Focus on margins gives Ceat a fillip

After the price of raw rubber shot up two years ago, Ceat redrew its customer segmentation chart. The company is targeting the well-heeled clientele. Ceat even tied up with Yash Raj Films to launch the Dhoom 3-branded, high-speed, special-edition tyres and is collaborating on the release of a video games based on the box-office monster.

Managing Director Anant Goenka who joined the company four years ago embarked early on the unconventional path of higher margin products to offset the sudden rise in the cost of rubber. When rubber prices hit the roof from Rs 100 a kilo to Rs 200 in March 2011, Ceat took a beating, margins shrunk 5 per cent, and net profit dipped to Rs 8 crore in FY 2012. Back in FY 2010, it had logged profits of Rs 165 crore.

Now Ceat is countering that dip by launching higher-end tyres where the margins are better and is focusing on the two-wheeler and four-wheeler tyre market. With the rapid penetration in the two-wheeler tyre market, Ceat has a bigger imprint in the passenger tyre segment, especially in the replacement-tyre business. Replacement demand for two-wheeler tyres is high and offers better margins. Its new Dhoom 3 tyre is targeted at the younger segment and is also meant to boost the company's image as a quality tyre manufacturer.

The new strategy has worked. Ceat has doubled its two-wheeler tyre market share in a span of three years from 10 per cent to 22 per cent, and it is gunning to take this to around 25 per cent by next year. Ceat is outsourcing two-wheeler tyres to an exclusive manufacturer to reduce fixed overheads, while it renews focus on expanding its distribution network in the rural areas. Says Goenka: "Two-wheeler tyres are a key business segment for us. We have improved our market share and we will continue to do well here."

The stock market is taking notice. Ceat's stock, which was hovering at around the Rs 80 mark for over two years now, has zipped past Rs 330, surging over 400 per cent in four months since September 2013. Last quarter, its profits increased to Rs 75 crore (which is Rs 2.75 crore over the figure in the previous quarter).

But while the stock is doing well, the competitive race is heating up even as Ceat has barely managed to increase its market share, which has been languishing at around 14 per cent for some years now. Big foreign tyre manufacturers with their deep pockets and new technologies are setting up huge tyre capacities in India. Michelin is said to be investing close to Rs 4,000 crore in a radial tyre plant near Chennai that will manufacture trucks and passenger car tyres. By contrast, Ceat's investment in its plant in Halol, near Vadodara, is merely around Rs 650 crore.

Ceat is drawing up plans to keep competition at bay. "Competition is good," says Anant Goenka, managing director. "We are focusing on improving our quality constantly and getting better road grip. There will be more competition at the higher end of the market. We will focus on a few key segments where we can be the number one or two player."

Another step that Ceat took to counter rubber's high cost was to look at the replacement market in the passenger car segment instead of the trucking segment. Says Goenka: "A commercial vehicle owner spends heavily on replacing tyres every month. For him, the sensitivivity of a 1-2 per cent change in prices is far higher than in the consumer segment, where tyres are changed once every three years. People in this segment don't think twice about paying Rs 500 more for a tyre. In this segment, safety and quality are more evident."

Passenger tyres, which comprised 40 per cent of Ceat's revenue in FY 2010, now account for over 50 per cent of the earnings. The company plans to ramp up this division to 60 per cent of revenue over the next three-four years, and Goenka is confident of driving in a better product mix that favours higher-margin products.

Ceat is looking at expanding its rural presence and beefing up its operations in the two-wheeler replacement market to enable it to make deeper inroads into the passenger-car tyre business. In rural India, utility vehicles and two-wheelers are vehicles preferred by households, precisely the sector in which Ceat is building up a stronger presence.

The company is also expanding into new overseas markets. "Bangladesh is a market that is unique," says Goenka. "It is among the N-11 countries of high growth, but it has no tyre manufacturer and all tyres are imported. We can turn it into a high-market-share business and become a dominant operator in a niche market." Accordingly, Ceat is setting up a Rs 275-crore radial tyre plant in that country under a 70-30 joint venture with the A H Khan Group. It plans to launch tyres in the Bangladesh market by around the fourth quarter of FY15.

Explaining that capital constraints had held back its growth in market share despite being one of the oldest tyre companies in the country, Goenka adds, "We don't want to necessarily be the largest tyre company in the world. We want to be the best tyre company in a few categories, and for that we are focusing on particular targets. By creating the right brand perception, and R&D."

Business wise, the key for the tyre company is operating profits, which have doubled to 12 per cent from 6 per cent three years ago. And it has helped Ceat stock create a dhoom in the market, rocketing up 400 per cent. Analysts are saying that if the company can demonstrate further market share gains in its key segments and make significant inroads into the passenger car tyre segment, the Ceat dhoom can be sustained.