CEAT Ltd. Q1FY22 Conference Call Analysis

Q1FY22 Standalone Financial Performance Highlights: Ceat Tyres Result

• Standalone revenue stood at Rs. 1,898 crores, a growth of 70% YoY and a decline of (16.7%) QoQ.

• EBITDA in Q1FY22 was Rs. 165.6 crores which was a decrease of (35%) QoQ and an increase of 63% YoY.

• EBITDA margin stood at 8.7%. EBITDA margin declined by (248) bps when compared to Q4FY21 and declined by (39) bps when compared to Q1FY21.

• PAT stood at Rs. 20 crores, a decline of (86%) QoQ.

Q1FY22 Consolidated Financial Performance Highlights: Ceat Tyre Annual Report

• Consolidated revenue stood at Rs. 1,906.4 crores, a growth of 70% YoY and a decline of (17%) QoQ.

• Due to rise in RM prices, the gross margin contracted by 306 bps QoQ. Margins stood at 39%.

• EBITDA in Q1FY22 was Rs. 173.2 crores which was a decrease of (36%) QoQ and an increase of 64% YoY.

• EBITDA margin stood at 9.1%. EBITDA margin declined by (265) bps when compared to Q4FY21 and declined by (33) bps when compared to Q1FY21.

• PAT stood at Rs. 23.1 crores, a decline of (85%) QoQ.

• Debt to equity ratio at Jun 30,2021 stood at 0.53.

Performance highlights for Q1FY22: Ceat Tyre Stock Price

• The decline in revenue during this quarter was partly aided by 4% improvement in overall realisations and (20%) decline in volumes QoQ.

• Volume decline of (20%) QoQ and increase of 70% YoY.

• Mid-single digit increase in exports as compared to last quarter. OEM volumes declined by (30%) and replacement declined by (20%) QoQ.

• Reduced marketing and discretionary expenses in Q1.

• The company Improved digital features for customers.

• Previous quarters gross margin 40%-42%. Last quarter 38%. Target is the previous quarter gross margin.

• Partnered with Olectra EV bus and Okaya EV scooter.

• Partnered with Tata Power to set up a 10MW solar power plant for Bhandup plant in Maharashtra. Targeting 50% of energy needs to be supplied by renewable resources by 2023.

• Consolidated debt rose by 368 crores in Q1FY22. Due to higher capex in Q1 and increase in working capital. Working capital increased by 236 crores due to higher inventory and decline in payables.

Raw material prices and price hikes: Ceat Tyre Quarterly Result

• Raw material prices remained at upper levels, and continued to take price increases to offset impact.

• RM cost rose by 12% in Q1FY22. Took a price rise of 3%-4% in Q1FY22.

• Expect pressure in Q2 due to rising raw material prices.

• Price Increase across categories. 4%-6% price increase across all categories. End of July 2%-3% price increase.

• The management stated that it needs to take a 4%-6% price hike to come at 10%-12% normal margins.

• The management expects RM cost to rise more by 3%-4% and would also take subsequent price rises.

• Inflationary pressure of this level is the first in the last 10 years, said the management.

• Price increases in exports are better than replacement segments.

Capex and debt level: Ceat Tyre Value Research

• CAPEX intended at 1000 crores this FY. Hence, debt level will go up in this year and will have an impact on interest cost. Spent less than 200 crores in Q1FY22.

• Dividend pay-out of close to 74 crores would also be a factor contributing to increase in debt.

• Project CAPEX of 182 crores in Q1FY22 and 39 crores in cost and energy saving. Rs. 150 crores – Rs. 175 crores of routine capex and maintenance.

• Most of the capex will go to the Chennai factory, also investing in off highway tyres. Debottlenecking in Haalol factory. Largest portion of capex will go for passenger car tyres.

• Future plans for capex are 700 crores-800 crores per year for 2-3 years.

• Interest cost rose from Rs. 40 crores to Rs. 46 crores due to increase in debt.

Demand level: Ceat Tyre Stock Analysis

• The company witnessed a fall in demand in April because of lockdown and the second COVID wave. Replacement demand recovered a bit during mid-June.

• Sales were better in OEM and Exports were better as compared to last year.

• Similar levels to last year wave 1 demands. Higher uptick in passenger car and 2 wheeler segment. Truck recovery may take time.

• In the overall revenue, the share of segments was as follows, Replacement share: 55%, OEM: 25% and Export: 20%.

• The demand for tyre production is known from OEMs, which give indication about the demand. And Replacement market productions depend on the pull.

• 2 wheeler OEM demand is weaker than the 2 wheeler replacement. Passenger OEM demand is better than 2 wheeler OEM demand.

Truck demand: Ceat Tyres Ratio Analysis

• The planned increase in capacity for trucks will take 20 months to complete.

• The management expects truck demand to revive in the long term.

• Very short term truck demand revival is weak.

• Slower increase in demand for the truck segment. Price hike that has already happened. Overloading norms in the east could be causing the demand.

Replacement market catalyst: Ceat Tyres Chart

• Bouncing back of macro-economic indicators, mining activities, industrial revival, commodity companies doing good and COVID wave coming down will increase commercial vehicle demand.

• Demand for personal mobility is going up.

• Passenger car segment is a priority for gaining market share. The company is witnessing traction after the second wave. Increased distribution and new range of tyres which are launching can play a key role.

• The company currently is Leader in 2 wheeler tyres.

Inventory: Ceat Tyres Swot Analysis

• Inventory was higher by 180 crores on 30th June as compared to 31st of March. Mix of RM and finished goods. 2/3rd finished goods and 1/3rd raw materials over 31st March levels.

• Inventory level happened at factory levels due to drop in demand. No change in dealers inventory levels.

IPL: Ceat Tyre Q4 Result

• Paid to the extent of % of matches that happened.

• No advertisement in the month of April.

• Advertisement expenses in Q2FY22 will increase due to IPL and cricket fees.

• Irrespective demand, marketing spend will be maintained on these levels.

Competition

• Competitiveness remains high.

• Lots of capital investment done by players.

• Price increase is expected but the lag to raw material prices can cause a certain margin erosion in upcoming quarters

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