiscernible] plant. There too, we have enough capacity upside and 2-wheeler, there's only downstream investment that needs to be done and a little bit on people and training. So to that extent, we have enough upside in terms of capacity at this point of time. I would say, at least for the next 1.5 years or so. So if you have to look at any further capacity, we don't need to take a decision most likely for the next 6 months or so on any of the categories, except off-highway tires, which we are continuing to expand at this point of time. On employee cost, our increment cycles start from July onwards. So there can be a small -- small increase in employee cost from July onwards on employee cost. And yes, we do keep doing VRS on a regular basis that keeps the cost of our older plants a little bit in check. But growth and inflation to a certain extent, has been high. And to that extent, employee cost has not gone up. So as a percentage of sales, at least employee cost has been under better control in the last year and year-and-half. I understand correctly our number of SKUs, we would be at about 750 number of SKUs in the tire space.
Okay. So if I understand you correctly on the capacity trend, you said that roughly between 20% to 25% increase can be possible. So if you were at about INR 2,800 crores top line in this quarter. And so maybe you can go towards INR 3,500 crores kind of a quarterly top line. Obviously, it will matter depend also on the pricing season at a ballpark number, that is the kind of INR 14,000-odd crores kind of a top line you can do based on your current plans and current capacity. Once you start approaching towards a 90% utilization number, you'll have to go for another CapEx rate. Is that understanding correct?
Approximately, I would say about 15% to 20% upside in volume terms.
Our next question is from the line of Siddhartha Bera from Nomura.
[indiscernible] on the demand side. You have said like the first quarter, we have seen a very good recovery in the passenger vehicle and 2-wheeler segment. So how do you see the trend going ahead in the current quarter and all because some of -- so I just wanted to understand whether this is -- there is some seasonal element to the recovery? Or is this is more sustainable type of volume trends we are to continue to do for the year?
No, we're seeing overall positive demand environment at this point of time. There is a little bit of seasonal. Usually, summer months are higher selling months for us. Monsoon months are a little bit on the lower side. But at an overall level, if you look year-on-year kind of or standardized kind of levels quarter 2 versus quarter 3, I think growth will continue to be strong going forward. There is a little bit of pressure on the rural side, rural demand hasn't picked up to that extent fully, but I think we're in a good position on PCUV on the 2-wheeler [ segment ].
So in 2-wheeler for example, we have continued to see very sort of sales growth in the past and that is what also has not happened in the past. So do you think that a sale now 2-wheeler demand is looking much more [ legally ] and current and you are more confident of taking price hikes? Because we -- if I look at, there is not much of a growth. So just wanted to understand from that this improvement is coming from the replacement.
Right. So yes, 2-wheeler demand, I'd say that quarter 3 and quarter 4 of last year was quite a bit lower. If you look at numbers before that we were a little bit better. We've seen some shrinkage in the overall market over the last few years on the 2-wheeler side. I think this is beginning to expand a little bit again, and we are hopeful for things to continue to be positive going forward. With a positive monsoon also, I think that should result in better uptick of 2-wheeler demand.
Got it. Got it. And second thing is on the pricing again. So we have been sort of having supplying to most of the new launches which are getting happening on [ both the 4, and ] 2-wheelers as well as cars. So I just wanted to understand in terms of margins or pricing? Will it be at par if we had the current model that we are supplying or because these are new launches, this will be slightly lower?
With respect to price increases in the replacement segment, we do hope to see price increases coming in. On the OEM side, it varies from a -- so since these are new launches, each pricing has their own respective strategy. I'll not be able to share much details with you. But most of them, I'd say 70% to 80% of our relationships are linked to raw material price shifts. So there is a pricing raw material increase or decrease that gets passed on to the customer as well.
Got it. And sir, asking questions on the cost side, sir. Basically, in the current quarter, as you said that you had this IPL cost, how much will it be for the current quarter one?
So it would be about 15% higher in quarter one. Our marketing costs for quarter one will be 15% or so higher than our normal standard month.
Okay. But on an annual basis, do you think you will be, I mean, closer to maybe the levels of 2%, 2.5%, which you have done in the past? Or can it go higher?
No, we will maintain our ratio of revenue to marketing expense, approximately the same over the course of the year. There can be a little bit on a quarter-on-quarter, some differences because of events or certain sponsorships, et cetera, that are there. But beyond that, we want to maintain it as a percentage of sales.
Okay. Got it. And the last question on the interest side, like you said, the debt set for because the rates are rising. So what will be your blended interest rate on the debt currently?
Kumar, would you like to take that?
Yes. Currently, our average interest rate is around 6.5% as of now, covering both short term as well as long.
Okay. Got it. Okay. I'll come back.
Our next question is from the line of Hitesh Arora from Unifi Capital.
Yes. Could you just remind me what is the -- on the rate at basis, what is the price hike that you've taken in July? What was the number?
I will not have the exact number, but I would say approximately it would be 1% to 2% on average.
And how much you plan is baking August, September, you said?
We've not yet announced anything yet. We still have to take a decision internally. I think there will be price increases, but that still has to be decided. In my view, it can be maybe 4% plus levels.
So that means like a significant number compared to what you've taken on regular intervals. I think in the past, you've taken in the range of 1% to 2% and obviously, you're looking at something like 4%.
It would vary quite a lot from category to category level once again.
Yes, of course. But on a weighted average, closer to 4%?
So yes, we don't know that number, I would say that we still have to take a call internally.
Sure. Sure. Just one more thing. On the sports side, we've benefited from this whole channel or something. But best you will be seeing a lot of inflation and for politicians, inflation is very cost but there's been talking down of bringing tariffs what they have put in. So that is if [indiscernible] talking of bringing and they've done it in some categories already. So how do you see that as impacting your side of the business? Have you've gained from that -- those tariffs in the past, but once those come off given inflation concerning the rest, you probably have a bit of impact. Any thoughts there?
No, I'm very confident of maintaining margins even if tariffs come off. I think we've established ourselves as a good quality brand offered at very attractive prices as well. And there is a certain segment positioning that say we would be standing at. So at a -- from a competitive perspective, you have certainly the Tier 1 players at a certain level, the Michelins and Pirelli, et cetera, followed by Korean and Indian players and then the Chinese at the lowest level. So to that extent, I feel quite confident that margins -- that we will be able to maintain market share irrespective of tax impact.
Our next question is from the line of [ Manish H ] from Nirmal Bang. I'm sorry, as this participant is not responding to us. We will move to the next question, which is from the line of Basudeb Banerjee.
A few questions, one, the 2% to 3% raw mat basket increase for Q2 is currency adjusted to what you mentioned in the beginning of the quarter? Second thing, sir, as you said, replacement and OEM volume growth sequentially of roughly 7.5%, 8%, 9% revenue growth, which means price increase or mix change of 1.5-odd percent in 1Q and as against raw mat increase here last Q was around 4%. So typically, if you look at raw mat sales being 70-odd percent so, which means price hike required would have been 3% and it came in at 1.5%. And one of the reason of gross margin decrease is that. So just wanted to understand what has changed post 1Q where such muted price hikes against each raw mat increase, whereas vice-versa in Q2 onwards, raw mat increase is now normalizing and your price hike has accelerated. So subjectively, how to look at that, what is driving that higher price hike now?
Okay. I think one is that volume has been overall better for us at least. So growth is looking attractive. I think we're in a position to take better price increases. Besides that, I would say nothing else has really changed. I think price increases -- further price increases have been quite a bit overdue. We have had lower margins for quite some time. So to that extent, we just need to cover up the lag. That's all.
Sure. That's great. And last thing in Q1, was there any major shift towards OEM mix? How much was the shift, revenue-wise?
Yes, there was a shift towards OEM mix, the OEM segment grew the fastest amongst all categories. In terms of mix, I think OEM would have been about 30% and replacement just a little bit over 50% and then the balance fixed international business.
And this OEM mix would have increased how much, sir, sequentially?
I think a couple of about -- just a second, about 2 percentage points.
Sure. And one more question, if I can chip in from Kumar, sir. Sir, in 1Q, where working capital reversal of INR 130 crores had to take care of the INR 250 crores CapEx. And for full year, as you said, project plus maintenance together is INR 950 crores to INR 1,000 crores. If I look at EBITDA margin reaching some double-digit figure, then only quarterly PAT moves ahead of INR 100 crore levels in general. So at 68% or margin level, depreciation of INR 110 crores a quarter, still INR 250 crores of cash flow per quarter looks pretty high. So any debt level you are seeing end of fiscal '23 until which it is fine from your side, sir?
I think going by what you said and as per our working also, during the course of the year, our debt level will move up because our free cash flow would be negative, and our operating cash flow would not be adequate to take care of the CapEx part of it. But generally, overall, our threshold is in case of debt equity would be below 1% and net EBITDA, we try to keep it around 3%, okay? So therefore, whenever we have some challenges around that, that is when we try to use other levers, which includes even relooking at our CapEx, okay? So therefore, we would like to keep our debt level in line with that. In the event there is any shortfall in EBITDA, okay, we would review CapEx.
Yes. So net debt to EBITDA of 1 is very much within control. So that won't be an issue at all. Sure.
Our next question is from the line of Chirag Shah from Edelweiss.
2 or 3 questions I have. One is a broader question that you indicated that gross margins should improve from Q3 onwards? My question is, internally, how do you look at the business? Do you look at gross profit per tonne or you'd like to focus on gross margins? That will be the first question that I have. And related to that is historically, what is the historical gross profit per tonne benchmark? Do we expect those numbers to [indiscernible] significantly given that the revenue per ton would have seen significant improvement over the last 2 years given that the prices have gone up?
Okay. So we look at gross margin percentage, at least internally when we discuss. We don't look at gross margin per tonne. And that is what we would like to duly work towards maintaining or improving.
Okay. The second question is, I missed the impact from this net currency impact that Kumar sir was indicating. The net of import-export and that we had indicated, I just see if you can [indiscernible]?
Yes, sure. Kumar?
Yes. No, when we indicated the raw material cost, we have assumed the impact of currency. But needless to mention, whenever we place orders on import we do hedge them. So therefore, whatever is going to be the cost based on whatever import orders that we have hedged and whatever is likely to be bought from the local market, we have taken into consideration. So therefore, that estimate considers the impact of currency as far as quarter 2 is concerned.
Yes. Is the 2-wheeler demand both OEM and replacement, what are the initial signs you are getting? Is it improving? Or is it largely the base effect, which is making numbers looking good?
So on the 2-wheeler side, I mean, one is, of course, you can't compare on a year-on-year basis because last year was very, very low. So against that, we are talking about growth levels of 40% plus kind of levels. But even on a quarter-on-quarter basis, both on OEM and replacement, we are seeing volume and value growth, both. So to that extent, that indication certainly is more positive. To a certain extent, of course, we had a lot of challenges every quarter here and there with Omicron and various kind of closures that happened. All of that seems to have stabilized and come to an end. This quarter was also a little bit of the marriage season, monsoon kind of getting stabilized and better in the last 20, 30 days all across the country. I think these are some positive signs. And then the entire inflationary impact on 2-wheelers that had happened in the last, I'd say, year or year-and-half because of increased safety norms, et cetera. That also would have possibly stabilized and now people would be looking at buying 2-wheelers once again.
Would it be right to say that versus initial expectations, the volume outlook is actually better than what you are initially looking at? That would be a right statement? Over the last 2, 3 months, would that be the right way of looking at 2-wheeler demand?
Yes, I'd say that the demand has been better than we expected -- especially looking at what quarter 3, if I remember right, December, January, February, were pretty challenging with respect to overall industry growth perspective, but things have been better at this point of time.
This would be both for OEM and replacement both, right, the broader directional [ commentary ]?
That's right. Higher in the replacement side, slow on relatively lesser on the OEM side. We double-digit growth on replacement, single digit -- high single digits in OEM.
Our next question is from the line of Karan Kokane from AMBIT Capital.
I just had a few questions. So first was on the growth in exports. So obviously, we've seen very good growth in exports. In FY '21, the mix was 14%, '22, it has moved up to 20% and even now, we're seeing good growth. So do you have any medium-term aspirations in terms of export mix?
So I think the export mix, at least in the near term, is looking to be stable because of good growth on replacement and OEM as well at this point of time. Also, global recession impact may be higher in international markets than what we are seeing in India. India may feel some of these pressures of interest rates and GDP growth impact relatively lesser than maybe Europe and then U.S. and other countries over time. So I think from a mix perspective, we expect to maintain our mix on the OEM side. It will not grow at least in the near -- I mean I feel in the near term, say next 6 months or so. After that, but in terms of our focus, our focus on exports continues to be high. It is relatively a good margin category for us. OHT business is something which we are very optimistic about and going to grow in. Even passenger car and truck radial are areas of growth for us on exports. But the momentum that we are seeing domestically, when you ask about mix, I think the mix will be stable.
Understood. Understood. Sir, and second question is on CapEx. So obviously, this year, you said that project CapEx will be around INR 750 crores and INR 200 crores of maintenance CapEx. I wanted some clarity on FY '24 CapEx. So once this expansion is done in Chennai, so will we see a significant drop in CapEx for, say, FY '24? How are you looking at CapEx for FY '24?
So at this point, we had, at one time, announced an expansion of truck radial tires of 2 phases. We have postponed our scrapped phase -- the second phase at this point of time. Phase 1, we had delayed to October, which we may further deliver a little bit because we still have enough capacity in our [ Salon ] plant. Besides that, we have no further CapEx that we have planned, except for some amount of highway tires. So to that extent, I think truck radial is still to be -- a decision still to be taken based on demand situation, and we can update you possibly in the next quarter call. Besides that, we have highway tires and then the routine CapEx that will happen. This is what we have at this point of time, which is an overall maybe some drop next year from this year. Kumar, anything you'd like to add here?
No. Anant largely covered the -- we would be completing the first -- this one, specialty or Ambernath radial capacity expansion by first half of next year. With that cost base will be over. But as you mentioned, that we don't have any big CapEx plans until we go beyond the current plans as far as [indiscernible] radial is concerned. Truck and bus radial we will update maybe in the next call. You covered it well, Anant. There is nothing more to add.
Our next question is from the line of [ Subhadip Mishra from UTI Mutual Fund ].
If I heard you correctly, you guided for a debt to EBITDA of 3x. But if I look at your credit rating report from Gear Ratings and India Ratings, they have given a negative trigger at 2.5x to 2.6x. So is there -- I mean can we expect some rating downgrade -- credit rating downgrade or something like that? Because we are guiding for 2.5x, 2.6x or as you guided for 3x?
Kumar, anything here, you'd like to...
See, in all our engagements and interactions with credit rating agencies and also on our projections, we have kept -- when we said 3x, that is kind of pressure beyond which we don't want to cross. And sometimes, the revenue generation happens after you complete the CapEx, which is evident even in the last few quarters in terms of revenue growth. We don't expect any downgrading to happen as far as the credit rating is concerned. And we'll be happy to engage with the credit rating agencies, which we do once a quarter with them. So we're not expecting any downgrade as far as credit rating is concerned. Last year, we ended at 2.9%. And this year, we're still keeping threshold upper limit as a 3x. And in the event, our operating performance improves in the balance quarter of the year, we don't have to even cross the threshold. So that's the way we are looking at it.
Our next question is from the line of [ Richa Sheth from Annual ].
Sir, I wanted to ask that when you are saying that you're expecting good volume outlook going forward, even in Q2, so the mix is skewed towards OEM or replacement as we are seeing more growth in OEM? And the second question, if you can tell, even in the mix of truck and bus passenger, 2-wheeler, where is the more growth and volume growth coming from?
Right. So in quarter 1, we saw OEM clearly has the highest growth, and that trend is looking to continue particularly as chip shortage is easing out. And so to that extent, I think OEM, we expect to grow the fastest followed by replacement and then international business. And in terms of category level growth, we are seeing higher growth in SUV on 2-wheelers and then third on the truck side as an overall across category level.
Okay. And sir, so more of OEM mix may impact our margins. Am I getting it right?
Yes. It can have a temporary impact, I mean, in terms of our mix margin, but hopefully, we'll be able to take that -- I mean, that will have a positive impact in the longer term. So we will continue to invest on -- in terms of OEM growth. We are fine with that. I think that we have enough capacities as well. So at an absolute level, we expect to see there needs to be no negative impact on profitability. It will overall help plant utilization levels and...
So [ overall ] 3 years, we expect the mix to remain same, right? Or you want to make a higher mix of OEM or 30-70 mix?
No,,. That is not a long-term view. So I'd say that, of course, this is how we are seeing OEM growth at this point of time because of the chip shortage easing off, we see strong SUV versus last year or continued growth on the SUV side. So all categories are kind of doing relatively better on OEM side. And therefore, that's resulting in growth. But this will, of course, at some point of time, stabilize at a certain level and other categories will see higher growth over time. So I don't see long-term mix undergoing any change.
Okay. Okay, sir. And sir, when you said that overall price hike was 1.5% this quarter and volume was 8%, there was no mix impact, right?
So there would have been a minor adverse mix impact on net realization because of OEM being a little bit higher. But if I recollect that would have been net of inflation impact. The number that we would have shared would have been met.
Okay. And sir, and overall [ scheme of banks ] since OHT is also increasing with the capacity coming in and OHT has a much higher margin than other tires. So that will also have a positive impact. How much can be the OHT share going forward since we are expanding only in that segment? So OHT share, we are today at about -- approximately 65, 70 tonnes per day to day production. This is for the month, but that continuously going up. It will go up to about 80 tonnes per day by November or so. And then there is some shift that we are doing in our older plants also towards bias tires. So yes, there will be a shift towards off-highway. Beyond that, as we fully utilize the 80 tonnes per day, we will look at further expansion going forward. So that mix will shift today. I would say the overall mix of tractor and OTR would be somewhere around 15% of our sales. This is not all high margin. So for example, the domestic tractor is not high margin. But approximately, that 15% should further go up. It should maybe closer to 13%, 14% last quarter, maybe 15% this quarter. So some improvements will come in going forward.
Our next question is from the line of Ashutosh Tiwari from Equirus Securities.
Firstly, we had got INR 160 crores of CD last year from state government, grants, and all versus INR 31 crores in FY '21. So are they seeing the same related continuing this quarter as well, like INR 160 crores, INR 40 crores per quarter is continuing?
Kumar, would you like to take that?
Okay. Last year, Chennai being the second year of operations. So a lot of incentives, and there's also some backlog in other factories where fiscal benefit was more received in the last year. We don't expect fiscal benefit to sustain at that level. Okay, so it had benefits relating to earlier period that we received some portion of it we received in the last year.
So at what level it will probably settle in this year. Any range?
Okay. See, currently, we are conservative with respect to accrual of that income in our books, okay? So only after we get certain confirmation or approval, we do recognize them in our books. It could be around half of what we have taken -- what you said just now -- but it depends on the timely receipt of approvals for us to occur accrue the benefit.
So that is -- that income is not good in this quarter or go to some extent?
Sorry?
That subsidy amount, grant amount is good in this quarter or not any of [indiscernible].
Yes. Some portion, wherever there is a certainty, our accounting policy is that if that benefit comes only after approval, we accrue them on approval. If there is any certainty where approval is not required, we recognize it. Some in the current quarter that went by, in quarter 1, a small portion of the fiscal benefit is accrued.
Even that would contribute some kind of your margin condition quarter-on-quarter. The previous quarter, you recorded higher subs this quarter is also right?
It's not that the amount -- the total amount that you mentioned was received in the previous quarter. It was received in the previous year.
So I'm saying that Q2 would have been a higher amount than what we received in Q1, right. So that would have also contributed to some kind of margin competition quarter-on-quarter.
True. It is part of our gross margin. So, therefore, to that extent, it is also true that quarter 1 accrual was lower than quarter-4 accrual. So, therefore, that also played to some extent in the gross margin.
Okay. And secondly, you mentioned that in TBR segment, through [indiscernible] you increased your capacity. So what kind of increase has happened now or the capacity of TBR overall verses earlier?
So today, we are at about 140,000 tires per month, approximately capacity. Really, the producible capacity maybe 130, 135. But as our people get trained, we can take it up to 140. And maybe over time, maybe between 140 and 150 depending on how much we are able to stretch the capacity.
Okay. Okay. And then lastly, what is [ reduced operating ] capacity? How much we are operating at? This TBR capacity?
About 115,000 tires, approximately, Kumar?
Yes, approximately.
Our next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Just one clarification, Kumar the debt that you mentioned, how much of that would be foreign currency rate debt?
No. All are Indian currency debt only. We don't have any foreign currency debt in our books.
Okay. So then the 6.5% average cost of debt seems to be quite low [indiscernible] what we have based on comes to P&L or this is actually cash cost.
See, this is a combination of both short-term as well as long-term. So short-term interest rates are 5.5% at this point in time. Okay? Longer-term interest rates are around [ 12.5% ]. Not all of that has come in as of now because in case of 1 year reset the rate of interest revision will happen. So the average rate of interest for the quarter is approximately 6.5%.
Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to the management for closing comments.
Thank you very much for your interest in Ceat and look forward to catching up once again next quarter same time. Thank you.
Thank you very much, members, of the management team. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.