Ceat Ltd (CEATLTD) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator: Ladies and gentlemen, please stay connected. We'll begin the call in the next few minutes. Thank you.
Moderator: Ladies and gentlemen, good day, and welcome to Q2 FY '27 earnings conference call of Ceat Limited, hosted by ICICI Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference
Moderator: Mr. Ronak Mehta from ICICI Securities Limited. Thank you and over to you.
Ronak Mehta (ICICI Securities Limited): Thank you, Yashasvi. Good evening everyone. On behalf of ICICI Securities, we would like to welcome you all to CEAT Q2 FY'27 earnings conference call. Today, we have with us from the management team Mr. Arnab Banerjee - Managing Director and CEO, and Mr. Kumar Subbiah - Chief Financial Officer. We will start the call with the brief opening remarks from the management team about the quarter gone by and then we'll proceed to the Q&A session. Thank you, and over to you, Mr. Kumar.
Arnab Banerjee (Ceat Ltd): Good afternoon, everybody, and welcome to CEAT's quarter two FY'27 earnings call. I will be taking you through the business updates for the quarter, and then Kumar shall have his remarks on the financial performance. Post that we'll have the Q&A. I also have Amit Tolani, who heads the OHT division in CEAT along with me. If you have any questions on CAMSO he can handle them as well. So moving on, during quarter two, structural consumption tailwinds triggered by last year's GST reforms continued to anchor domestic volumes. On the input side, however, we still continue to face sharp cost inflation. During Q2, further raw material cost increase was around 8 to 9% over Q1. This, this is in addition to about 15% increase in Q1 over March exit prices. And Q3 RMC will also be about 3% higher than Q2. Thus by December, total increase will be 27% over March exit price. Our gross margins have been stagnant at around 33.6% and behind our comfort zone of 7 to 7% more gross margin that we would like to operate with. This, coupled with further raw material price hike expected in Q3, calls for more price hikes in all segments in quarter three. We maintained a tight grip on all cost elements, which resulted in an EBITDA of 10.1% in quarter two. On the demand side, while the near term structural anchors remain supportive, demand may moderate during Q3 on the back of a higher base over of previous year, El Nino effect, and recent repo rate increase. In the near term, we expect replacement demand to be led by 2-wheeler segment, where demand is still strong and more so in rural market. MHCV growth is expected to be in mid mid-single digits. In passenger, there is some concern about growth, maybe low-single digit. In OEM, demand is still holding strong across categories, which could moderate YoY because of high base effect. Farm production seems to be tapering off due to lower demand post-monsoon deficit. In international business, recovery has been strong on the back of demand revival in Africa and LATAM. Segments that are witnessing good demand are 2-wheeler and commercial vehicle. However, freight rates and elongated and unpredictable transit times are a challenge to handle. Sales to Middle East, although improving, still remains impacted. Q2 witnessed robust performance with a strong revenue go growth of about 23% YoY on stand-alone basis and an underlying volume growth of close to 10%. Standalone EBITDA in Q2 stood at Rs 461 crores. Growth momentum continued during Q2 over last year, 23% value growth. Replacement segment grew in mid-teens, while both OEM and IB segments grew in high 20s. Overall growth in CV, 4-wheeler, 2-wheeler, farm were all in excess of 20% or strong double-digit. Replacement growth was led by 2-wheeler and commercial categories, while growth in 4-wheeler was muted. Saliency of premium 2-wheeler and 4-wheeler grew in replacement. OEM grew handsomely in all categories led by strong demand, and we enhanced our fitment in premium vehicles and EVs in OEMs. Growth in IB was strong across categories in the high 20s and even 30s in some for some segment. For CAMSO, business transition is nearly complete. About 85% of the customers have come to CEAT fold now with sales being directly made to them. We expect to complete the balance transition by by quarter three. Alongside the customer transition, we have now set up local entities in US, Canada, UK, France, Germany and Poland, which helps us serve customers in this market locally, rather than as an exporter from Sri Lanka. In Q2 '28, we will have control over the entire CAMSO value chain right from raw material procurement to end customer servicing and and the project to install upstream equipments in the Sri Lankan plant is running on time. That
Arnab Banerjee (Ceat Ltd): 28, the first year of Camso running entirely on CEAT platform and we expect the margin benefits of the integration to start showing up. We have gross margin visibility to the extent of 50 to 55% in Camso. Capacity utilization in the Sri Lankan plant is less than 50% leaving headroom for growth. H2 volumes in this financial year are expected to grow by 20% plus on H1 actual volume base. This business is close to being EBITDA positive in H2 and we expect this business to be EPS accretive as consolidated level by FY '29. We are taking steps to eliminate the mark to market losses or gain on the US dollar loan component from CEAT India to OHT Lanka and we shall keep you informed about execution of the same by end of next quarter. Continuing our comments on key trends of electrification, international business, premiumization, and digital and AI. In electrification, on the electrification platform, during Q2 we maintained leadership with 25% share in OEM PCUV electric segment, and strengthened the two-wheeler EV share to beyond 30%. International business saliency in Q2 was approximately 20% on standalone basis and consolidated business basis, it was 24%, which includes Camso turnover, which is fully international. We have a plan to take it to 33% at total CEAT level in five years. In quarter two, OHT business delivered its strongest ever quarter, registering strong growth YoY up by about 30% plus. This was despite headwinds from elevated ocean freight rates and continued increases in raw material costs, which put pressure on margins. During Q2, we added 21 new off-highway SKUs as well. In the on-road tyres business, growth was robust with improving realization. Segment registered mid-20 growth during Q2 on YoY basis. Europe, LatAm, Southeast Asia business growth has been good. However, record freight rate increases and difficulties in container availability continue to be the challenges. Premiumization. Q2 saw multiple launches in two-wheeler and passenger car market with premium offerings in higher rim sizes, in off-roading applications and in certain niche sizes. CEAT's overall sale volume, sales volume of premium passenger tyres, which we define as 17-inch plus rim size tyres, registered high growth on YTD basis, mid-30s. Our two-wheeler premium portfolio comprising of motorcycle steel radials, fabric radial and tyres for 250cc plus bikes also grew handsomely, registering high mid-teens growth. Digital and AI. At CEAT, we are scaling up AI adoption through a portfolio of top management led initiatives across key business functions. During the quarter, functions advanced the use of AI and and and analytics for predictive insights, proactive anomaly identification, process automation, and faster decision-making across sales, finance, manufacturing, supply chain, and other areas. In parallel, our Enterprise Data Lake project is progressing well. Our SAP RISE project also continued to advance as per plan. During Q2, premium tyre sales through leads grew by 1.2x, while overall four-wheeler tyre sales through leads grew by 36% over the same period last year. Positive sentiment for the brand moved up by 37% YoY. Tariffs by US. Applicable duty on auto components remain at 25% plus the original 4% tariff. So on-road tyres including truck bus radial and passenger tyres, passenger car tyres continue to fall under this category. Off-highway tyres are subject to lower 10% global tariff. So OHT tyre exports from Sri Lanka also attract the same 10% duty. For tracks, the applicable tariff is 10%. However, the metal component of tracks, which is primarily steel, continues to attract a higher tariff of 25%. Sustainability remains a key driver of innovation, efficiency, and long-term value creation at CEAT. We have improved logistics efficiency, reduced inbound transport intensity, and we have successfully deployed LNG-powered trucks for natural rubber transportation. We have also begun working with suppliers to increase adoption of alternative fuel vehicles across our supply chain. Our commitment to sustainable products was recognized with a gold award from the Indian Society for Quality for CEAT SecuraDrive, India's most sustainable passenger car tyre. With this, I would like to hand over the call to Kumar for his remarks.
Kumar Subbiah (Ceat Ltd): Thank you, Arnab. Good afternoon, ladies and gentlemen, and thank you for joining our Q2 FY '25 earnings call.
Kumar Subbiah (Ceat Ltd): I'll share some more financial data points with you, all post which we can enter the Q&A session. First, overall financial performance our consolidated net revenue for the quarter stood at 4,762 crores which is with an year-on-year growth of 26.2%. The revenue that we delivered in Q2 was the highest ever. This was aided by a combination of both strong volume and price growth on a year-on-year basis. Approximately 40% of the growth came through volumes and balance came through positive price and mix. as regards pricing, similar to quarter one, pricing impact was positive across all segments. During quarter two, OEM and replacement segments led the upward pricing readaptations. So far, replacement has been receptive of our pricing actions where demand is still holding strong. We have effected approximately about 12 to 13% kind of price increase from the beginning of the current financial year till end of September in replacement and about 14 to 15% in OEM segment from the beginning of the financial year until date. We still have some gap to bridge vis-a-vis increase in raw material costs that will be addressed in the in due course. Coming to operating margins, our consolidated EBITDA for quarter two stood at Rs. 452 crores, translating to 9.5% of the revenue. It's an expansion of 94 basis points sequentially and a drop of about 403 basis points versus quarter two of last year. While our standalone margin was about Rs. 461 crores for the quarter, translating to a margin of 10.15 14% of revenue during the quarter, an improvement of about 101 basis points Q-on-Q and a drop of about 356 basis points. The drop in margin gross margin versus the previous year of the same period is mainly on account of increase in raw material costs in the last 6 months. Our consolidated gross margin for quarter two stood at 34.6% and expanded by about 66 basis points sequentially, helped by other operating income and increase in realization. The drop in margin, as I mentioned, is largely on account of raw material costs versus the last year. Coming to raw materials, during quarter two, crude oil prices continued to remain at elevated levels. While it averaged at lower level in the beginning of the quarter, that is in July to around $84, $85. But ever since, ceasefire deadline expired in mid August and re-escalation started in towards the end of August, the crude has been hovering around $100 per barrel. As we speak, the crude continues to hover around $105 per as we speak due to increase in crude premium, the crude derivative prices, which go into tires moved even higher than the movement in crude prices in the quarter two. Natural rubber prices followed a similar trajectory during the quarter with international benchmark that is Singapore Commodity Exchange, starting quarter two at around $2,200 per ton but since then moved to around $2,600 level. In line with the movement and following price parity, domestic rubber prices also remained elevated and is priced currently at around Rs. 285 per kg, which is a 20-year-plus high. And and continues to remain you know, strong even in the current market conditions. Recent sharp movement in international natural rubber prices has, in a way, also closed the gap with local prices. Earlier, the international prices were at discount to local prices, today it is more or less in parity with the local prices. Coming to Rupee, while recent intervention package announced by Reserve Bank of India has pulled back some of the negative sentiment and hence it remained within a range leading to a limited impact on our cost during the quarter. So overall, as guided in our quarter one call of our raw material costs for quarter two, the raw material prices surged by about 8 to 9% quarter-on-quarter compared to quarter one. Moving into quarter three, the pressure is expected to persist as commodity prices continue to remain high and and it is expected that the raw material cost would move in the range of about 3 to 3.5% in quarter three over quarter two. We hope and we look forward to finally West Asia war comes to an end
Kumar Subbiah (Ceat Ltd): would bring the commodity prices back to the normal levels. Coming to capex, we spent about 493 crores during the quarter on a standalone operations, that includes approximately about 120 crores plus in Nagpur plant, as part of our capacity increase from 80,000 tyres to 100,000 tyres a day. And approximately about 280 crores in Chennai was towards expansion of our truck and bus radial and passenger car tyres capacities. Our capacity utilization continues to be high, particularly in two-wheeler and truck and bus categories. And the capex that we frontloaded in the first half of the above would help in meeting our demand in the coming quarters. For our overall capex, both growth capex plus our normal maintenance capex including R&D, we aim to manage it in the range of around 1,400 crores as we guided in the earlier quarters. Coming to working capital on a standalone basis, our net working capital increased by about 74 crores, largely on account of higher inventory arising out of higher scale of operations and higher value of the materials. And while working capital moved up by 280 crores on a consolidated basis, which includes the inventory in transit for our overseas operations and receivables relating to Camso as we have started invoicing directly to our customers. On a consolidated basis, our debt stood at 3,846 crores, an increase of about 604 crores over quarter one, and to fund our quarter two capex program we spent most of the money, and we also paid about 140 crores of dividend during the quarter. I wish to inform you that we have got necessary approvals from the authorities to convert about $24 million of debt provided by State India to Lanka HOE State Limited, and the same is reflected as of end September results. Our debt-to-EBITDA on a consolidated basis stands at a healthy level of about 1.93x, arrived at based on trailing 12 months, and which is a marginal increase over quarter one of about 1.58. And our debt equity ratio continues to remain healthy at about 0.77, a marginal increase over quarter one level of about 0.65. Coming to other expenses, our employee cost was marginally higher in quarter two, about 14 crores on a standalone basis and about rupees 26 crores on a consolidated basis, which includes revision in our salary due to annual cycle revision that starts in quarter two. However, employee cost as a percentage of revenue has declined in quarter two versus quarter one, a trend that we have been witnessing for the last four quarters. Our consolidated other expenses was about 18.2%, a 39 basis points improvement in quarter one. This is at a time we are seeing unprecedented increase in freight and other indirect costs. Despite broad inflationary pressures extending beyond just direct input costs, we continue to strictly manage them efficiently. Our depreciation at a consolidated level remained in line with quarter one. And our interest, our finance cost was 87 crores versus 146 crores in the previous quarter. The drop is mainly on account of the fact that in quarter one we had certain amounts of foreign currency-related costs that was part of it, which we did not have in quarter two. Overall, our consolidated profit after tax for the quarter stood at about 112 crores compared to about 186 crores during the same quarter of last year, and rupees 4 crores in the previous quarter. Thank you, once again, you all. With that, we can now open the floor for Q&A.
Moderator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We'll take our first question from the line of Raghunandhan NL from Nuvama Research. Please go ahead.
Raghunandhan NL (Nuvama Research): Thank you, sir, for the opportunity. Good to see the margin improvement on Q-o-Q, given challenging times. My first question was on the replacement demand outlook for H2.
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