Ladies and gentlemen, good day and welcome to the CEAT conference call hosted by Elara Securities Private Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Jay Kale from Elara Securities Private Limited. Thank you, and over to you, sir.
Thank you. On behalf of Elara Securities (India) Private Limited, I welcome you to the Q1 FY 2025 result conference call of CEAT Limited. From the management side, we have Mr. Arnab Banerjee, Managing Director and CEO, and Mr. Kumar Subbiah, Chief Financial Officer. I would now hand over the call to Mr. Arnab Banerjee for his opening remarks. Over to you, sir.
Good afternoon and welcome to CEAT's Q1 FY 2025 earnings call. I'll be taking you through the business updates for the quarter and then hand over to Kumar for his remarks on financial performance. Post that, we will have the Q&A. The car industry continues to demonstrate robust growth with rising economic progress and more disposable income, helping in enhanced offtake of cars. Better road infrastructure is expected to increase the vehicle utilization and enable longer drives. We expect FY 2025 volume growth in the replacement segment to remain healthy, and OEM growth in most categories led by two-wheelers and passenger and MHCV will continue to be good. We have, however, got an issue in terms of a margin squeeze in Q1 due to exceptional rise in raw material prices. We have tried to mitigate this with price increase in all segments led by replacement.
In the commercial segment, as we speak, including July, we have had a 2.3% price hike. In the passenger segment, including July, we have had a similar price hike of around 2.5%-3%. In two-wheeler, we had a price hike already of about 1%. In OEM, which is primarily indexed, we did not have too much of a price change in Q1. However, in Q2, we see an indexation benefit of already 2%. In international business, the price hikes were back-ended, and most of it will flow through in Q2. Similarly, in replacement, also most of the prices happened in late May, June, and July, and hence were back-ended and will flow through in Q2.
We continue to improve our product basket and recently launched the Milaze X5, which is the commuter tire for passenger segments, with an innovation in wear and alignment indicators, which is one for a patent. Our financial year started with strong revenue growth of 8.5% on a YOY basis. The standalone profit was INR 149.2 crore for Q1 FY 2025, which was 6.4% lower on a YOY basis. We continue to deliver double-digit post-tax ROCE consistently. Further, happy to share that we have had the highest-ever production in our Chennai, Bhandup, and Halol plants during the quarter, leading to a better capacity utilization overall at about 80%. On TBR, our capacity is completely sold out from Halol. We have invested heavily in brand repositioning in Q1 to the extent of 100 basis points over last year's average spend on the marketing front.
We also continue to invest consistently in R&D, which is at above industry level. Growth momentum has continued well into Q1 with 8.7% volume growth over last year. It was led by replacement and international business with double-digit volume growth and a somewhat muted growth in the OEM segment. There have been some headwinds in terms of significant freight hikes to the extent of 3x-4x in international business, and also coupled with this was the issue of non-availability of containers. Had it not been for these issues, our growth in international business would have been far higher. Our order base looks strong, and the growth is coming from desired focus markets of Latin America, Europe, and progressively it will also come from the U.S.. Replacement volume was led by commercial vehicles and the two-wheeler segment.
I spoke about the brand relaunch, which has led to increased traction in premium categories. Our saliency in premium categories is continuously on the up in the passenger segment as well as in the two-wheeler segment. Rural demand seems to be coming back gradually. With good monsoons, we expect rural demand to keep coming back as sustainably at a higher level as compared to urban demand. Our raw material cost has gone up approximately by 5% quarter-over-quarter, and this is singularly responsible for the contraction in gross margin. We mentioned about enhanced marketing spends through IPL and World Cup also. Domestic natural rubber prices have surged by about 25%-30% over the past few months, and currently, it has scaled to INR 200, which is the highest in the last 13 years.
We have mitigated the RM prices, as mentioned just a few minutes back, in replacement and international markets by taking progressive price hikes in steps, and we'll continue to do so in Q2. CEAT is future-ready, and we are geared now towards outgrowing the industry through acceleration in profitable segments through our four platforms of electrification, international business, premiumization, and investing in digital measures. We have consolidated our position in electric vehicle OEMs in both two-wheeler and three-wheelers. We have close to 30% share now in both two-wheeler and three-wheeler EV OEMs, as well as in four-wheeler EVs being sold by OEMs in India. We have started working with international OEMs also, and we expect to get some breakthroughs and nominations within the next 3-4 quarters in international OEMs.
International business has been a focus. 20% is the saliency in Q1, and we are targeted at levels of 25% in 2-3 years. This is margin-accretive. We launched about 42+ off-highway SKUs in Q1 and about 30+ passenger vehicle SKUs in Q1, targeted towards various international markets. In Sri Lanka, the macro situation is improving gradually, and our volumes are seeing positive traction in Sri Lanka with maintained profitability. We are investing in premiumization, as I mentioned. Our coverage of range meant for premium cars in India, which is, let's say, BMW, Audi, Mercedes, etc., continues to be in the range of 95%. We have launched our latest marketing campaign with a shift in our positioning from being a commuter brand through a highway brand, targeted towards bigger vehicles traveling longer distances, having higher speed rating.
Our investment in key media properties, starting from the strategic timeout in IPL with a QR code this time to news during election week and some key GEC properties, and finally in key matches during the T20 World Cup, has taken off the new campaign in a very positive front-ended manner. We also saw the finale of the second season of the KTM Cup in the month of May, which took place at Kari Motor Speedway, Coimbatore. All these interventions are going to help and positively impact the premiumization in the passenger category. We continue to lead in digitization across domains and remain committed to offer our best business platforms for the distributors, dealers, and the fleet operators. We are also investing heavily in improving our supply chain through digital modes. Our Chennai factory is slated to go for Lighthouse certification.
As you are aware, Halol was the first plant to get the certification, and we can expect significant gains in energy consumption, wastage reduction, water consumption, and also enhancement of quality. With interventions of artificial intelligence and machine learning, we are now getting into predictive quality, which is a first in a continuous process industry. As we know, the best way to reduce cost is to enhance quality. The organic traffic on our website grew 25%, and from premium SUV users, traffic increased by 5x. There has been a 42% uptick in brand conversion volume and a 140% increase in average engagement per post year-over-year. Conversion from website leads increased by 10% for SUV customers. We indicated a CapEx for the year at around INR 1,000 crores, out of which about INR 254 crores were spent in Q1, and all expansion projects are progressing as per plans.
We continue to reduce our carbon footprint during Q1. Our tCO2e emissions per metric ton of production was lowered by 3% YOY, and currently, 37% of our plant requirement is tied up through renewable sources. Overall, demand is looking good and will continue with our strategy to pursue accelerated growth with margin accretion by leveraging advanced technology for superior product quality, better operational efficiency, and for implementing targeted marketing to capture high-value market segments. We look forward to continuing investing in marketing and R&D at levels higher than the industry average. With this, I would like to hand over the call to Kumar.
Thank you, Arnab. Good afternoon, ladies and gentlemen, and thank you for joining our Q1 FY 2025 earnings call. I'll share some more financial data points with you all post which we can enter the Q&A session. Overall financial performance, our consolidated net revenue for the quarter stood at INR 3,192.8 crores and year-on-year growth of 8.8% and 6.4% growth sequentially. The growth was driven by volumes, and the growth was margin-accretive as we had a higher growth in more profitable segments like replacement and exports during the quarter. Our revenue of INR 3,193 crores achieved on a consolidated basis in Q1 was the highest that we have achieved in a quarter so far.
Coming to gross margin, our gross margin during the quarter shrunk by about 184 basis points year-over-year and 306 basis points quarter-over-quarter, largely due to increase in raw material cost, which is now about 5% quarter-over-quarter. Increase in raw material cost basket was largely driven by increase in the prices of natural rubber. The prices of crude derivatives remained range-bound during the quarter. The natural rubber prices are currently trading around INR 207 per kg in India, which is the highest in the last 12 years. Indian rubber prices are currently at a premium to international rubber prices to the extent of about INR 10-INR 12 per kg due to short-term supply-demand gap, and further steep increase in the ocean freight has also contributed to increase in the landed prices of natural rubber.
The prices of natural rubber are expected to cool off progressively from the end of the current quarter. Overall, we expect raw material prices in Q2 to be higher by about 5%-6% over Q1. Considering the spurt in raw material prices, we have already put necessary controls on discretionary expenses. Coming to operational expenses and operating margins, our consolidated EBITDA for the quarter stood at INR 388.2 crores, which is about 12.2% margin. This is a contraction of about 130 basis points quarter on quarter, and primarily, the contraction is on account of increase in raw material prices and higher but planned marketing expense in Q1. Employee cost was lower during the quarter on quarter as in the Q4 of last financial year, we had higher variable incentives and retirements that were provided based on the previous year's performance.
Other expenses other than marketing costs had come down in line with our various programs to bring down the operational expenses. Coming to debt and capital expenditure and working capital, we spent about INR 254 crores of CapEx during the quarter, which is in line with our guidance, primarily funded through our internal approvals, and the overall proportionate amount of INR 1,000 crores spent during the quarter. We kept tight controls on our working capital, as always, and closed the quarter with a negative working capital of about INR 240 crores. We generated healthy operating cash flow, which allowed us to meet the entire CapEx of INR 254 crores during the quarter funded from our internal approvals. Our consolidated debt stood at INR 1,647 crores, a marginal increase of INR 18 crores over Q4 of last year, and INR 343 crores reduction year-on-year basis.
Our debt-to-EBITDA on a standalone basis stands at a healthy 1.1 and debt-to-equity of 0.4. Depreciation for the quarter was largely in line with Q4. Interest cost largely remained as Q4. Effective interest rate has largely remained at the same level as Q4, and we expect the interest cost to remain at similar levels in the near term. Our consolidated profit after tax for the quarter was INR 154 crores, which compares well with INR 144 crores in Q1 of last year and INR 102 crores in Q4 of the previous year, which is the preceding quarter. Our continuous improvement in free cash flow and balance sheet improvement in leverage ratios further strengthens our financial position, and that is geared up to provide necessary growth capital to the business.
Lastly, our strategies are in place to strengthen our brand CEAT while ensuring we meet the investor expectations, create value to the investors and all stakeholders through improved product quality, expanding our market presence, and driving innovation through sustained R&D investment. Thanks once again. We can now open the floor for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is from the line of Siddhartha Bera from Nomura. Please go ahead.
Yeah, hi sir. Thanks for the opportunity. So my first question is from the volume side. If you can share the volume growth numbers in the quarter for overall as well as replacement and OEM, and then I have a few more follow-ups. I'll come back.
The volume growth overall has been close to 9% YOY and led by replacement and export with double-digit growth, and we had a slightly muted growth in OEM in low single digits.
Okay. Okay. Okay. So in terms of the outlook, if you can share, I mean, how are you looking at the trends in the replacement side? What is driving this double-digit growth in the quarter? Do you expect some of these trends to continue going ahead? And any particular segment where you are looking at good traction?
You are asking this for only replacement segment or overall?
Yes. Yes, replacement.
Okay. So replacement, we had double-digit growth in Q1. We expect the rural demand to be good, and with monsoons predicted to be good, we expect rural demand to be stable. Hence, farm tire and two-wheeler growth, which has been pretty robust, is expected to continue and strengthen further because of our distribution network and investment in brand. The four-wheeler segment growth, also because of investment in highways and extra traveling, longer traveling by customers, is going to sustain demand-wise. We are investing heavily in the brand relaunch campaign and new product development. So we expect passenger and UV tires also to grow heavily in replacement segment. Our growth in truck bus radial has been also very robust, and we are 100% sold out from the Halol capacity.
As Chennai TBR capacity comes on stream by end of Q2, we expect renewed growth in the truck bus radial segment as well in replacement, mining, construction. All these areas are doing well. Overall, GDP growth is good. So in all segments, we expect double-digit growth to continue and, in fact, accelerate from here on as we go into Q2 and second half.
Got it, sir. Sir, on the OE side, just a follow-up. If we look at the two-wheeler industry production, it is up in healthy double digits on a YOY basis. So why the weak growth on the OE side? If you can share some color there.
Yeah. When I mentioned OE, it is overall OE. So in the OE, our truck-bus radial sale was constrained because of our capacity being sold out, and we are static in terms of MHCV volumes. In PCUV, as the new models start coming out and rolling out on CEAT tires, our growth will accelerate in PCUV. And you're right about two- or three-wheeler growth being already robust in OEM. And here, there's an opportunity for us to increase our market share in both motorcycle and scooter. Hence, this will catch up as we go along in Q2 and H2.
Got it, sir. Thanks a lot, sir. I'll come back in the floor.
Next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities. Please go ahead.
Thank you so much for the opportunity, sir. Sir, how do you see the pricing scenario? Recently, we have seen a competitive position in the truck and bus radial space. Also, I want to hear your pricing plans for truck and bus radial space. Also, you can comment on the pricing scenario in two-wheeler space as the pricing has been lower there.
So first, truck and bus radial space, I guess you're talking about replacement market again. So our price increase so far has been the maximum in truck and bus radial space, as I mentioned, about 2%-2.5%, 2.4% to be precise, including July price hikes. I had talked about in the past few calls about increasing pricing independence amongst competitors in the industry. As we speak, there has been a price discount announced by one of the larger competitors, but we are not going to do any kind of discount, and we are holding on. And we have decided to reevaluate and further increase in the month of August, which may or may not come. As of now, we are confident enough with our product superiority in TBR to hold our price and, in fact, look at a further price increase later on.
In two-wheeler, yes, the price increase has been muted to about only 1%, and we are looking at the next price increase by end of July. So we will continuously strive to increase price in smaller doses over Q2 in both truck bus radial, two or three-wheeler, as well as in PCUV.
Just on the two-wheeler, are you using why this low pricing action, sir?
In two or three-wheeler, in the competitive scenario, there was no price increase by any of the players. We were the only player to increase only by 1%, which is a small amount. And now, given the performance in Q1, we are confident that we will be able to take further price hikes in two or three-wheeler, even if our competitors don't.
Okay, sir. Sir, how much further price hike will be required to cover the increase, sir?
I think progressively, because raw material cost impacts as we build on arrivals, I think about overall to recover all the cost gaps in Q1 and now, 3%-4% kind of increase would be required progressively.
Got it, sir. Sir, on the EPR, what was the EPR provision for Q1, and what would be in terms of percentage of domestic sales, sir? I want to understand what's the plan for the past year of the impact at both OEM and aftermarket level, sir?
Now, EPR now, from our planning point of view, we should assume it as a part of the cost. Internally, we would like to treat that like a normal raw material cost while working out our internal gross margins and internal margins. And as per the notification, while the ATMA Management Committee and body is engaging with government to look at some changes. So at this point in time, it is linked to what was produced two years back, and equal and production sold in India is what should be assumed as EPR. So that is what will be part of the P&L. It will sustain if we get any formal communication with respect to any changes.
Got it, sir. Thank you so much for the opportunity, sir.
Next question is from the line of Mr. Raghunandan from Nuvama Research. Please go ahead.
Thank you, sir, for the opportunity. Sir, on the export side, growth you indicated in double digits. Would it be over 20% on a YOY basis? Also, then you said that region-wise, LATAM, Europe, and U.S. are doing well, and U.S. would progressively do well. If you can elaborate which categories are doing well, and U.S. in terms of entry into TBR and PCR, if you can provide some details on how that progress is happening. Finally, for FY 2025, would it be fair to assume that double-digit growth will continue?
Okay. So it is not 20% when I mentioned double-digit, the export growth, but it is pretty healthy, and it would have been much higher had we not faced the issue of container shortages by end of June. This headwind is expected to continue in July and maybe part of August. We have a very healthy order base. So overall, through the year, we expect double-digit growth to continue in international business. So that answers part of your question. Now, in U.S. truck bus radial, the channel build-out has happened to a significant extent. We have created, let's say, some kind of geographies within U.S. in mind, and 60% of those geographies are already covered by way of network access. And we have started booking orders and shipping truck bus radials to U.S. So that has already started happening.
The product feedback is excellent, and we are meeting all benchmark product performances after testing by an independent agency. The passenger car radial rollout is going to happen by Q4 of this year or by Q1 of next year. We are testing our products. The range expansion is happening, and the channel build-out has also started. This is the status. Agri radials are already selling well and growing significantly, of course, on a low base in U.S. U.S. progressively will become an important factor in international business, and our growth should accelerate. We are seeing good traction of passenger and truck bus radial and agri radials already in Europe, which is somewhat of a more mature market for us. LATAM truck bus radials have grown very handsomely in LATAM.
Passenger radial and two-wheelers have a very small base and have got significantly upside, which is yet to be tapped.
Got it, sir. And specifically on the agri radials, given that you are coming out with more and more new products, the growth will obviously be including market share gains for you. But how would the underlying market be doing, sir? Is it seeing a positive growth in Europe and U.S.?
See, we have a very low base in U.S. So the growth is fantastic. So you should see it in that context. We have just entered U.S. with agri radial a couple of years back. In E.U., we are doing well on the replacement side, and we have been gradually gaining access and market share in E.U. When the OEM volumes come back in E.U. and in the rest of the world, let's say LATAM, etc., that is when the real blockbuster growth will come. We have set up the capacity at Ambernath, which is at 105 tons already on. Our utilization is about 70%. So 30% headroom is there, which we want to utilize by Q4. The project for phase two is gaining traction for 160 tons. So we are pretty confident about growth, given our low base and given our go-to-market success and visibility so far.
Thank you. Next question is from Mr. Ajo Frederick from Sundaram Mutual Fund. Please go ahead.
Hi, sir. Thanks for the opportunity. Sir, my question is on EPR. For this quarter, have we taken EPR, and is it part of RM?
No, it is not part of RM. I said we would like to treat it the way we treat RM from internal performance management point of view. So in the books of accounts, it will appear as other expenses at this point in time.
We have taken for this quarter, maybe -2.
Yeah. We have taken.
Okay. And sir, again, by accounting for the reversals, my math is showing 1.03% of revenue to be EPR versus our earlier guidance of 1.3%-1.5%. Am I right? It has come off from what we have purchased, and then I'm netting off your earlier numbers.
We made a provision based on certain assumptions. At that point in time, certificates were not available, or we were not able to establish the market value. So as we had completed our commitments for the year 2022-23, whatever we had assumed versus what we had actually incurred, that differentiated amount, we have shown it as income and the exceptional cost. I would still say it's early days. We still say early days because in the year one, the commitment is about 35%. Year one, it goes doubles, and the year three, which is the current year, it triples. So from that point of view, it's too early to say what the rates would be with respect to certificates. And second, government is also trying to fix up some floor rates.
So from that point of view, it's possible that the rate that government is now, in terms of guidelines, seems to be higher than the market rate. So therefore, we are not able to confirm to you whether what it will be. Internally, I think we have told you what the number would be in the last call. So let us stick to that range. Maybe a quarter or two later, we'll get more clarity, and possibly we'll be able to share more information in terms of how the market has panned out.
Understood, sir. Very helpful. That's it for me. Thanks.
Thank you. Next question is from Mr. Amar Kant Gaur from Axis Capital. Please go ahead.
Yeah. Hi. Thanks for taking my question. I had a couple of questions. First one being, so you guys have been quite proactive in terms of taking price hikes and not just taking price hikes for offsetting the impact of RM, but also improving your pricing position in certain segments. So I just wanted to understand cumulatively, since, let's say, from the beginning of the year, what would be the price hikes that you have taken in each segment, and how far, according to you, you would be from the leader in those respective segments in terms of pricing?
So I mentioned in commercial segment, including July, we have already taken about close to 2.3%-2.4%. In passenger, including July, we would have taken, again, close to maybe 2.5%-2.8%. In two or three-wheeler, it has been somewhat muted, but we have taken a price hike of around 1% in the replacement segment. OEM is indexed, as I mentioned, and we have been aggressive in terms of price hike, and we believe, as Kumar mentioned, we need to mitigate another maybe 2% price hike overall, at least maybe more, which we'll continue to do in the month of July, end August, and maybe in September as well.
Just to understand your position versus peers, could you shed some light on that?
Yes. There are many peers. So you want me to answer on behalf of all, that will be too much. But I can tell you.
Just from a leadership perspective.
So the market leader in TBR has not taken any price hike in Q1. The number two player in two or three-wheeler, which is the same player as the market leader in TBR, has not taken any price hike in any category. And all others have taken some price hike here and there, depending on their strengths in the respective markets. I would say the range would be similar for the other players, barring one player.
Understood. Understood. And if I got it correct, Kumar, you said there would be further 5%-6% RM cost increase in Q2?
Yeah. Approximately, that is what we expect in terms of RM cost on RM base, yes.
So just to go back, there's so much of price hikes that you have talked about, and you have definitely taken. There's an EPR, which you're talking about, part of it will be automatically translated. But when I look at the numbers this year, this quarter, your ASP is largely flattish. So can you indicate where there's a gap in our understanding?
Yeah. So first of all, the OEM business is indexed, and there we have hardly got any increase because it will come with a lag. So the price hike in OEM is coming in Q2. The replacement price hikes have all started around May, middle to May, end, June end, and now in July. So it is back-ended, and the full impact will come in again in Q2. In international business, we have a healthy order base, which needs to be serviced, and then the price hike will come. Secondly, because of the very high freight rates, which we have incurred in, which we have seen in international trade, in many cases, those increasing freight rates are shared between our channel partners and us. These are some of the reasons why the entire thing has not flowed in in Q1.
You're right when you say that the value growth is almost entirely volume growth. It is almost similar. The net impact will come in Q2. One more thing is that the business mix was such that the truck-bus radial sales and replacement was also disproportionately higher as compared to some of the other segments. All combined, it has not flown through adequately in Q1 and should flow through in Q2.
All right. Thanks. Thanks for that, Apollo.
Ladies and gentlemen, I request you to please limit to one question per participant. The next question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead.
Yeah. My question pertains to the volume growth. We're talking of close to double-digit growth for FY 2025. This is what we expect across categories, or it would be gained by the two-wheelers and some segment, and PCR and truck and bus would be relatively muted in the sense low single-digit or the single-digit kind.
I cannot predict exactly, but are you talking of replacement or overall?
Replacement.
Replacement. Okay. Okay. So because, as I mentioned, the rural demand seems to be coming back, and monsoons are going to be good. So we expect two or three-wheeler and farm definitely to continue growing strongly for us. And in two or three-wheeler and farm, both we have a network advantage. In terms of commercial vehicle, our base is low. As you know, we have a low market share to start off with in replacement. So as the Chennai facility comes along, we expect to grow because of very, very favorable feedback that we are getting from customers who have used the tires. It is definitely superior in performance to any of the competitor, SKU to SKU. So once the capacity comes on stream in Q2, we expect to do well in truck bus radial as well. Passenger growth may be in single digits and may not touch double digits.
That will be a little muted is what our expectation is. Overall, in the mix, combined with other categories, we expect to definitely grow in double digits.
Got it. Got it. Just a clarification, for passing on the entire cost inflation, which we are seeing in 1Q and 2Q, we need to take another 2% price hike or 3%-4% price hike?
No. I think, see, since we have already taken some increase, and that is not reflected in the financials because of reasons that Arnab just mentioned on the exports, the freight impact of it is currently shared. On the existing contracts, if there are C&F contracts, those freights are currently absorbed by us. And the second, also a little bit on category mix with respect to realization per kg has not been favorable because of higher sales of commercial, higher growth in commercial categories and therefore, these are the reasons. So when Arnab indicated 2%-3%, it is after adjusting the price increase that we have already taken. So overall, to mitigate the impact, we need around 3%-4% based on what we have seen as far as the current quarter is concerned.
So any increase in the prices of raw materials recently will have lower impact in the current quarter, and if it sustains, we'll be there more in the subsequent quarters. Just to mitigate the impact for current quarter, around this range should be okay.
Ladies and gentlemen, please limit to one question per participant. Next question is from the line of Nirav Seksaria from Living Root Analytics. Please go ahead, sir.
Yeah. Am I audible?
Yeah.
Yes, sir.
Yeah. So just to clarify, you said Q1 and Q2, you need to take 3%-4% price hike, right?
Yeah. No, I said because some increases happened already in the beginning of July. Okay.
Including that, it's 3%-4%?
Yes.
Okay. And also could you also mention the average commodity price that you have seen in Q1?
Approximately, commodity basket increased quarter-over-quarter by about 5%.
So I mean, could you give me the price of natural rubber, crude, carbon black that we have seen in Q1?
See, beginning of natural rubber, I'll be able to tell you. See, carbon black has multiple grades. Overall, carbon black prices did not change much in Q1. And so in case of natural rubber, I think the beginning of the quarter, it was hovering around INR 165 in that range. And currently, local prices are around INR 207. And international prices are about INR 10-INR 12 discount to current local prices. So that moment is lower. That increase would have been lower, but for increase in freight rates, which we expected to normalize. For example, Southeast Asia to India, freight used to be around $45-$50 per ton. Okay. Currently, it's $190 per ton. Okay. So we hope this will progressively by end of the quarter will come back to the normal levels.
So to that extent, natural rubber prices should also get the benefit of drop in ocean freight as far as international prices are concerned. Considering domestic prices have some linkage to import parity prices, the local prices also should stabilize. So natural rubber of INR 207 today, premium about INR 10-INR 12 to international price. One is on account of the fact that there's a demand, local demand. Second, transit times have increased. Earlier, it used to take about 3 weeks for a vessel to reach from Southeast Asia to one of the two ports in India, either Chennai or JNPT, as far as natural rubber is concerned. That 3 weeks has now become 60 days. So there is a short-term blip in terms of supply-demand gap. So therefore, that will always have a profound impact on the local prices for a short period of time.
So that's the way natural rubber prices have moved. Crude derivatives have more or less remained within a range bound. Crude prices were hovering around $90 in the first half of the quarter one, and it came down to around $85. And at some point in time, it even went below $80. So it's been range bound overall. And so from that point of view, crude derivative prices have not really changed much as far as the consumption cost in quarter one is concerned.
Okay. So, are we expected to assume that in Q2 also, we'll see a major increase in natural rubber?
Yes.
Okay. Thank you.
Yeah. See, current market prices eventually will reflect. Our holding inventory cost is obviously lower because these purchases were made over a period of time. And if they're unlikely to buy large quantities and the prices are at a 12-year high, okay, so we will buy based on the need. Sufficient quantities are there in transit. So therefore, local purchases would be immediate short-term need-based to sustain those containers which are there on high sea reaches our ports. So therefore, we are taking those things into consideration, removing those extremes in our forecast, in our pricing decisions.
Thank you. Next question is from the line of Mr. Joseph George from IIFL. Please go ahead.
Hi. Thank you for the opportunity. Just one question on the RM basket. You mentioned that in 2Q, you expected to be 5%-6% higher compared to 1Q. What I want to understand is, will that reflect the entire RM pressure, or do you expect it to increase further in 3Q if the current price of crude and natural rubber were to sustain?
Okay. No. See, quarter two is on a base of quarter one. Our understanding of the market, see, commodity prices are difficult to predict, but directionally, what we see is that the $150 impact on freight, on most of the raw materials which are imported, we expect that to correct over this quarter. Okay. Even on the export freight also, once the availability of vessels, because the freight rates have gone up 3x-4x in general, and transit times have doubled, if not tripled, depending on the location. So we expect that to correct. Then when the international prices of rubber, let's assume it stays. Today, international rubber prices are around $1,630. Let's assume that stays. When the transit times come back to normal levels, when the freight rates come down, what happens? The premium in the domestic market will get readjusted. Okay.
Those things will happen during the course of the next quarter without even underlying SICOM as a reference for rubber or crude changing much from the current levels.
Thank you. Next question is from the line of Mr. Amyn Pirani from J.P. Morgan. Please go ahead.
Yes. Hi. Thanks for the opportunity. Just had a clarification on this EPR. In the notes, you have mentioned that you have reversed the charge for FY 2022/23. So just to understand, you have reversed it from this quarter's numbers, or you have gone back and reversed it from last year's numbers?
Because we have reversed it in the current quarter, therefore, we have shown it as an income in our exceptional cost. Exceptional cost, you would see as a negative about INR 7 crore approximately.
Right. Right.
That's largely on account of 2022/23 after adjusting some VRS that we had. So otherwise, it will become a restatement. When we provided in 2023/24 for 2022/23, we called it out as an exceptional item because we were not pertaining to 2023/24. It was pertaining to 2022/23. So since our actual costs are a little lower than our estimates, we have also reversed under the same head as exceptional cost.
Thank you. The next question is from Mr. Siddhartha Bera from Nomura. Please go ahead.
Thanks for the call. So I had a question on this. Basically, your competition not raising prices. So do you think that and not sort of especially in the two-wheeler segment. So now with we sort of leading the price hike, do you think there's a risk of the growth slowing down or market share loss given the difference now in the pricing, or you don't expect anything to change much despite the price gaps with the larger players?
So I mentioned there has been no price hike by one competitor in quarter one. The same competitor is having a price hike in the month of July. So the situation will correct.
Thank you. The next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities. Please go ahead.
Thank you so much for the question, Ami. Just on the employee cost, it has seen a sequential decline in Q1. Any one- off in them? And what should be sustainable numbers on that?
In our employee costs, some portion is a variable element which is there, which is linked to overall company performance. Considering last year, we had grown well, particularly with respect to profits. So therefore, quarter four had little provision relating to company performance, which is normalized as far as the current year goes. Second, I think in the previous engagements, we spoke about improving capital productivity as one of the drivers. We are also working on improving manpower productivity as one of the important themes within the organization. Particularly, we also want to reflect that in terms of employee cost as a percentage of turnover as well, in addition to that. So some work has happened. You would have seen some VRS costs appearing in our exceptional item. One of the consequences of that is also it should lead to some drop in employment cost. Okay.
We are working in terms of improving our manpower productivity so that not only in absolute cost, but it also reflects in terms of cost as a percentage. Some of those initiatives have started yielding results. Therefore, you will see that some improvement in the employment cost as the focus.
Thank you. The next question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead, sir.
Yeah. My question is on their expenses. For this clarification, the 100 basis points increase in marketing spend you are indicating is both YY and on QQ basis. Is that correct?
Can you repeat the question once again, please? What are your questions?
The increase in marketing spend of 100 basis points is both on YY and QQ basis for IPL and World Cup. Is that correct?
It is. Look, generally, our marketing cost, we look at on a full-year basis, which has some kind of a seasonality. During IPL season, we spend more. So what we spent, I think which was covered in Arnab's speech, was what we spent was higher than our average by almost that basis, about 100 basis points over what we would be spending on a full-year basis.
Thank you. The next question is from Chirag Shah from White Pine Investment Management Private Limited. Please go ahead.
Yeah. Thanks for the opportunity. So just first, one clarification. What is your further revenue growth that you had YY? What is the breakup between volume and pricing in aggregate level?
Yeah. Year-on-year basis as well as quarter-on-quarter basis. The revenue growth is actually a volume growth. In fact, yeah. Maybe ±0.1% level. Okay. So you might assume it as a volume growth.
Volume growth. Okay. So second question is on the distribution side, especially.
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Hello. Ya. So second question is on the distribution side, especially in the export markets, U.S. and Europe. So who are the distributors? Are they very similar to your existing Indian peers who are present over there, or these are different sets of distributors you are targeting? And how are you differentiating yourself given that you are among the latest entrants from the Indian continent? And if I can add, even from the Asian continent in that sense. So how are you differentiating yourself so that you start gaining reasonable and sustainable foothold?
So these are local distributors who are experts in placing products in retail markets in those territories and also in fitting truck-bus radial tires to established fleet operators in those territories. So they are not Indians who have settled there necessarily in Europe and U.S. So that's number one. And number two is that the distributor's portfolio brand should match our value proposition. That is how we select. Our value proposition is superior quality, let's say, and quality which is equivalent to the top three in Europe and at a value pricing, right? So how do we support that? We support that by independent ratings, by magazines in Germany. For example, they pick up the tires from the market, and we have no hand in supplying the samples. They pick it up and test, and they rank.
Two of our platforms have ranked in the top 15 in Germany, which is one of the toughest markets in the world. Those are the measures that we are taking through which the customer gets confidence to take it off the retail shelves. They are completely different, and the product quality which is tuned to the local market is completely different. U.S. is different from E.U. as well, and U.S. and E.U. are both completely different from India.
Thank you. The next question is from the line of Aditya from Sovilo. Please go ahead.
Thank you for the opportunity. Okay. So my question was, like when you guys said you have the highest R&D spend, so what exactly is it spent? Do you have a specific portion which is it overall into R&D for tires, or do you dedicate specific portions targeting specific markets like U.S., America, or E.U.?
Yeah. So the trend is targeted towards India, first of all. We are big domestic players, and we are investing heavily in product development for truck-bus radial. You heard me say that our products are definitely superior to that of competition in truck-bus radial. We are launching new ranges in passenger. We are overhauling the full range to have the next generation product in two-wheelers. So bulk of the spend is targeted towards increasing share and dominance in the Indian market. As far as E.U. and U.S. is concerned, we have an R&D office at Frankfurt in Germany, which you are aware of. So that office, along with the India office, invests heavily in product development for E.U. and now increasingly maybe for the other international business markets. So when I say investment in R&D, it is primarily towards domestic market and then towards international business.
Thank you. The next question is from the line of Mukesh Saraf from Avendus Spark. Please go ahead.
Yes, good evening, and thank you for the opportunity. Just had one question. You did mention about the independent pricing strategies now across segments. So could you give us some sense on, say, for a like-to-like SKU in each of these categories, how are we placed in terms of pricing? Let's just say the market leader in each of these segments.
When I say independent, it's not completely independent. I must correct the perception. But it is increasingly independent, let's say, over the last 4, 5 years. This is an industry phenomenon. It's not just about CEAT, right? In two-wheeler, for example, our pricing in motorcycle and scooter would be anywhere. We are the market leader. Vis-à-vis market leader, the question is redundant here. But to the next.
The largest competitor.
The second player, we are about 2%-4% higher in 2-3 wheelers. In passenger segment, market leader is Bridgestone, and Bridgestone would be 8%-12% higher than us across the SKU range. Yeah. So they have a massive premium on CEAT as well as, let's say, Apollo. And CEAT and Apollo would be somewhat similar in pricing. Okay. So that's the PCR range. As things stand now, we would be within 1%-2% of the market leader in truck-bus radial. We are lower in terms of pricing in the truck-bus radial segment. So these are the three main segments. I hope that answers your question.
Yeah. I mean, actually, in some form, I was trying to understand if there is some truly if there is truly some independence in pricing because in two-wheelers, we weren't really able to take too much hikes. Obviously, the leader there did not take hikes in the last quarter. And in TBR, we are looking to take hikes. Obviously, we are still priced lower than the, say, the market leader there. So just trying to get a sense while we have, over the last year or so, we've taken a lot of hikes. Are we coming to a situation where from here on, taking hikes is actually going to be a lot more competitive because we're starting to see a lot of price actions, some discounting, the leaders taking price hikes with a much larger lag now? So I'm just trying to get that sense.
Yeah. So in truck-bus radial, your market share is in single digits, as you are aware. So from that perspective, it really doesn't matter. We can take a pricing stance which is fairly independent. So that independence actually comes from low market share position. In two- and three-wheeler, you are right. The independence is not 100%. The price hike has been 1%, but there will be a price hike at the end of July, irrespective of what our competition does. And that confidence comes from our market share status and volumes in quarter one, which is already demonstrated. In passenger, it's a multi-corner thing. So the most competitive, actually, is passenger car tires, where there are multiple players and in multiple segments of commercial and passenger car tires, multiple kinds of pricing stances are there. So there, it will be opportunistic and not across the board, but in whichever segments.
Also, geographically, we may differ, like North and South India, etc. We will go for opportunistic pricing action in passenger vehicles.
Sure. Sure. That's it from my side. Thank you for that.
Thank you. I now hand the conference over to Mr. Arnab Banerjee for closing comments.
Yeah. So thank you very much for your patience and attending this call. And thank you for some great questions. And it also gives us some food for thought as to what we would be acting upon. See you at the end of quarter two and wish you all the best. Thank you.
Thank you. On behalf of Elara Securities Private Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.