Just wanted to begin by discussing the raw material setup. I know this is something that we have talked about earlier as well. But at the end of Q1, you were talking about how the raw material prices could increase by 5% to 6% in Q2. Now, on one hand, while the rubber prices have gone up, crude prices have come off, would you still stick with the view that the total raw material cost will be up 5% to 6% or do you think an offset is likely to happen?
Arnab Banerjee: In the first quarter (Q1) raw material prices were about 5% higher than Q4 and Q2 raw material prices will indeed be higher by 4% to 5% than Q1. This is because the crude set off has happened towards the end of the quarter in the month of September. Right now, as we speak, it is down to 70-ish, low 70s. So, the benefit of the crude and the crude derivatives and raw material basket that impacts us will happen through Q3 and Q4, and not in Q2. The natural rubber prices, especially domestic, have been very high in Q2. In fact, they have been at a 15-year high. It has tapered off a little bit but is still very high at Rs 230 per kg.
In Q2, there is going to be an increase of around 4% to 5%. It will trickle in only in Q3 and Q4. So, what could be the impact in Q3? How much reduction are you expecting in raw material prices in Q3 then?
Arnab Banerjee: We have to wait and see because the drop in crude prices should translate into the drop in derivatives that would lead to the drop in the raw materials that we consume. So, pass-through will take time.
Secondly, the other big component is natural rubber. These prices are still pretty high, about Rs 225 to Rs 230 per kilo. If these stabilise at much below Rs 200 per kilo rate, then we could see overall moderation in raw material prices. Otherwise, it is difficult to predict at this moment.
We can’t rule out a price hike, can we?
Arnab Banerjee: Yes, price hikes will continue because the pass-through to the tyres per se is inadequate if we take the cumulative price hike from April to August. We have been able to pass on maybe 4%, in barely a couple of categories, but in a large number of categories, we have been able to pass on even less. The ability to pass on to OEMs is also restricted. We have not got an adequate hike from the OEMs, which is an indexed hike which happens after one quarter. So, we will see price hikes in the month of September. We have already taken some hikes and there will be further hikes in the month of September itself.
We have discussed the raw material and the supply side of things, but what about the demand side because we understand that there has been inventory build-up when it comes to the passenger vehicles in the system, especially ahead of the festive season. For the next few months, is there any sort of sluggishness which is coming in for PV ordering?
Arnab Banerjee: When you are talking about inventory build-up, it is about the OEM stocks, the cars. So, to that extent, the overall OEM demand will be flattish. But the replacement demand is not flat. We are witnessing growth in healthy single digits. And as far as Ceat is concerned, we would like to gain share in the OEMs. So, though the overall OEM turnover will be flat, we expect to gain share basis, visibility of the models where Ceat will get fitted in quarter three and quarter four. And replacement will keep growing. Export order basket in all categories is pretty strong. So, though there is a problem, a little bit of flattish growth in OEM passenger, I think overall growth outlook on the demand side, considering all business segments, is pretty good.It is a little bit more about how the business internationally is moving because we have expanded in agri tyres, and the TBR segments as well. In the US, what is it that we could expect in terms of progress, the kind of timelines that you may have for these plans?
Arnab Banerjee: You are right about two categories, agri radials and truck-bus radials. We are also quite pushy about passenger radials. So, three categories and three geographies we are focusing on, which is Western Europe, the US market and the LATAM market, primarily Brazil. Our outlook is pretty strong. Order books are good. We want to grow faster in international business as compared to domestic business, because of two reasons. One, we face all kinds of competition, which makes us prepared faster about the trends that are happening globally. And also, it is margin accretive at the EBITDA level. So, right now, our saliency of international business is 20%. We would like this to be stepped up to around 25% in about three years’ time.
Given the change in the product mix that you are talking about and the fact how the raw material prices are expected to move, what is the expectation of the EBITDA margins because you ended the year FY24 with a margin profile of around 13.5% to 14%. On a full year FY25 basis, what could that number look like?
Arnab Banerjee: We do not give an exact guidance. But if you see our Q1 result, where we saw a 5% raw material hike and we could not pass through the entire amount, the EBITDA margins stood at around 12%. We are having a similar kind of hike in quarter two. So, there is pressure on margin for the time being, though the top line demand outlook looks strong.
We talked about the four-wheeler as well as the export market, but what about two-wheelers back home? What kind of inroads are you building up on that one?
Arnab Banerjee: The two-wheeler OEMs are doing very well. They are growing double-digit. And finally, they are coming around to the volumes, which are pre-Covid levels, so 2019 kind of volume. It went through a trough. But year-on-year growth is very good. The replacement demand is also pretty robust, close to double-digits, with rural markets coming back.
So, the rural market growth is higher than the urban market, and both are growing. We have an extensive reach through our distribution network in the replacement market. We are market leaders in the two-wheeler tyre segment and with a significant gap with the number two players. We would like to maintain that in the replacement market for the two-wheelers and grow with the market.
Your FY25 capex plan was Rs 1,000 crore and you were going to front-load a large part of it. How is that trending? What is the expectation?
Arnab Banerjee: We will be around Rs 1,000 crore for the full year. Out of that, about Rs 250 crore is regular capex, which is for overhauling the equipment, moulds and those kinds of things. Rs 750 crore is growth capex, which we are spending as per schedule. And the Chennai TBR plant is already under commercial production starting September. The other projects which are spread across Chennai, Ambernath, as well as a little bit in Nagpur and Halol also are on track. So, we will be around thousand crores for the year.
In our earlier discussions, you had hinted at a double-digit volume growth in FY25 and you were expecting exports also to grow double-digit. You are standing by that, right?
Arnab Banerjee: We are still pushing for growth to accelerate in the second half. Yes, so we are standing by that.