By Priya Nigam
All that glitters is not gold. Well, this idiom does not really fit Ceat Ltd. The company is celebrating its golden jubilee and is still shining!
Of course, the global surge in the prices of commodities and oil has had an impact on the flagship of RPG Enterprises. Ceat expects rising raw material prices to hurt margins, despite a hike in tyre prices. Rubber constitutes 60% of the cost of tyres and prices for this raw material have appreciated steadily over the past few months. Faced with soaring rubber prices and skyrocketing oil prices, the company has decided to increase tyre prices by 5%, with effect from April 18. Despite this move, higher raw material costs are expected to negatively impact margins by at least 100 basis points in the financial year ending March 31, 2009. While margins may contract, Ceat expects to be able to protect its overall profit through growth in volumes. Managing Director Paras Chowdhary has projected 20% volume growth for the year. Sales in the financial year ended March 2008 are expected to be Rs2,600 crore, taking the company’s profit to record levels.
The rise in raw material prices, albeit significant, has not deterred the company from planning a huge investment into facilities. Ceat plans to invest Rs900 crore in two plants over the upcoming two to three years. One of the plants is likely to be set up in Gujarat to manufacture truck radial tyres, and have a capacity of 120 tonnes per day. This would require an investment of Rs560 crore. The other plant would be a speciality tyre facility at Ambernath, near Mumbai, requiring an investment of Rs340 crore. Earlier plans were for an Rs800 crore investment, but with inflation at four-year highs, the plan has been revised upwards. While land sale in Mumbai is expected to contribute Rs130 crore towards the total investment, the remaining funds would be raised via internal accruals and debt. The tyre manufacturer plans to shift its entire facility at Bhandup to Ambernath, which would allow the company to lower its headcount by about 500 employees. The two facilities are expected to results in a 50% increase in capacity. Ceat also plans to invest heavily into setting up an R&D centre at the Ambernath facility.
Although the company faces a huge market opportunity, catering to the $4 billion Indian tyre market, it also faces significant competition from high-end tyre manufacturers as well as from low-cost manufacturers in China. Ceat is addressing these issues. Firstly, it exports to around 110 countries (last year exports contributed Rs500 crore in revenue). Secondly, it has initiatives in place to enhance its product mix by increasing the production of high-margin speciality tyres. Thirdly, the company is seeking a technology tie-up with a foreign partner for expanding in the radial technology arena.
While the company is taking steps to lower costs, enhance its product mix and boost its profitability, shares have plunged from their 52-week high of around Rs244. At these levels, I believe Ceat shares represent good value.
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