CEAT Ltd


BSE: 500878 | NSE: CEATLTD | ISIN: INE482A01020 
Market Cap: [Rs.Cr.] 1,422 | Face Value: [Rs.] 10
Industry: Tyres

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Management Discussions

Management Discussion and Analysis

TOTAL TYRE

PRODUCTION IN INDIA HAS GROWN AT A CAGR OF ~10 PER CENT IN THE LAST DECADE (FY 2003 TOFY 2012). IN FY 2012, THE INDIAN TYRE INDUSTRY GREW BY 5.3 PER CENT IN TERMS OF VOLUMESDESPITE ECONOMIC SLOWDOWN AND HIGH INPUT COSTS.

GLOBAL ECONOMIC REVIEW

The global economy still projects a weak outlook. The recent Cyprus bailout by theEuropean Union underlines the fear of financial crisis for most European countries. The USeconomy, on the other hand, is slowly recovering. However, the growth is vulnerable toheadwinds. According to the International Monetary Fund (IMF), global growth declined to 3per cent in 2012, compared to 4 per cent in 2011. The governments and central banks in USAand Europe are adopting considerable policy measures to bring stability to the relativelyvolatile financial market.

Declining global growth affected Indian economic development during FY 2013 as well,combined with weak foreign direct investment scenario and sluggish global trade. Theservice sector registered a growth of 6.6 per cent in 2012-13, as compared to the growthrate of 8.2 per cent in 2011-12. Lower growth in agricultural and industrial activitiesfurther affected the scenario. While most countries in Europe and the US will yearn forIndia’s 5 per cent growth in FY 2013, the country still has major challenges toovercome. However, the Government’s recent focus on reforms and policy implementationaugurs well for the economy. The revival of private sector consumption growth aided byhigher growth in agriculture, high Government spending and lower interest rates, project amodest rebound of 6.7 per cent growth in 2013-14. [Source: CRISIL Report and EconomicSurvey 2012-13]

GLOBAL TYRE INDUSTRY

A disturbed financial market and floating exchange rates have constrained the volumesof tyre sales, especially in advanced economies such as North America and Western Europe.In 2012, the global tyre market size approximated USD 185.8 billion, up 2.6 per cent froma year earlier. For 2013, the global industry growth estimate is no more than 0.5 percent. [Source: Yahoo Finance]

Nevertheless, declining raw material costs project a positive industry outlook in thelong run. Global tyre demand is anticipated to increase steadily during 2013-2018, withannualised sales volumes set to reach over 3.6 billion units by end of 2018. Passenger carand light truck market segments, which together accounted for close to 60 per cent of theworld markets’ value in 2012, are predicted to fuel the global demand for tyres overthe forecast period. Region-wise, the Asia Pacific nations, especially China, India andThailand are expected to drive the demand. [Source: Bloomberg]

INDIAN TYRE INDUSTRY

Overview

Being a capital intensive sector, the Indian tyre industry is mostly organised(excluding the bicycle tyre industry) and is dominated by cross ply tyres. CommercialVehicle (CV), Passenger Vehicle (PV), two and three wheelers, tractor, constructionequipment and other off-the-road (OTR) tyres are the various categories of the industry.CV tyre segment is the primary demand driver for the Indian market while PV tyre segmentworks as the key demand driver for mature markets like North America and Western Europe.The three major segments for the tyre industry are Original Equipment Manufacturers,Replacement and Exports.

Total tyre production in India has grown at a CAGR of ~10 per cent in the last decade(FY 2003 to FY 2012). In FY 2012, the Indian tyre industry grew by 5.3 per cent in termsof volumes despite economic slowdown and high input costs. FY 2012 reflected a decline inreplacement demand in terms of volume, subdued Original Equipment Manufacturer (OEM)demand growth and a healthy export growth. [Source: ICRA]

In FY 2013, the overall production marginally de-grew by 2-3 per cent from 125 milliontonnes to around 123 million tonnes. PV segment gained over 11 per cent while Truck &Bus segment gained over 5 per cent in FY 2013. The de-growth can be attributed to theeconomic moderation, weak domestic demand for automobiles, further lowering tyre off-takefrom OEMs and preventing significant recovery in replacement demand. Imports, especiallyin the Truck & Bus segment, are expected to decline in 2012-13 as well, mainly due toincrease in domestic radial capacities, implementation of BIS norms and depreciation inthe rupee. [Source: CRISIL]

Snapshot of the Indian tyre industry

Total turnover – Rs. 43,000 crores

Tyre Production (Tonnage) – 15 lacs MT

Tyre Production – All Categories (Nos.) – 2,254 lacs

Exports – Rs. 4,209 crores

Number of companies – 39

Top 10 companies – Account for over 95 per cent of the total production

(Source: Automotive Tyre Manufacturers Association)

Industry composition

Replacement market

The Indian tyre industry is dominated by the replacement market which is largelydependent on the Truck & Bus segment. This segment in turn depends on commercialactivity and economic growth of the country. Muted GDP growth over the last 1 (one) yearstopped the replacement market from reaping the benefits of a vibrant OEM market in the2009-2011 timeframe.

Original Equipment Manufacturers (OEM)

Due to the economic slowdown, several automobile majors had to undertake productioncuts during 2012-13. Growth for all categories except Utility Vehicles and scooters waseither flat or negative. The Medium & Heavy Commercial Vehicle (MHCV) category was theworst affected with a 23 per cent decline. The scenario is not expected to be positive inthe coming year either.

Exports

In 2012-13, exports in value terms grew 10 per cent year-over-year, with a healthy CAGRof around 18 per cent in the last decade. In volume terms, export has registered a growthof 8 per cent as compared to last year. Truck & Bus segment (14 per cent) and LightCommercial Vehicle (LCV) (22 per cent) were the major segments having a higher exportsshare. Indian tyres are exported to more than 100 (hundred) countries and primarily toLatin America, Middle East, South Asia and Far East.

Key industry trends

Sluggish automobile industry growth

The automobile industry produced 16,85,355 vehicles in March 2013 as against 18,45,868vehicles in March 2012 resulting in a de-growth of 8.70 per cent. The overall growth indomestic sales in 2012-13 was 2.61 per cent. Passenger Vehicle segment grew at 2.15 percent in 2013.

Passenger Car segment declined by 6.69 per cent, while Utility Vehicle Segment grew by52.20 per cent and Vans Segment grew only by 1.08 per cent during FY 2013 as compared tothe same period last year. The overall Commercial Vehicle segment registered de-growth of2.02 per cent in FY 2013 as compared to the same period last year. While MHCV segmentgrowth declined by 23.18 per cent, LCV Segment grew at 14.04 per cent.

Three wheeler sales grew by 4.87 per cent in 2012-13. Passenger Carriers grew by 8.58per cent during FY 2013 and Goods Carriers registered de-growth at 9.20 per cent duringthis period.

Two wheeler sales registered growth of only 2.90 per cent in 2012-13. However, in March2013 all sub-segments of two wheelers i.e. scooters, motorcycles and mopeds registeredde-growth of 3.18 per cent, 8.32 per cent and 4.54 per cent respectively.

Slowdown in Exports

During FY 2013, overall automobile exports registered de-growth of 1.34 per centcompared to the same period last year. Passenger Vehicle exports grew by 9.02 per cent,while the other segments like CV, three wheelers and two wheelers fell by 13.35 per cent,16.22 per cent and 0.72 per cent respectively.

[Source: Society of Indian Automobile Manufacturers]

Overall, the international market witnessed a slowdown too with tyre companies slashingprices to increase sales. Countries like Brazil were affected due to currency devaluation.Developed economies like Europe were the worst affected in terms of demand.

Declining imports

Indian government implemented the Bureau of Indian Standards (BIS) norms in May 2011,which makes it mandatory for tyres that are imported, stocked or sold, to obtain a BIScertification. As a result, global players exporting tyres to the Indian market are facingprocedural delays. However, these norms helped eliminate low quality Chinese imports,which had flooded the market between 2009 and 2011. Implementation of these norms, coupledwith sharp currency depreciation, has rendered imports unviable. Collectively, thesefactors resulted in an estimated 7-10 per cent import decline in 2012-13.

Key raw material price movement

Raw material cost accounts for 70 per cent of the industry’s turnover with naturalrubber being the key raw material. Despite being the fourth largest natural rubberproducer, the demand-supply gap in the industry impacts the overall margins andprofitability of the entire industry. However, during FY 2013, improvement in supplysituation and slow recovery in demand exerted a downward pressure on rubber prices. Afterhaving reached a peak of Rs. 240 per kg in April 2011, rubber prices have fallen to aroundRs. 162 per kg during March 2013.

Composition of Indian tyres

Natural Rubber 44 %
Nylon Tyre Cord Fabric 19 %
Carbon Black 12 %
Rubber Chemicals 5 %
Butyl Rubber 4 %
PBR (Poly Butadiene Rubber) 5 %
SBR (Styrene Butadiene Rubber ) 5 %
Others 6 %

(Source: Automotive Tyre Manufacturers Association)

Radialisation in India

Radialisation has now slowly started picking up in India. The Indian passenger carsegment was almost completely radialised (98 per cent) by 2008-09. However, radialpenetration in the Truck & Bus segment has been low at around 22 per cent. Contrary tothe global scenario, where the Truck & Bus segment is highly radialised with mostdeveloped nations reaching over 90 per cent levels, Indian Truck & Bus segmentwitnessed single digit growth in radialisation. However, this trend is expected to pick uprapidly over the next 5 (five) years. In view of that, healthy capacity additions in theTruck & Bus radial segment were witnessed in 2012-13, which will drive the futureradial tyre demand.

BUSINESS OVERVIEW

CEAT Limited offers a wide array of tyres, which includes heavy duty Truck & Bus,LCV, PV, tractor, trailer, scooter, motorcycle, auto-rickshaw and OTR product categories.

Product-wise revenue break-up

Particulars Contribution (%)
Tyres 90
Tubes 9
Flaps 1

Industry composition wise revenue break-up

Particulars Contribution (%)
Replacement market 59
OEM 21
Export 20

Vehicle-wise Product mix (in terms of volume)

Particulars Contribution (%)
Truck & Bus 52
Light Commercial Vehicle 9
Two-Three wheeler 13
Car / Utility Vehicle 8
Farm 6
Off-the-Road / Speciality 7
Other 5

PERFORMANCE OVERVIEW

Operational overview

Despite the economic headwinds and industry challenges, CEAT continuously invested inevery aspect of its business. The future-focused strategies, investment andcapability-building activities yielded significant results in FY 2013. The Halol plant,which made the Company a significant player in the radial tyre industry, touched acapacity of 115 tonnes per day. The performance of the OEM segment was particularlyimpressive with increased supply to several new OEMs.

During the year under review, the Company has also entered into a Joint Venture (70:30)with A. K. Khan & Company Limited (AKK), one of the leading business houses ofBangladesh, to set up a tyre manufacturing facility in Bangladesh. The Company has alreadyfinalised the blue print of the plant. The plant will start catering to the domesticdemand of Bangladesh and neighbouring countries from early 2015. On the other hand,Associated CEAT Holdings Company Private Limited (ACHL) - the Sri Lanka Joint Venture ofthe Company continued to enjoy overall market leadership in Sri Lanka.

New product launches

Over 70 new products were launched in the year 2012-13 across all product categories.

Most notably, CEAT has launched ‘CZAR’, a premium range for Utility Vehicletyres. Low noise and less wear and tear are the primary features of this product range.These tyres are also puncture resistant and enhance off-road stability that ensures asmoother ride. The television advertising campaign for ‘CZAR’ was launchedearlier in the year and received a good response from the market.

CEAT PRO

In order to spread awareness among truck owners about the best business practices toimprove operational efficiency, CEAT actively organises educational sessions known as CEATPRO. Since the commencement of the initiative in June 2009, CEAT Pro has successfullyconducted 99 seminars with expert speakers on lubes, auto finance and insurance, vehicleAMCs, telematics, and other related topics for better customer satisfaction, resulting inhigher profit margins.

CEAT PRO is, the first of its kind programme for fleet owners, to spread awarenessregarding the best industry practices to enhance operational efficiency. In FY 2013, ithas conducted 26 seminars to educate fleet owners on new technological advancements forbetter information access, advanced concepts of brand building and customer service. Keypersonalities from logistics, finance, marketing, human resource management, commercialvehicle OEMs and other related sectors also addressed the major concerns of the fleetowners.

CEAT SHOPPE

CEAT Shoppe is a ‘one stop tyre shop’ exclusive retail channel thatpositively contributed to the Company’s sales, especially in the passenger tyresegment.

During the year under review, the Company has successfully added more than 60 Shoppesin the new look. By FY 2014, CEAT plans to increase the number of Shoppes to 200,concentrating on towns with population of 5 to 10 lacs.

Financial overview

Income : The Company recorded a Total Revenue of Rs. 4,902.92 crores, as compared to Rs.4,504.44 crores for the previous year, a growth of 8.9 per cent.
EBITDA : The Company’s EBITDA stood at Rs. 424.5 crores against Rs. 246.8 crores during the previous year.
PAT : The profit after tax (PAT) stood at Rs.106.35 crores against Rs. 7.53 crores during the previous year.

OPPORTUNITIES

Stable raw material prices

The stabilisation in natural rubber price in 2013-14 is expected to have a positiveimpact on margins and profitability of the tyre industry.

Healthy tyre demand in the long term

In the medium and long term, the tyre demand is expected to be healthy in spite of atemporary slowdown in the short term. The automobile industry is expected to grow at aCAGR of 9-10 per cent over a 5 (five) year time horizon and is expected to fuel growth inthe automobile components sector.

Growth in radialisation

Overall radialisation will report sharp growth, from an estimated 20-21 per cent in2011-12, to 41-43 per cent over next 5 (five) years, largely due to higher acceptance fromOEMs, expansion of service network and investments in road infrastructure. The share ofradial tyres in buses will outgrow that of trucks, with more State Transport Undertakings(STUs) and private bus operators shifting to radial tyres. The share of radial tyres inthe bus category is estimated to increase from 32 per cent in 2011-12 to around 55-56 percent by 2016-17, mainly due to higher usage by OEMs. On the other hand, the share ofradial tyres in the truck category is estimated to increase from 18 per cent in 2011-12 to39-40 per cent by 2016-17, as preference will shift slowly towards radial tyres. [Source:CRISIL]

CHALLENGES

Fluctuating crude prices

Of the total raw material costs, Nylon Tyre Cord Fabric (NTCF) constitutes 13-14 percent, while synthetic rubber accounts for 19-20 per cent. NTCF prices are closely linkedto prices of its key feedstock, caprolactum. Prices of caprolactum, in turn, follow crudeoil prices, the former being a derivative of the latter. Hence, volatility in crude oilprices is a threat to the tyre industry.

Changing regulations

As India imports natural rubber substantially, proposal to hike rubber import dutycould hit domestic tyre manufacturers in the near term.

Enhanced competition

Post globalisation, several foreign manufacturers, including Michelin and Bridgestone,are expanding globally by acquiring or setting up manufacturing bases overseas, whichescalates domestic competition.

Environmental uncertainties

The domestic tyre industry faces major concerns, such as rising inflation, economicuncertainty, competition from imports and firm interest rates.

OUTLOOK

According to latest estimates by the Society of Indian Automobile Manufacturers (SIAM),while Passenger Car and UV segments are expected to grow at 5-7 per cent and 11-13 percent respectively during 2013-14, MHCV and LCV segments are expected to grow at a rate 1-3per cent and 10-12 per cent respectively. The two and three wheeler segments are expectedto grow at 6-8 per cent and 3-5 per cent respectively in this period. This is expected toimprove demand for tyres in the domestic market by approximately 5 per cent during thecurrent year.

CEAT is well positioned to seize the market opportunities, leveraging its key strengths– state-of-the-art products, diverse offerings, improved operational efficiency,extended network across the country and access to international markets and the expertiseof its management team.

RISK MANAGEMENT

Risk Mitigation
Demand fluctuation in different product categories CEAT has a diverse product range across all categories. Also, continuous new product launches along with a widespread domestic and international distribution network reduce this risk considerably.
Late entrant in Truck & Bus and Passenger Vehicle radials segments The Halol plant’s state-of-the-art technology produces superior radial tyres, which has already captured a reasonable market share.
Rising domestic competition Enhanced after-sales service, unconditional warranty offered on products, superior quality, good brand pull and aggressive channel expansion help mitigate this risk.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

At CEAT, internal control systems play a critical role. Well defined organisationalstructure and authority matrix, documented policy guidelines, extensive internal auditsand regular management reviews ensure the Company’s compliance with internalpolicies, applicable laws and regulations and protection of resources. To furtherstrengthen transparency and strict adherence of the internal control system, CEAT hasadopted an Online Corporate Compliance Management System ‘Legatrix’, inassociation with Legasis Services Private Limited. ‘Legatrix’ is a secure,sophisticated and easy to use IT enabled legal support solution, where the updatedinformation system automates the required compliance management activities with ITintegration, eliminating enterprise and operational risk related to compliances.

The Company also organises regular Management Committee meetings to discuss budgets anddecide on the future action plans, based on key performance indicators and varianceanalysis. At each Board Meeting, operational reports are tabled after being discussed atAudit Committee Meetings.

HUMAN RESOURCES

A young and motivated workforce is one of the key drivers of CEAT’s growth. A welldrawn-out recruitment policy, clearly defined roles and responsibilities, individualperformance management systems and performance-based compensation policies help retain thebest human capital in the industry and ensure career progression of each and everyemployee. In order to enhance human efficiency and accelerate business process, theCompany regularly identifies the areas of improvement and scope of training. Environment,Health and Safety (EHS) was top most priority for CEAT during the financial year. Keyachievements were:

a. Reframing EHS Policy.

b. Adopting frame work of BS OHSAS 18001:2007 and ISO 14001:1994 as standards forenriching EHS Performance.

c. Total Employee Involvement of people in EHS.

d. Improved compliance to EHS statutory requirements.

e. Improved key performance parameters of EHS .

f. Capability building among team for EHS .

g. Improved safety performance.

The process for obtaining BS OHSAS 18001:2007 and ISO 14001:1994 certification for allmanufacturing plants has been implemented and will assist continual and sustainedimprovement of EHS Performance.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Company’sobjectives, projections, estimates, expectations may be ‘forward-lookingstatements’ within the meaning of applicable securities laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould influence the Company’s operations include economic developments within thecountry, demand and supply conditions in the industry, input prices, changes in governmentregulations, tax laws and other factors, such as litigation and industrial relations.

   

Peer Comparison

Company Market Cap
(Rs. in Cr.)
P/E (TTM)
(x)
P/BV (TTM)
(x)
EV/EBIDTA
(x)
ROE
(%)
ROCE
(%)
D/E
(x)
MRF 10,069.53 12.56 2.76 3.86 24.7 23.9 0.51
Apollo Tyres 8,719.20 19.77 3.75 6.40 14.3 17.1 0.97
Balkrishna Inds 4,888.56 11.67 3.45 6.64 28.5 17.6 1.50
CEAT 1,421.68 5.55 1.88 2.99 17.2 19.8 1.63
Goodyear India 1,003.43 10.67 2.39 3.17 24.4 35.4 0.00
JK Tyre & Indust 843.58 4.53 1.17 5.70 17.9 12.5 3.06
TVS Srichakra 259.52 8.31 1.52 2.51 9.1 14.5 1.83
PTL Enterprises 173.44 10.19 2.43 5.62 25.3 20.7 1.13
Falcon Tyres 130.17 42.00 0.62 64.62 0.0 0.0 3.26
Dunlop India 83.80 0.00 0.29 0.00 -2.8 -0.6 1.19
Modi Rubber 48.58 0.00 1.67 1.88 2.1 -1.2 0.05
Govind Rubber 33.63 0.00 1.05 6.88 2.1 10.1 3.62
Krypton Inds. 16.91 143.75 0.59 8.63 1.6 6.6 0.49
Surya Indl. Corp 4.27 0.00 -4.10 6.14 1.3 3.7 0.00
Modistone 3.74 0.00 -0.07 0.00 0.0 0.0 0.00

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Key Information

Key Executives:

H V Goenka , Vice Chairman  

Paras K Chowdhary , Non Executive Director  

Anant Vardhan Goenka , Managing Director  

Vinay Bansal , Director  


Company Head Office / Quarters:
463 Dr Annie Besant Road,
Worli,
Mumbai,
Maharashtra-400030
Phone : 91-22-24930621
Fax : 91-22-66606039
E-mail : investors@ceat.in
Web : http://www.ceattyres.in
Registrars:
TSR Darashaw Ltd
6-10 Haji Moosa
Patrawala Ind.Estate
DrEMoses Rd Mahalaxm
Mumbai - 400 011

Fund Holding


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