Ceat, one of India’s biggest tyre producers, reported a 10% year-on-year decline in standalone net profit for Q4FY24 at Rs 119 crore. Revenue from operations grew by 4% to Rs 2,979 crore. The biggest reason for the drop was the impact of a new regulation. Arnab Banerjee, MD and CEO, Ceat, spoke to Swaraj Baggonkar on the results.
There was a 10% drop in net profit, what would you attribute the fall to?
There is a big impact of the extended producer responsibility (EPR) liability which the government introduced. All the tyres produced need to be recycled. We have provided for the first two years (FY23 and FY24) liability in Q4FY24. This expense has come to Rs 43 crore.
Is it an expense or a provision?
It is a provision that has been made but we are also buying the EPR credits from the market which we started doing in March-April.
Can you tell us more about this impact?
This is not exclusive to Ceat, but a government notification applicable to others (as well). It is for being responsible for recycling tyres that we produce. Prospectively, this will have a 1% impact on margins which we are planning to recover in pricing.
Is this expense a recurring item?
It is ongoing and will go on forever. The FY23 liability was pertaining to FY21 and that is Rs 43 crore. Out of this, Rs 35 crore is EPR. The FY24 liability is pertaining to FY22 production, for which we have made a provision. For FY25, every month we will provide and it will be a regular cost item.
What will be the quantum of the expense and how will it be decided?
Since we have to buy EPR credits and there are suppliers in the market, the price is not fixed, but as of now we are looking at incurring a cost of 1% and this will be recovered in pricing. We had some price increases at the end of Q4FY24 and at the end of April.
Did Ceat take price increases in Q4?
Farm and passenger cars tyre prices increased by around 1%. There was no impact on market share. We have, in fact, grown market share in passenger cars and two-wheelers in the replacement segment. In the farm segment we have maintained our share.
Will there be price hikes in every quarter because of the EPR?
Our gross margin is 42%+ which has been our normal rate. Raw material (RM) prices have been stagnant over the last one year with minor fluctuations. But in Q1FY25, RM is expected to move up by Rs 5-6 per kg. These two (RM and EPR) will have a negative impact on margins which will be recovered from the market.
Can you talk about the segment-wise performance?
The international segment has done very well in all the segments like two-wheeler, passenger cars. In OEM we have had some headwind in all the segments leading to some mild degrowth. In replacement, the agricultural vehicle and truck and bus segment has done well.
What was the capex for FY24 and will it be for FY25?
We ended FY24 at Rs 866 crore. For FY25 we are looking at Rs 1,000 crore capex.
What is your outlook on demand for FY25?
We will continue to press on with the international business because that is margin accretive story. In Q2FY25 we will launch tyres in the US. Latin America, West Asia and Europe have been steady. Two-wheeler demand in rural areas is expected to be good. In the OEM segment CV demand is not expected to revive before the general elections.
What is the share of exports in revenue and how is it expected to move?
It is about 19% and we are looking at 24-25% by FY26. The US is a new addition and it will take time to ramp up. We are looking at direct exports to the US.
What is your outlook on margins?
We would like to maintain our gross and Ebitda margins, but there is some inflationary pressure. It will move in a narrow band. It has been in the 14% range for the last few quarters.
