Ceat stock price jumped 11% intraday after the company announced its September Quarter 2023 results. The street was enthused with better-than-expected margins and stable revenue and volume growth in Q2FY24. But with crude prices on an uneven track, it is a double-edged sword for tyre manufacturers. High raw material prices impact margins and price increases taken to counter raw material cost affect volumes. But Ceat management is optimistic about the medium and long-term growth opportunities and has a strategy in place to tackle raw material uncertainty. Ceat stock price has gained 42% over the past one year.
Quick Insights
- Raw material cost is expected to increase by 4% QoQ in Q3FY24 impacting margins
- Replacement, original equipment manufacturers (OEMs) and export volumes grew 4%, 10% and 7% YoY in Q2FY24
- Off the road (OTR) capacity to increase from 105 tonnes to 160 tonnes per day in Ambernath by next year
- The management expects revenues to increase to Rs 14,000 crore in the near future
- The management is aiming for the US market rollout for truck/bus and passenger car radial by the end of FY24
Raw material cost to increase by 4% QoQ, price hikes to be taken
In its post Q1FY24 conference call, Ceat management had guided for stable margins unaffected by crude price variation in Q2FY24. Operating margins came in at 14.9% with a YoY expansion of 792 basis points (bps) in September Quarter 2023 aided by better product mix and lower raw material costs. Raw material costs fell 14% YoY in September Quarter 2023.
Ceat maintains two months cover with respect to crude and its derivatives feed stock. So though margins in Q2FY24 were robust, upcoming quarters will witness crude price volatility impact on operating margins. Brent crude price remained above $90 levels in September 2023 and was volatile throughout October 2023 before cooling down to $85-88 range by the end of October. Crude and its derivatives constitute 40-50% of the cost of tyre production. Price of another significant raw material, rubber, has gone up by $100 over the past two months. Speaking on raw material cost increase, Kumar Subbiah, CFO at Ceat said, “Taking into consideration the depreciation of Indian rupee in the last three months, we expect our raw material basket to increase by about 4% in quarter 3 versus quarter 2.”
Market absorbs Ceat price hike, volumes on a stable and strong footing
To counter high raw material costs, the company will be forced to increase product prices. In case of significant raw material cost increase, pricing will be the last resort but a good option, said Arnab Banerjee, Managing Director and CEO, Ceat Ltd. The company has been focussing on non-truck tyre segment or passenger segment constituting, two-wheelers, three-wheelers, four-wheelers and off-highway tyre segment. Speaking on price hikes Banerjee said, “On the passenger side, there is more pricing freedom than the commercial side. So, we’ll look at that as well to mitigate the raw material cost hike, which looks inevitable. That’s going to happen.”
In Q2FY24, Ceat implemented a 2% price hike for the passenger segment and kept its prices unchanged for the truck segment, though competitors reduced prices by 1%. In spite of raw material cost going down for Ceat, price hike was implemented in September Quarter 2023. “The market has absorbed this kind of pricing stance by CEAT and has rewarded us with higher volumes.” Ceat volumes increased by 7% YoY in a low seasonal September Quarter 2023. Revenues came in at Rs 3,053 crore up 5.5% YoY in Q2FY24.
Capacity expansion will lead to higher revenue growth
Ceat management expects strong volume growth momentum to continue both for the medium and long-term. Thus, a robust capital expenditure plan of Rs 800 crore is being implemented for capacity expansion. While routine maintenance capex will be for Rs 200 crore, Rs 100 crore will be spent for truck and bus radial, Rs 250 crore for OTR (Ambernath) and remaining balance for Nagur (two-wheeler and passenger car), Chennai (passenger car) and debottlenecking in Halol plant. According to the management, the capex plan will increase the capacity of Ambernath from 105 tonnes to 160 tonnes per day by next year and add 45,000 tyre capacity in Chennai plant. In accordance with the capex plan, revenue is also expected to increase. Speaking on capacity expansion, Subbiah said, “Taking into consideration the truck and bus radial addition and OTR Ambernath addition, our revenue potential is a little in excess of Rs 14,000 crore.” A 30% revenue growth in the near future. Hopefully, the auto sector should be in the pink of health.
