lipped from: https://economictimes.indiatimes.com/opinion/interviews/we-expect-a-strong-growth-momentum-in-the-next-financial-year-arnab-banerjee-ceat/articleshow/81776407.cmsSECTIONSWe expect a strong growth momentum in the next financial year: Arnab Banerjee, CEATLast Updated: Mar 31, 2021, 02:08 PM ISTSynopsis
“We are looking at higher demand by way of consumer pull as well as import substitution.”
Quarter one in the upcoming FY will be an optical growth because quarter one last year was a washout, but we expect strong performance across the replacement market, OEM market and also pick up in international business as far as top-line growth is concerned, says Arnab Banerjee, COO,CEATNSE 2.52 % Tyres, during an interview with ET NOW. Edited excerpts:
Same time last year, things were a lot different but the tyre industry was the first to recover within the entire larger motown arena. How is FY22 likely to pan out?
Arnab Banerjee: The tyre industry, in fact, recovered quite fast in quarter two of last financial year and the growth rate has continued strongly in quarter three and quarter four. We expect a similar kind of momentum in the next financial year. Of course, quarter one will be an optical growth because quarter one last year was a washout but we expect to have strong performance across the replacement market, OEM market and also pick up in international business as far as top-line growth is concerned. For CEAT particularly, it is an opportune moment because we have been investing close to Rs 4,000 crore over the last couple of years, not all of that investment is complete but we have caught up the cycle in a very opportune time and we expect to have significant rating leverage in the coming quarters.
Can the upcoming CV cycle drive demand for OEMs for tyres as M&HCV as well as LCV tyres contribute to about almost 40% of your OEM sales?
Arnab Banerjee: Yes it is a cyclical industry and you can see clear cycles if you study the ups and downs over the last 25 years, I am talking of the OEMs. Right now, we are probably entering an upcycle. For the last three-four months, demand has been good and increasing so our supplies to OEMs is certainly going to see an uptick. In the replacement market, the demand was already very strong and right through the end of the first quarter, because transportation and wheels are basic drivers of the economy. I mean if the wheels stop rolling on the roads, the economy comes to a standstill and vice versa. So replacement demand is very strong and the government’s Atmanirbhar policy has also helped because more demand was available for the domestic manufacturers. We are well-equipped quality-wise and capacity wise to tap that demand. So replacement and OEM both are going to see good demand and increasing demand over the next financial year.
How exactly should one understand the impact of raw material prices for a B2B business or a quasi B2B business like tyre? Can you pass on all the raw material price hike to your customers?
Arnab Banerjee: We have a significant amount of business in B2C which is the replacement market, which is like any competitive market place. We can pass on raw material price rise provided the competitive intensity allows us to, so that is one. In the B2B part, where we supply to OEMs, usually, a large part of the pricing is indexed to publically available data of raw material prices that goes as per the indexation and we go up or down as the raw material price changes.
Could there be a situation where your top line becomes higher because of raw material prices but the bottom line may not increase in that same proportion?
Arnab Banerjee: When I talked earlier about top-line growth, I was talking of volume growth actually. The value growth is a consequence of various factors like mix and price increase because of raw material, etc. So when we say that, we see demand for CEAT is bullish, then I was talking of volume growth across the categories and particularly for CEAT. There has been a continued increase in market share in replacement in all categories – minimum 2% in passenger category – we are growing by 3% to 5% so that is volume growth.
Coming to your second question about margins, when the raw material price goes up, we implement a price hike from time to time. For example, the March raw material situation is at least about 10% higher than the quarter three raw material situation. So to nullify that, we would require a 6% kind of price increase. As we speak, about 4% to 5% of that increase has happened, there will be a slight lag for the balance 1- 2% pricing increase which we are contemplating right now in early April. Through the quarter one again, raw material will further increase on the quarter four base, which will require another 2-3% price hike which we are planning to take through quarter one.
How dynamic are your contracts both from your suppliers, which are raw material providers and your buyers which is OEM buyers? How dynamic are you about renegotiating your contracts?
Arnab Banerjee: The usual frequency is once a quarter on both sides; on the buyer side and on the supplier side but if there are situations where the spike is too high in a short span of time then we sometimes look at a smaller timeframe also but the usual default timeframe is once a quarter.
While we are talking about replacement demand, if I may add that for the last year which is the calendar and financial year has gone, you have gone through a lockdown process followed by a semi lockdown which means a lot of cars and a lot of trucks and a lot of vehicles have not done the normal motoring and commuting which they would have done. Could that have an impact on replacement demand?
Arnab Banerjee: A lot of tyres were coming up for replacement. By March-end, all that stopped, there was no replacement of those tyres through the month of April and most of May. In June, it started looking up. So that natural pent up demand came up. Trucks were plying on the road in April, May and June. Yes, there was a moment where it crashed to about 30-40% of the usual traffic but it moved up to 60-70% pretty quickly. So the truck tyre wear and tear went up.
Immediately after the pandemic hit, the shared mobility industry suffered and so people started using their cars which were lying in the garages much more frequently than they had ever used in the past. People started shunning public transport and this was not only in cities like Mumbai and Delhi, this was also about small towns. If you venture out to the highways, you will see people using their motorcycles to commute distances of 50-60 km instead of the state transport bus which they would have otherwise taken. This switch is semi-permanent to permanent. I do not know whether we will bounce back to using shared mobility and public transport in the future. So, the wear and tear have gone up. The next factor of course is the stock or the vacation of the imported tyres which is the Atmanirbhar Bharat initiative of the government. That has also made available a larger slice of the pie to us. Therefore we are looking at higher demand by way of consumer pull as well as because of import substitution.
Given what you have described and with investments in both capacity and products in the last couple of years, how do you see the market share expanding? What kind of targets are you working with?
Arnab Banerjee: As I had mentioned earlier, we have gained market share in the last financial year in the replacement market and OEM market. And we are pretty bullish about holding and gaining market share in all categories starting from two-wheelers to passenger car tyres to truck tyres. We have the capacity, our products have stabilised, we have gained in network share which is the share of quality dealers which are also dealing in Ceat.
CEAT has the deepest penetration of the hinterland of India by way of a unique distribution model which is somewhat similar to the FMCG distribution model though not in scale. We reached the largest number of outlets and we are better than the competition by 6-7x in terms of direct reach of outlets. So we think that we have the ability to tap the demand and by way of creation of demand, we have been investing heavily above the line as well as in digital marketing. We are looking at consumer journeys afresh and the world is changing, the old model of just advertising and picking up demand through your network is shifting to more mass personalisation, customisation of engagement with the customers. So all these initiatives are there, the products are good, the capacities are coming up. We are looking forward to a lot of excitement in the next two to three years because when you talk about market share and investments and the operating leverage you do not talk about one quarter and the next, we are talking about the next two to three years.