DSIJ Interview with,Kumar Subbiah CFO, CEAT
"We have to ensure that we increase the size of the market pie"
Kumar Subbiah joined CEAT in Feb 2015 after spending little over 20 years with Unilever and Hindustan Unilever, where he handled various finance and commercial roles in India and outside India. Kumar is a B.Com graduate from Loyola College, Chennai. He is also a Chartered Accountant and a Cost Accountant with professional interests both in finance and supply chain.He is fond of macroeconomics and information technology.
As a CFO of CEAT, what are your top three strategic priorities?
My priorities will be aligned to the organisations priorities. So, our priority number one is growth, and to grow profitably. So, my priority as a CFO is how do I help business to grow and to grow profitably? Priority no. 2, we have large capex plans and so my priority is how do I help the business to manage that capex in terms of funding, managing the overall cash flows, ensuring that capex is well spent, etc. The third priority is, in the tyre industry, the commodity or the raw material cost is 60 per cent of the turnover and any volatility in the raw material prices will certainly impact the margins. Therefore, how do we manage that commodity to ensure that the business gets enough time whenever there is upward movement in the raw materials prices or the commodity prices, and how do I give protection or cover even the exposure arising out of forex? So, these are the top three priorities for me.
Can you throw some light on your capex plan?
In terms of capex plan, we have already stated that we would be spending about Rs.4000 crore over the next 3-5 years. So that is our capex plan. It is a large amount of capex and currently CEAT's balance sheet is reasonably healthy, particularly with respect to leverage ratios, whether debt/equity, debt/EBIDTA, etc, so CEAT's consolidated basis debt-equity ratio is 0.28 and standalone is 0.2 as on.June 30. So we have enough balance sheet strength to fund capex, but considering that the capex amount is large, we are planning to fund one-third of it from internal accruals and two-third through debt. However, it depends on the cash flow. We have already started expanding our capacity. The first one is for truck and bus radial tyres at our existing location in Halol and we are going to set up one large modern passenger car radial plant in the southern part of India near Chennai. So, we have clearly drawn out a plan in terms of where would be investing that capex and how much for each of the categories is being worked out and broadly shared also.
In FY18, 61 per cent of your revenue was from replacement market. What is your strategy to ramp-up revenue from the OEM segment?
Our original equipment share is very close to about 28-30 per cent. If you really look at sales of tyres in India also, it would be a similar ratio between replacement and OEM. But when you really want to grow, we have to ensure is that we increase the size of the pie and not necessarily change the ratio significantly. So when we increase the size of the pie, then it means we have to sell more tyres to original equipment manufacturers even to maintain the same ratio.Hence, we are doing a lot of work with the OEMs to get our products approved well in advance, so that when we add capacities we are able to supply tyres to them.
Presently, you are a leader in Sri Lankan market. What is your strategy to grow in other international markets?
In Sri Lanka, we have a manufacturing presence. In Bangladesh also, we have some plans to set up a factory because these are neighbouring countries. For all other markets, we export out of India. Therefore, we have not thought of manufacturing presence in other locations, however, we certainly have plans to grow in the international market. So step number one, we have set up a specialty tyre manufacturing plant at Ambernath, which commenced operations in October last year. This is an exportoriented unit, so whatever is produced there will be predominantly exported. Its export market is large. Secondly, we are also adding capacity and some portion of that capacity is also for meeting exports of both passenger car tyres as well as truck and bus tyres, in addition to specialty tyres. Therefore, currently once we expand our capacity, we'll have that much additional volumes for us to export.
How do you plan to sustain your margins amid rising crude oil prices?
This is a very big challenge. To be honest, I don't think anybody can influence crude oil prices, and it is also very difficult to predict crude oil prices. You can understand the trend, you can understand the macroeconomic reasons for the prices in case of any movement in prices, but it is difficult to sustain. What we do is that, we have a good procurement cover policy. What happens is when the raw materials prices increase, it increases for everyone, so we are not in a disadvantageous position compared to any of our competitors. Therefore, what is important is that business needs adequate time to react in the market. Therefore, it is important for us to ensure that we give that much time for the business to react in the market whenever the raw material prices move up significantly.
We are in a competitive market and CEAT is not a market leader, therefore, sometimes we have to ensure that we remain competitive in a market because we are not a leader for us to take any initiative. So what we try to do is, we try to have good control over costs, efficiency and overheads and try to minimise discretionary costs whenever raw material prices increase, if we are not able to support it with price increase, etc. So, we take these actions in addition to ensuring that we buy well and we give enough time for the business to change or react to the market whenever the raw material prices increase.