How was demand both on the OEM side as well as on the replacement market? How did it fare this quarter and what is the outlook going forward? It is said that all the capex and reforms are leading to healthy CV demand and other parts of the market are also doing well?
Kumar Subbiah: In the quarter that went by, we witnessed growth largely in export and the replacement businesses. The OEM business was muted. In Q3, the demand from OEMs, particularly post festive season, tends to be a little lower. In addition to that, from our own portfolio or business point of view, we had stopped supplying to some of the auto majors in passenger car radial tyres, in the beginning of the year and we hope to get equivalent or higher volumes in the later part of the current year. This is also reflected in the last quarter. So, it was flat in OEMs. The export business grew by about 20% and replacement business grew by about strong high single digit numbers. That is the way we saw growth in Q3 year-on-year.
What is your outlook on the export front? The global environment is subdued. How are you managing to outperform in exports and also going forward, how do you see the outlook on both domestic and overseas business growth?
Kumar Subbiah: Overseas export growth is an important priority for us. As we stand, exports are 18-19% of our revenue share. Three years back, it used to be about 10-11% of our revenue share. So, in the last two or three years, we constantly took various measures to increase the share of exports on our overall growing top line number. In the next quarter, we intend to launch our passenger car radial tyres and truck and bus radial tyres in the US market in replacement. It is an important strategic action for us and we would like it to be successful.
Second, we are also growing in certain geographies and we are facing headwinds in some other geographies. Geographies where we are growing are Latin America, part of Southeast Asia and some parts of the Middle East and Africa. In Europe, we are facing some challenges thanks to the local environment. In terms of our growth plans, we are also investing in our agri radial tyres which is a growth engine for us in many of these markets.
So, we will continue to invest behind exports, particularly with respect to growth, and we would like that share of our revenue to go up from current 18-19% to around 25% in the next two years to come. That is an important area of growth and we will continually work on them. We may have short-term challenges in certain specific markets which we hope will stay as short-term and we will be able to overcome in due course of time and we have a clear plan in terms of reaching there.
As far as domestic is concerned, generally Q4 would be a better quarter for us compared to other quarters in a year and as the demand for agri tyres generally is more in Q4 and from our own channel and the distributors’ point of view, we work on annual basis and therefore, generally there is a tendency to buy more during the summer months. So we expect Q4 to be a decent quarter in terms of growth versus Q3 and we expect the last part of that growth to come from passenger cars, two-wheelers and the commercial category in that sequence in replacement.
As far as OEM domestic is concerned, we expect it to grow from Q4 onwards as we have enough pipelines with respect to our own RFQs have been accepted and we would be start supplying. So, we will see progressive growth from Q4 on passenger car radial tyres, supplies to OEMs as well, that is the way we see the growth.
A couple of things that were highlighted both by Bajaj Auto as well as TVS Motors was in terms of the Red Sea issue. The logistics costs as well as time of delivery is doubling. Is that a concern that you are facing as well and because of that, will you face any issue in terms of increase in cost in the near term?
Kumar Subbiah: No, as far as challenges are concerned, as you rightly mentioned, there are two areas. One is the cost of transportation. Many of our contracts are CAF contracts, so therefore freight is inbuilt into it. Therefore, from that point of view, when the freight rate increases, it has some impact both on export of tyres as well as an import of raw materials point of view and therefore it has an adverse impact on cost. Second, with respect to the ability to service our customers, the transit time would certainly increase on account of the recent challenges. We expect transit time to go up as much as 30 days for certain markets like North America and Latin America. Therefore, we expect these challenges to come and we hope it is a short-term problem and in the short term we will be absorbing the cost of additional freight on our exports. However, our endeavour is to service our customers and we try our best to see how to reach those tyres to the specific market based on the requirement.
What are the levers you have pressed to get more than 14% margins and what is the outlook on margins? How does it go from here?
Kumar Subbiah: We feel the worst is behind us and we are in a comfortable range as far as margins are concerned. And 14-15% kind of a gross margin is healthy. I am sure the margin improvement also leads to a higher profit before tax, after tax and leading to improvement in earnings per share. So scale is one of the important levers for us to sustain margins at a healthy level.
Second is the right mix. The right product mix is important and if you sell more than the replacement and exports, our margins tend to be better.
Third is our own focus category of passenger, which is passenger car tyres and two wheelers plus agri-radial. These are the focus categories from a margin standpoint.
One of the important elements that influences the margin is the raw material cost. In the previous two years, we faced some gross margin related challenges on account of continuous increase in raw material costs. It looks like raw material costs will operate within a band. Should that sustain, I am sure we will be able to maintain a healthy margin, which could be 12% to 14%, 15%. In that band, we are comfortable in terms of operating.
Sequentially, your debt has reduced. There was healthy cash generation and so a Rs 160 crore reduction in debt. What is the plan on those terms? Where could we see that moving in terms of a debt reduction plan?
Kumar Subbiah: It is a good story. If you look at the last four quarters, our debt has come down by about Rs 600 crore. Same time last year, that is at the end of December 2022, our debt was a little over Rs 2300 crores. Now it has come down to Rs 1,700 crore. Our leverage ratios are very healthy. And we are comfortable with the current level of debt EBITDA of about closer to 1, 1.1. And it used to be around 3. And debt equity is under 5. Now it is about 0.44. We are very comfortable at this level.
If the business continues to operate at current levels of margin, which is about 12% to 15% kind of a margin, even after factoring in, you know, Rs 800 crore plus kind of a capex, we should be able to generate reasonable cash. Our operating cash flow has been very healthy for the last four quarters. And in the first nine months, we incurred capex of about Rs 600 crore. But we still managed to bring our debt down by Rs 360 crore. We hope this trend continues and we are able to bring the debt level down. We are at a comfortable level; our endeavour is not to under-leverage, while over-leveraging is bad, it does not mean that under-leveraging is good.
We would like to utilize this cash to put into the business in a manner that is able to bring in more efficiencies and give us the right level of returns on the additional investment. Yesterday the board also approved some capex, which is over a three-year period for us to keep ourselves ready for creating some upstream capacity, work on solar, work on some investments that will give us some higher margin product categories and things like that.
So we continue to use the cash that business generates into the right areas so that we are able to sustain these margins.
