CEAT Tyres, the flagship company of RPG Enterprises was established in 1958. Today, CEAT is one of India?s leading tyre manufacturers and has a strong presence in both domestic & international markets. The company manufactures over 10 million tyres every year and enjoys a major market share in the light truck & truck tyre market. CEAT tyres, tubes and flaps are renowned for their superior quality and durability. CEAT offers the widest range of tyres to all user segments and manufacture world-class radials for all Indian vehicles including: Heavy-duty Trucks and Buses, Light Commercial Vehicles, Earthmovers, Forklifts, Tractors, Trailers, Cars, Motorcycles and Scooters, Auto-rickshaws.
Arnab Banerjee, VP?Sales & Marketing, CEAT Limited, is responsible for driving revenue in domestic, exports & OE market and also building premiumeries for CEAT brand. Banerjee come with a vast experience and knowledge of FMCG & Paints sector and has more than 18 years of experience in India and abroad having worked in diverse industries. He completed his graduation from Indian Institute of Technology, Kharagpur in Mechanical Engineering in 1985. Subsequently, he did his PGDM from Indian Institute of Management, Calcutta in 1987. Prior to joining CEAT Ltd, Banerjee worked with Berger paints and Marico Ltd in the capacity of Head ? New Business Development respectively.
Speaking with Anil Mascarenhas and Prayesh Jain of India Infoline, Arnab Banerjee says, "We shall remain margin-focused and are committed to delivering stability in the future."
Brief us about your latest numbers.
CEAT reported an impressive net profit of Rs602mn for the first quarter of FY10. Our net sales stood at Rs6.74bn and we registered an outstanding operating PBT to net sales ratio of 13.5%; the highest in industry for this quarter. EBITDA stood at 16.8%, again being the industry best for this quarter.
What is the size of the tyre industry in India? What is the growth being witnessed in the industry?
The size of the tyre industry in India is ~Rs230bn. Around 60-65% comes from the commercial segment, unlike Europe and US where 60% comes from the passenger segment. Such a shift will happen in our country when the economy gets developed. The tyre industry growth in India is happening at a healthy clip with topline growth shadowing the GDP growth. The tyre industry witnessed high single digit to double digit CAGR for the last few years. Growth, therefore, is not an issue. While the domestic market has been doing well, Indian companies including CEAT have substantial exports.
Indian tyres are world class in the commercial vehicles segment as far as the bias technology is concerned.
In the international market, Indian tyres generally command a premium over Chinese tyres. CEAT in particular gets a higher premium than other Indian tyres. Our brand is known in the international market giving us margins almost similar to the replacement market. In most cases, this is not true for other tyre manufacturers. As a result, we have a significantly hedged portfolio. The domestic market is doing well, export margins are good and we export to around 100 countries.
In the passenger segment, Original Equipment Manufacturers (OEM) have shown fantastic growth, despite the slowdown. The commercial segment witnessed de- growth. The view we have internally is that India is going to be a small car market. While the trend abroad may be for larger cars with larger rim sizes, in India the dominant sizes would be 12-14 inch. The entry of Nano will only add to this segment and other car manufacturers have also announced their small car plans.
Technology is a differentiator. How do you expect to compete with the global majors?
Indian manufacturers will always have an advantage because technology is not a differentiator in the smaller sizes. Channel access of Indian players and their cost structure will be superior to foreign players. In the high-end car segment, the brand would of course be important. As a company, we have to gear up to strengthen our brand to be competitive in those segments.
What about the two-wheeler market?
The two-wheeler market will continue to grow. A stable government at the Center announcing investments in rural areas will further increase to the demand from two-wheeler OEMs. Replacement sales would also increase.
Our investments are geared towards the passenger and two-wheeler segment. This will increase CEAT?s mix of passenger segment progressively in the years to come.
What about radialization? Is it catching on in the commercial segment?
In the commercial segment (trucks), the biggest trend is that of radialization. In the passenger segment, around 90% tyres would be radials. Two-Wheeler tyres are going to remain bias, because of high rural sales component so radialization on a large scale is unlikely immediately. The key trend that everybody is watching out for is radialization of commercial vehicle tyres.
Typically, we find that 12-15% radialization is the tipping point, post which the progression is geometric. All manufactures including CEAT are investing in radial capacities. The OEMs have started switching to radials in a big way. New platforms and vehicles are all expected to be on radial tyres. The potential to export is huge as well.
You see CEAT becoming a significant global player?
CEAT could become a significant global player in the time to come. However, the bigger opportunity lies first in the domestic market. Here, we expect competition to come from outside. Michelin and Bridgestone have made an entry. There is competition from China as well. Though there are many players in China, only the top end players have done well. We expect the size of the pie to grow big enough to offer opportunities to CEAT. We are building up capacity in the sales channel and scaling the learning curve ahead of our production capacities.
What is hampering radialization?
Radialization will be good for the economy. A back of the envelope calculation shows around Rs200bn pa would be saved in fuel costs, for the country. A trucker also benefits from longer tyre life. This brings down the operating costs. Then, there is the safety and comfort factor and lesser incidents of punctures. There is no question that radialization should happen at a faster pace.
From the company?s point of view, the investment required is very high. The technology is not widely held. There isn?t enough capacity today in the country to satisfy the latent demand for Truck and Bus Radials. The Chinese tyres have established the need for radial tyres in India. Customers have realized the benefits of radials and the trade-off vis-?-vis bias tyres.
For a trucker, the higher initial cost is definitely offset by fuel savings and enhanced tyre life.
What is CEAT?s break- up between commercial and passenger vehicle tyres?
We are heavily skewed towards commercial vehicles with about 70% being truck tyres. Our capacity in two-wheeler tyres and four-wheeler passenger tyres has been low. In two-wheelers, out capacity is mostly outsourced, while for four wheelers, our capacity is very low at 3-4% of the market size. We are looking at a six-fold increase in the capacity of four-wheeler tyres and four-fold increase in capacity of two-wheeler tyres.
Our truck and bus radials would roll out of our new greenfield projects. There will be an increase in farm capacity. We have seen unprecedented growth in agri in the last couple of years. Money in the hands of the farmers has increased. We see bright prospects in this segment.
In the tractor segment, there is a trend of moving towards larger wheels. With contract farming and co-operatives entering the arena, farmers are also trying to get economies of scale.
Tyre manufacturers and OEMs have not really worked on educating the farmers. A farmer on the field may not really need a radial but when the tractor is used for haulage, the radial scores better. I expect the demand for bias tyres to continue to come for some time as penetration of radial would be slow in the farming sector.
What impact have you seen on account of the slowdown?
In December, the demand from OEMs dropped by 80%. Though a very small proportion of our business comes from OEMs, that volume got impacted. We have focused more on the replacement market and have gained 1% market share consecutively for the last two years. We see a 2% gain in market share this year.
The replacement market size is huge and is about 4:1 as compared to the OEM market for trucks. By the time our capacities increase, the demand from OEMs would also be higher.
In the past, we have been impacted because exports had slumped. We have 20-25% exports and the demand slumped by 30-40% across the board. We were impacted to the extent of having lower production in the plant by 3-4 days every month. That translates into a 10-12% production cut for three-four months.
To what extent has the situation changed?
Thankfully, now it is just the other way round. We have a robust demand scenario. The first quarter was very good in terms of vehicle movements. Summer season is generally good for tyres. We are seeing good support in infrastructure as well as in rural areas. Tyre demand will be fueled by these two sectors and we are well prepared and optimistic about the future. The demand slump of last year is a thing of the past.
Off-the-road (OTR) tyres will see good demand. Road construction, ports, mining, and construction primarily require these tyres. The Chinese iron ore demand will increase. Being a power deficit country we will always see demand for coal. When coal mining activity keeps growing, the demand for dumpers (and OTR tyres) will continue to increase.
The long term growth story of India is intact. We have the capacity and we will invest in relevant capacity in future.