BSE: 500878 | NSE: CEATLTD | ISIN: INE482A01020
Market Cap: [Rs.Cr.] 3,284.14 | Face Value: [Rs.] 10
GLOBAL ECONOMIC REVIEW
The global economic balance shifted back towards developed nations in 2013. Encouragingeconomic data in the form of decreasing unemployment and growth in the services sector inadvanced economies validated the shift. Fiscal stimulus, low interest rates andreassurance by central bankers acted as the support system to these economies. Incontrast, there was a slowdown in emerging economies like India and Brazil owing tosubdued consumer demand and inflationary pressure.
Going forward, it is expected that emerging economies will grow, backed by structuralpolicies that support investments. Improving macroeconomic fundamentals will provide thenecessary fillip for global growth, with expected growth rates pegged at an average rateof 3.7 percent in 2014 against 3 percent in 2013.
Global growth (%)
|Other Advanced Economies||1.9||2.2||3.0||3.2|
|Emerging and Developing Economies||4.9||4.7||5.1||5.4|
(Source: IMF, January 2014)
INDIAN ECONOMIC REVIEW
The challenges in the Indian economy persisted last year in the form of slow growth,high inflation and fiscal imbalances. However, there were some positive developments aswell, in the form of the continuation of policy changes, normal monsoons and globalrecovery towards the second half of FY 2013. It is expected that the GDP will grow by 5.4percent in FY 2014-15 against a projected 4.6 percent in FY 2013-14 (Source: IMF).
THE GLOBAL TYRE INDUSTRY
The global tyre market size is estimated to reach $276 billion by 2017, growing 7.9percent annually. The rise in demand of tyres will be driven by the emerging economies inthe Asia-Pacific region, especially China and India. However, improved economic conditionsin the developed economies of North America and Western Europe will also accelerate suchdemand. These developments are likely to take global tyre demand to 2.9 billion units by2017, a growth of 4.3 percent every year. Motor vehicles capture the largest proportion oftyre demand and are likely to form about 73 percent of the global tyre demand by 2017.
The Asia-Pacific region
The Asia-Pacific region is likely to account for almost two-thirds of the global tyregrowth till 2017. China is the largest as well as the fastest growing tyre marketglobally. Japan and India are also among the major tyre markets. It is expected that Indiawill outperform Japan in terms of market size, owing to the strong demand for tyres by theend of 2017.
The North American / Western European region
These regions are forecasted to grow at around 2 percent annually through 2017. Animproved economic environment will provide thrust to vehicle demand and, in turn, to tyredemand. However, the delayed replacement of personal vehicles could limit such growth.With 13 percent of the global pie, the US is likely to continue to hold the second rankglobally in terms of the tyre market in 2017.
THE INDIAN TYRE INDUSTRY
Indian manufacturers sell $8 billion worth of tyres a year and compete with globalplayers such as Goodyear and Bridgestone. Today, India is the worlds tenth largestmarket for tyres and is on track to become the fifth largest by 2020. Tyre demand in Indiais driven by commercial vehicles as opposed to North America and Western Europe, wherepassenger vehicles deliver most of the growth.
Price movement of natural rubber
Natural Rubber (NR) is one of the major raw materials used in the tyre industry.Therefore, its pricing and availability can significantly affect the industry and its Someof the highlights in FY 2013-14 were: Domestic NR production dropped by 10 percent inApril-December 2013 due to adverse weather. International NR prices also fellsignificantly, owing to which there was a 53 percent surge in imports in April-December2013 over the same period last year.
Domestic and international natural rubber prices are currently hovering around Rs140/kg and $1.8/kg (duty free)respectivelyas April 2014 and are expected . to remainstable in the near term due to weak demand internationally.
Minimum custom duty on imported NR was increased from Rs 20 to Rs 30 with effect fromDecember 20, 2013.
Other raw materials
The availability of rubber chemicals is tight due to the financial crisis of localsuppliers and environmental issues in China.
Safeguard duty was introduced for carbon black imports and is expected to result inlong-term litigation. Joint action at the industry level is being pursued.
Opportunities and threats
The transportation sector is forecasted to grow at 5.0-5.5 percent in FY 2014-15. Tyredemand, a derived demand, has strong linkage with the automobile industry. The reductionof 3-6 percent in excise duty across different automobile segments, as per the recentUnion Budget, is expected to boost future automobile sales, leading to a higher demand fortyres. Demand in the domestic replacement market is expected to remain strong, supportedby a large vehicle population built up on the back of strong automobile sales in the lastfew years.
However, due to the immense opportunities in India, foreign tyre majors are alsogetting increasingly interested in the Indian tyre market. This will lead to enhancedcompetition and may also impact market share and profitability of the domestic players.
Indian tyre manufacturers are also facing stiff competition in the export segment fromChinese counterparts due to lower prices.
To be amongst the most profitable tyre companies in India by 2016 through: Marketleadership in select categories in India Market leadershipinsignificantcountries outsideIndia
Human resource management
Skill set building was one of the identified key business drivers, and all the peopleinitiatives / interventions in CEAT are being channelised in that direction.
We believe that excellence in Manufacturing and Sales can be achieved by removingoperational inefficiencies. Such inefficiencies arise out of lapses in knowledge andprocess. We tackle this by focussing on internal capability building throughinstitutionalised academies. These academies in Manufacturing and Sales were establishedand expert coaches were identified to run a system of continuous process improvement andproblem solving. Initiatives under these academies include the development of skillsmatrix for capability building, the Leadership Development Program for supervisors,training on time and condition-based maintenance, developing sales tools. This has led topositive trends in the PQCDSM parameters in Manufacturing, a higher level of engagement inworkmen, better working relationships between Sales Managers and reportees and asignificant drop in front-line attrition.
We focus on a customised and comprehensive mechanism of training needs assessment.Individual development action plans are a means to capture and bridge the competency gapsof each individual, thereby ensuring high motivation levels and engagement. Thesetime-bound action plans have enabled us to get greater buy-in from business as it balanceswell between both the behavioural and functional requirements of the individual. Coachingand development of life skills such as managing stress, self-discipline and conflictresolution are given as much attention as functional and behavioural development.Experiential programs on relationship management and coaching through reflection on360-degree feedback are conducted for all people managers. These aim at creating awarenessof ones managerial style and the behaviours associated with it. They also help indeveloping the necessary skills, behaviours and attitudes to move towards the idealmanagerial style.
Revenue from operations
Gross revenue for the year 2013-14 at Rs 5,846.14 crores, grew 10.2 percent over theprevious year. The growth in revenue is primarily attributable to solid growth of about 19percent in the OEM segment in both the PCR and TBR categories. The replacement segmentalso saw a growth of 11 percent over the last year. However, exports remained flat due tothe impact of volatility in the currencies against the dollar and a challenging globalenvironment.
In terms of product categories, the Company continues to focus on the high-contributionproduct categories. Advertisement campaigns have been a strong catalyst to market sharegrowth in these product categories. In the exports segment, the Company identified fiveregions in the global market to increase penetration and have now opened representativeoffices in these regions for focused growth from there.
Overall, the segment mix for the year stood at 58 percent replacement, 22 percent OEMand 20 percent exports. Moreover, the truck to non-truck and radial to cross ply ratioshave been continuously improving over the years, which has resulted in margin improvementyear on year.
Operating costs for the year 2013-14 at Rs 4,736.4 crores, a growth of 6 percent overthe previous year. These expenses include the cost of materials consumed, stock-in-trade,manufacturing expenses and other operating expenses. As compared to the previous year,these costs have increased, Reflecting the inflationary pressure and change in product mixin FY 2013-14. However, raw material prices remained stable during the year, and bymaintaining a judicious mix of indigenous and international purchases, operating cost as apercentage of net sales dropped by about 3 percent, thereby enabling the Company to post ahealthy EBITDA.
The above cost includes employee expenses for the year 2013-14 at Rs 289.07 crores,which increased by 7.4 percent compared to the previous year. There was a net addition of414 employees during the year.
Sales and Marketing expenses as a percentage of net sales for the year 2013-14 at Rs350.40 crores, increasing by 22 percent compared to the previous year. This was due to thecontinued thrust on advertising of key product categories through specialised campaignsand other innovative channels.
Other income for the year 2013-14 amounted to Rs 20.54 crores, as against Rs 21.47crores for the previous year, includes royalty and dividend from investments in Sri Lanka,short-term investments in mutual funds and proceeds from the sale of flats realised duringthe year.
Interest expenses for the year 2013-14 reduced marginally at Rs 169.16 crores asagainst Rs 177.89 crores in the previous year. This cost reflects interest and other costsrelated to borrowing. The reduction in the interest cost is mainly attributable to thereplacement of high-cost debt with low-cost alternate loans and renegotiation of interestrates on existing long term loans by around 75 basis points. The loan portfolio of theCompany comprises a blend of long-term and short-term, domestic and foreign currencyloans. The average borrowing cost for the year 2013-14 was 9.4 percent per annum, despiteinterest rate hikes during the year.
The company posted a healthy EBITDA of Rs 618.5 Cr. (11.6%) for the year 2013-14 asagainst Rs 408 Cr. (8.4%) in the previous year, an increase of 3.20%. Higher EBITDA wasmainly due to lower input costs, change in product mix and better sales realization.
The profit after tax (PAT) stood at Rs 253.78 Cr. (4.8%) for the year 2013-14 asagainst Rs 106.35 Cr. (2.2%) in the previous year, an increase of 2.6%. The said profit isafter the extraordinary/exceptional expenses of Rs 10 Cr. on account of VRS ofapproximately Rs 7 Cr. and provisions pertaining to fire accidents of approximately Rs 3Cr. The board has proposed a dividend of 100%, that is, Rs 10 per share, as a reward toits shareholders based on strong profitability.
Liquidity and gearing
The Company continues to focus on judicious management of its working capital.Receivables, inventories and other working capital parameters are kept under strictcontrol and continuous monitoring. During the year, incremental short-term working capitalfinance was deployed to finance strategic buying decisions related to natural rubber andother key raw materials. The Company also deferred a certain portion of its currentmaturities of long-term debt through fresh long-term funds, thereby improving the currentratio compared to the previous year.
On the debt side, the metrics has shown an improvement from 1.3x the previous year to1.1x in the current year despite increased operations and working capital requirements.With good profitability, DSCR has improved.
The Companys robust performance enabled it to fetch a two-notch upgrade in theexternal credit rating assigned to its debt program, from BBB to A, by FITCH IndiaRatings. This will further strengthen the creditworthiness of the Company in the marketand help it improve on its finance cost.
Capex plans key business update
The Company achieved a full ramp up of its Halol radial facility with 80 percent of itscapacity utilisation in FY 2014. The Company has also announced an expansion of capacityat the Halol plant by 120 MT. Progress on this project is on track and production isslated to start by Q2 FY 2016. In Sri Lanka, we have proposed an investment of LKR 60 Cr.to expand passenger car and UV radial production there. The Bangladesh project is also ontrack and we expect production to start within the next 18 (eighteen) months.
Foreign exchange risk
The Company is exposed to foreign exchange risk from its import obligations, exportrealisations and long-term and short-term foreign currency loans. Despite heavydepreciation of the Rupee and bouts of high volatility, the Company has managed its forexexposures prudently with a minimal loss of Rs 1.85 crores. The company is to hedge all itsFOREX exposure through forward contracts at inception to reduce the impact of fluctuationsfrom currency movement.
Sri Lankan operations continued its robust performance in the current year as well. Therevenue grew at about 18 percent and EBITDA and PBT margins were 24 percent and 22percent, respectively. The absolute EBITDA for Sri Lanka was Rs 109 crores and PBT was Rs98 crores. Interest for the full year stood at Rs 172 crores this year compared to Rs 181crores last year.
The consolidated EBITDA stood at Rs 658 crores in FY 14 compared to Rs 438 crores lastyear. EBITDA margins improved significantly from 8.7 percent to 11.9 percent.
Consolidated debt profile and key ratio trends
On a consolidated basis, there was positive improvement in the debt profile. The keyfinancial indicators on gearing, debt service coverage and interest service coverageshowed encouraging improvement.
The Company imbibes a philosophy of consistent innovation to cater to the changingdemands of the industry. The R&D Department at CEAT, housed at the Halol plant, is astate-of-the-art facility that focuses on new product development, alternate material andgreen tyres. Staffed with a 101-member team, the department has rolled out over a hundredproducts between Sri Lanka and India, across categories, in FY 2013-14.
During the year, the R&D team worked on several projects to reduce tyre weight andmaterial cost in order to improve margins.
Additionally, the team tied up with premium institutes and global vendors to work onprojects in nanotechnology and bio-based, hybrid materials. Some of these include: IITKharagpur and Cochin University on material projects IIT Bombay and IIT Madras on astructural engineering project
Tata Chemicals and IIT Indore for noise and related studies
MANUFACTURING CAPABILITIES AND TOTAL QUALITY MANAGEMENT
The Company has embraced the Total Quality Management philosophy to enhanceorganisation-wide capabilities across diverse functions of manufacturing, sales andmarketing, material procurement, human resources and Finance. This effort is expected toresult in robust systems and processes which will enable CEAT to increase operationalefficiency, enhance customer-centricity and minimise the impact of raw material pricevolatility.
THREATS AND RISKS
Enterprise Risk Management (ERM) in the Company is the process of identifying,analysing and evaluating risks. This includes selecting the most effective way to managebusiness risks. The objective of this risk management exercise is not to eliminate riskaltogether, but to understand it and ensure that the Company can avoid its negativeimplications while benefiting from any possible opportunity.
Risk identification and mitigation
The identification of risks is the first step in the risk management process. Thepurpose of the identification of risks is to describe events that may have an adverseimpact on the achievement of business objectives. In order to identify risks, a range ofpotential events is considered while taking into account past events and trends as well asfuture exposures.
The ERM team conducts interviews and enables prioritisation based on a risk-ratingprocess that evaluates the likelihood and impact of the risk. The ERM team focuses on theidentification of business, operational and strategic risks, as well as potentialcompliance and financial issues.
Reviewing the status of mitigation and residual risks
Once risks are identified, they are prioritised based on the impact, dependability onother functions and effectiveness of existing controls. The risks are monitored andreviewed periodically to assess the change in their likelihood and impact. Emerging risks,if any, are also documented in this process with their mitigation plans. The progress ofrisk-mitigating actions / controls is measured by evaluating the companysperformance on the Key Risk Indicators (KRIs) defined for every risk.
BUSINESS RISKS AND MITIGATION STRATEGIES
Commodity price volatility
The company manages the risk of volatility through a commodity desk that gathersintelligence on the market and guides procurement. Further, it has also implemented arobust Vendor management system to maintain the confidence of its suppliers and itcontinues to scout for new sourcing partners to widen its supplier base .
Radialisation in Truck & Bus segment
The company is converting its truck and bus bias capacities into other segments thathave a higher demand. It is also increasing its penetration into export markets with highacceptability for the bias tyres.
Occupational Health & Safety
The company has identified critical procedures as per OHSAS 18001:2007 and implementedthe same to ensure effective control over hazards. It has also deployed engineeringcontrols to reduce exposure. A Periodic Medical Examination program has also been rolledout to improve occupational health & safety.
The changing industrial relations climate in India posses a challenge to the company onthis front. It has taken steps at trust building with its workforce to strengthen thelabour relations at its manufacturing facilities.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has an internal control system that is commensurate with the size, scaleand complexity of its operations. The scope and authority of the Internal Audit (IA)function is defined in the Internal Audit Charter.
The Internal Audit Department monitors and evaluates the efficacy and adequacy of theinternal control system in the Company, its compliance with operating systems, andaccounting procedures and policies at all the Companys locations and itssubsidiaries. Based on the report of the Internal Audit function, process owners undertakecorrective action in their respective areas and thereby strengthen the controls.Significant audit observations and corrective actions thereon are presented to the AuditCommittee of the Board.
The Indian tyre industry is expected to show a muted 2-3 percent growth in revenues inFY 2014-15 over the current estimate for FY 2013-14 of Rs 47,500 crores. Sluggishness inthe OEM automotive industry is expected to continue. However, the demand in the domesticreplacement market is expected to be comparatively stronger, supported by a large vehiclepark that has been accumulated over the last 3-4 years of strong automobile sales.
Raw material prices are expected to be stable, thereby assisting the operating marginsof tyre manufacturers. However, with stable raw material prices and a subdued demandscenario, there might be pricing pressure, which might impact operating marginsnegatively.
The Company also has expansion plans that have already been announced. These includethe expansion of the Halol radial plant with a capex of Rs 650 crores and the expansion ofthe radial tyre business in Sri Lanka with a capex of LKR 60 crores.
Statements in the Management Discussion and Analysis describing the Companysobjectives, projections, estimates and expectations may be Rs 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 Companys 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.