Ceat shares have nearly doubled over the last month doubled as investors see the company's profits rising due to low rubber prices. The company some time back had decided to import natural rubber to gain from cheaper prices. This year so far, the company has imported roughly half its rubber requirements. A Subba Rao, CFO says he is flexible on this strategy and it would be driven by cost advantages.
Also Read: Expect coming quarters to be stable: Ceat
Rao says tyre companies abroad don't see too much volatility in profit margins even if rubber prices fluctuate sharply. Indian companies too will have to learn to overcome these raw material cost increases and maintain profit margins.
Rao sees second half earnings and margins to be in line with those seen in the first half.
Around 30 percent of Ceat's revenues come from vehicle manufacturers, and the rest from the replacement market. "Auto industry has been going through one of its worst periods in the last decade; commercial vehicle growth there is a negative growth of 25 percent for the second successive year, so passenger car sales is just at the breakeven level as compared to the last year," he says. Rao doesn't expect any substantial improvement in demand from the OEM side, but he is trying to get new customers from the OEM segment.
Below is the verbatim transcript of A Subba Rao's interview on CNBC-TV18
Q: The one big reason why you have seen operational gains is because you took a decision to import natural rubber in order to take advantage of lower prices, a couple of quarters ago. Can you tell us as a percentage of your total rubber needs, how much will the import of natural rubber be and going ahead how much will that help your margins improve further from 13.5 percent level you have clocked in?
A: There is no static percentage year-on-year as to how much we would import from overseas markets, but this year it has been averaging approximately about 50 percent of the imported rubber and 50 percent of the domestic rubber. It depends upon the price arbitrage and even Rs 1 difference makes a substantial cost difference to the ultimate cost management of the product. So, we continuously keep watching the markets both international and domestic and take appropriate decision at that point of time whether domestic rubber purchase is better or international rubber purchase is better.
Q: In terms of future performance of margins, what we want to know is your future perception of your raw material cost, are there further downsides and within even the current prices will you be able to squeeze more increases in margins?
A: Regarding future prices I wish I were in a position to answer, but what we have been building so there has to be some fundamental DNA changes; every industry has to learn the art of overcoming raw material cost increases and unfortunately the tyre industry in the country has been perceived, its prosperity is associated with rubber price movement but internationally tyre industry does not go through the same volatility, margins and profits as the rubber prices go through.
So, Indian industry also has to learn through this and that is what we have been working on, this kind of enabling situation and when you increase your competency on the shop floor to the top floor. So, this is what we have to do it. So, we have to introduce best practices of the management right from the shop floor to the top floor. So, this will give a sustainable improvement in our margins and profitability regardless of what happens to raw material prices, of course when raw material prices fluctuate, I am not saying that there would not be any volatility in the profitability, but the volatility gets contained provided we have the best practices and that is what we are trying to do.
So, competency improvement across the entire value chain that we have been focusing, the shop floor improvement is taking place, the office improvement is taking place, the management practices are changing, the planning practices are changing, the strategies are changing. So, these are some DNA changes that we have been working on that will give durability to whatever we are doing.
Q: Since you have just come to the helm of Ceat, what do you think the second half will bring about in terms of an increase in operational performance? In the first half your EBITDA jumped by 70 percent, in the second half what do you think you will do?
A: Without getting into numbers which would amount to forward looking statements, I would that the rest of the year could at least be inline with first half of the year, would be able to manage the margins that we had, managed the kind of profitability we had but I will not be able to give number for the rest of the year.
Q: Talking about the demand side equation, how are you seeing demand from original equipment manufacturers (OEMs), demands from replacements? We heard of a lot of bad news in the automobile sector but how is the second half looking in terms of demand and therefore in terms of projected sales growth?
A: Seventy percent of the demand comes from the replacement market and 30 percent demand comes from the OEM market. However, OEM market - auto industry has been going through one of its worst periods in the last decade; commercial vehicle growth there is a negative growth of 25 percent for the second successive year, so passenger car sales is just at the breakeven level as compared to the last year. So, this is the kind of situation. We do not expect any substantial improvement of demand from the OEM side but we have been making deeper inroads of getting new customers from the OEM segment. That is what would generate additional demand for us on the OEM side.
On the replacement, it has been stable and that is why we have been able to grow ahead of the industry, almost about 8-9 percent. So, despite the gloomy situation in the market we expect the same kind of growth to continue and the last quarter of the year that is January to March is always an exceptional quarter and as per the historical track we expect that to be an exceptional quarter in the current year also. For the second half of the year we expect demand to be better than the first half. So, that's what our expectation of the market demand would be.
