Our margins will be steady in Q3 & Q4: Arnab Banerjee, COO, CEAT Limited
Arnab Banerjee, Chief Operating Officer (COO), CEAT Limited, talks about capacity utilization, demand trends, Inventory levels at dealers and margins among others during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts:
Q: Initial trends in the festive season are showing strong trends and the August numbers are presenting a strong recovery. So, have you increased your production and how much capacity utilization has increased as compared to the past two months?
A: After April-May, the market recovery started from June, June-July-August-September and under it gradually our capacity utilization is fluctuating between 90% and 100%. Already we are utilizing the capacity to its full. But as you know that we have invested in Chennai in passenger tyres, Halol in the truck-bus area and investment for two-wheelers is going on in Nagpur. All these three are going beyond the capacity and as the capacity is going up it is being utilized fully. So, going forward, as you said there is a festive demand in the third quarter, agriculture and rural economy was already doing well and now we are seeing a trend in which people are avoiding the public transportation. In the rural market, people are trying to manage their works on the motorcycles as much as they can. In the case of cities, those who were earlier using shared mobility but have their vehicles are using their vehicles. So, a lot of private vehicles is on the road and truck movement on the highways has turned normal, while bus movement is slightly low because of the public. So, overall tyre usage has normalized and is good at present and in festive demand the OEMs are separate, I was talking about the aftermarket. We expect that the OEM demand will be good in form of festive demand for cars and motorcycles. So slight improvement can be seen in the OEM demand and after that, it may go down in winter. So, overall, we have a positive outlook on the third quarter.
Q: How is the situation with your dealers and have their inventory levels reduced? What is the inventory level and has it normalized?
A: In the June to September period, the uncertainty of supplies was there across all the industries, although it was very high in the case of the tyre industry. The inventory with the dealers was also volatile and dealers were purchasing quickly from all the companies. So, you will have to see between April and September, there was no business was for two, April and May. When we are looking at April to September period than 6 months business was done between June and September, which is termed as pent-up demand. Thus, the monthly turnover is very high and it does not mean that the growth was too high between April and September period, however, there is a growth in the aftermarket, therefore dealers inventory level is low at present. Dealers are buying and it is being sold because the movement of the end-users is shifting towards personal vehicles and the usage of commercial vehicles is also high.
Q: As a tyre company you are benefitting a lot in terms of cost because of the low level of crude oil. Do you think that going forward the margins can improve in coming times? What is your outlook on margins?
A: COVID period stared in April-May and huge inventories were lying with us in for of finished goods and raw materials because we were heading towards the peak season. Summers are the picking season for tyres. The sudden fall of rates for crude and the rubber took some more time in passing on in the COGS because huge inventory was lying with us. So, it was passed on to the margins gradually in quarter two but the time by which it was passed on was completed, the cost of the natural rubber and crude – as you said is $42 and rubber price has also moved up – has reached almost to the pre-COVID level, may you have a look on the imported rubber or crude and its derivatives. It has even crossed the pre-COVID levels in certain raw materials. We buy 140 raw materials, so it is high in some, while low in others, so the overall impact is higher. I want to say that the margin will be steady and the lowest raw material pass through a period is behind in quarter two and it, the raw material, will go up in the third quarter. Margin will not be fluctuating in Q3 and Q4 and is going to be a steady one.
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Q: The government in the recent past has said that import of the tyres will not be allowed under the DFIA (Duty-Free Import Authorisation) scheme, which is a good opportunity for domestic players like you and the industry overall. What is your view on the announcement and what benefit will you get from it in terms of market share and what incremental revenue come due to the announcement?
A: I would like to say 2-3 things about CEAT. The opportunity in the market is available to everyone including CEAT. Secondly, in the last 2-3 years, we have disproportionately invested in our capacity, a lot of investment has been made, which will provide am operating leverage to us. If you have a look at the April-September period, our market share has improved a lot in the aftermarket/ replacement market in truck-bus, passenger and motorcycles. It is a significant improvement, not 1-2 per cent. We want to sustain it in the third and fourth quarter. Going forward, market share is a long-term strategy, which fluctuates quarter-on-quarter. We expect that taking together capacity, quality and OEM presence, overall market share of our company will improve in main categories as well as in the replacement.