CEAT Limited (CEATLTD) Q2 FY23 Earnings Concall Transcript

CEAT Limited (NSE:CEATLTD) Q2 FY23 Earnings Concall dated Nov. 08, 2022

Corporate Participants:

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Analysts:

Ashutosh Tiwari — Equirus Securities — Analyst

Annamalai Jayaraj — Batlivala & Karani Securities India Private Limited. — Analyst

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Rishi Vora — Kotak Securities — Analyst

Nishit Jalan — Axis Capital — Analyst

Mitul Shah — Reliance Securities — Analyst

Chirag Shah — Nomura — Analyst

Siddhartha Bera — Nomura — Analyst

Navin Mehta — Mahindra Manulife — Analyst

Disha Sheth — Anvil PMS — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q2 FY’23 Earnings Conference Call of CEAT Limited, hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions]

I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities India Private Limited. Thank you. And, over to you.

Annamalai Jayaraj — Batlivala & Karani Securities India Private Limited. — Analyst

Thank you, secretary. Good afternoon, everyone. On behalf of B&K Securities, welcome to Q3 FY’23 post-results conference call of CEAT Limited. I also take this opportunity to welcome the senior management team of CEAT Limited. We have with us today Mr. Anant Goenka, Managing Director and Mr. Kumar Subbiah, Chief Financial Officer. I will now invite Mr. Anant Goenka for his opening remarks.

Also, may I remind you of the Safe Harbor. The company may be making some forward-looking statements that has to be understood in conjunction with the answers and replies thereof in the company’s interest.

Over to you.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Thank you, Mr. Jayaraj. Good afternoon, everyone, and a very warm welcome to CEAT’s Q2 FY’23 earnings call. I am Anant Goenka, and I have with me our CFO, Mr. Kumar Subbiah on the call with us. I hope you all had a wonderful Diwali and a very good festive season too. As usual, we start-off with some brief remarks from me and Kumar, post which we can take up questions-and-answers.

With respect to sales performance, the demand environment has remained healthy, carrying the momentum seen in quarter four FY’22 onwards, we were able to maintain our volumes achieved in quarter one. On the replacement side, two-wheelers saw a moderate growth over the quarter one, EV remained flat. Commercial volumes were seasonally a little bit weak, which was the same for tractor tyres as well.

On the OEM side, the two-wheelers continue to see some growth, while passenger car and commercial volumes were flattish. And on the export side, volumes were impacted by macro headwind, especially in our traditional geographies. We were able to sustain momentum in Europe and U.S. driven by some new launches and channel addition. However, overall international business volume saw some minor dip over the previous quarter. Overall volumes for quarter two were lower by about 1.5% on a quarter-on-quarter basis and grew by 7% on a year-on year basis.

Going forward in terms of outlook, domestic demand situation looks steady. As reflected by two-wheeler vehicle demand and other consumption data, there is a pick-up in rural sentiment. Abnormal rain may impact the Kharif output, but the Rabi season is expected to be promising with improved water availability. I agree, output prices have been on the higher side, so hopefully rural cash flows should improve further over the next few quarters.

Export demand will stay volatile for a few more quarters given the geopolitical uncertainties and weakening macroeconomic situation around inflation and recession fears across geographies. From a near-term perspective, quarter three would be the fourth normal quarter vis-a-vis COVID-related disruption, so we are expecting routine seasonality to play-out more prominently from now on.

On the cost front, we witnessed a commodity basket inflation of about 4% over quarter one, marginally higher than our guidance. We were able to take adequate price increases, which covered for the raw material inflation during the quarter, and therefore expanded gross margin by about 80 basis-points. On the back of slightly higher revenues and similar operating costs, our standalone EBITDA margin expanded by 127 basis points over quarter one to reach 7.1%. Prices of these commodities like crude and natural rubber has been softening over the last few months. The benefit of which should start reaping in from the second half of quarter three. We expect raw material basket for quarter three to decline by about 2.5% to 3% over quarter two.

As indicated previously we are tightly monitoring our capex and cash flows. Barring off-highway tyre segment, we believe we have sufficient capacity across product categories. The guidance for FY’23 project capex remains at INR750 crores, which we will review during quarter three. Our current off-highway tyre expansion plan remains has per plan, the off-highway radial capacity at our Ambernath plant has reached 80 tons per day, which will further increase to 105 tons per day by mid ’24. We are also converting about 18 tons per day of truck bias capacity in our Bhandup plant to off-highway tyre. We have taken Board approval for adding another 55 tons per day radial capacity in our Ambernath plant over the next 2 years, which would come at a cost of about INR395 crores. We will trigger the same based on the demand situation. Once implemented, our total off-highway radial capacity will reach 160 tons per day. The off-highway tyre category, a strategically important category for us and we are confident of generating the desired EBITDA margin and ROCE from this capex.

We successfully launched our EV tyre platforms across product categories. Energy drive EV for passenger car and UV tyres. Energy ride for two-wheelers and wind energy for truck and bus segments. Many of these were the first in the Indian tire industry. These platforms will also help sharpen our position as a leader in EV tires and expand our market-share.

We also rolled-out our new SecuraDrive campaign for digital and mass-media with the theme Stay Ready for Rockstar’s on the Road. We are present on high-impact properties like Kapil Sharma Show and Indian Idol with this campaign. Our previous campaign which was called Switch to SecuraDrive recently won International Advertising Association IndIAA Chapter Award in the auto and auto ancillary categories.

We continue to remain committed to ensuring that our tyres provide maximum energy efficiency from an environment perspective. As a step forward with our focus on sustainability, we have started energy certification of our tyres and initial set of each product with PCUV we TBR category have received 5-star rating from the Bureau of Energy Efficiency. In H1 FY’23, about 22% of our local rubber requirement has been sourced via alternate transport, which has a lower carbon footprint. We plan to continue and build on this aspect of an environment-friendly supply chain.

Though the tire sector has seen unprecedented margin compression since the last 7 quarters, we are beginning to see some green shoots now. We expect the commodity situation will remain a little benign, and demand remains healthy in the coming months, resulting into quick and sustainable some amount of margin recovery. From a longer-term perspective, we have created multiple levers like scale, premiumization, growth in high-margin categories, a check on costs to achieve robust profitable growth.

With this, I hand over the call to our CFO, Kumar.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Thank you, Anant. Good afternoon, ladies and gentlemen, and thank you for joining our Q2 earnings call. I’ll share some further financial data points with you, all post which we can enter the Q&A session.

First, regarding our revenue, our consolidated net revenue for the quarter stood at INR2,894 crores, a sequential growth of about 3% which was largely driven by price growth and year-on year growth of about 18%, which has a mix of both price growth as well as volume growth. As regards to our gross margin, during the quarter the gross margin moved up by 80 basis points. And our blended raw material cost went up by approximately 4%, largely neutralized by price increase taken during the course of the quarter. The inflation was largely driven by increase in crude derivatives and natural rubber prices. Both of them have cooled off since last few months. Some of the crude derivatives and chemicals are still holding up and are correcting with a lag. We expect our overall RM cost basket to go down by 2.5% to 3% in-quarter three over quarter two.

Currency movement, however, has been adverse and is diluting the benefit from cost correction since many of our inputs are pegged to U.S. dollars. U.S. dollar has gone up by almost 7.5% year-to-date. Due to recession fears, commodity prices may remain subdued in the near-term, but currency may still have an adverse impact should the rupee continue to depreciate. We are monitoring the situation closely and taking necessary corrective actions.

Now coming to debt, our capital expenditure and working capital. We spent INR205 crores on capex including projects as well as routine during the quarter, and our working capital during the quarter went up by approximately INR170 crores sequentially due to higher inventory values. Overall, our net debt increased by about INR197 crores in quarter two compared to the end of quarter one. We are keeping a close watch on our debt situation, which is still near our internal thresholds. We expect our debt to increase further in quarter three and quarter four. However, as margins and cash flows improve, reasonable portion of our capex will come from internal accruals, and hence incremental debt requirement will progressively come down.

As regards our operational expenses and EBITDA, we have been working continuously on multiple cost optimization measures since last several quarters, some of them have started yielding results. Despite inflationary pressures across the board, we have been able to contain our operating costs as a percentage of sales in quarter two in line with previous quarters, and that has had been from margin expansion. Our consolidated EBITDA stood at INR204 crores in the quarter with a margin of about 7% and about 96 basis points from the previous quarter.

As part of our exercise to make our older factories cost-competitive, we incurred about INR23 crores towards VRS to our employees in our older factories. Our depreciation position was similar to the last quarter. Our interest cost went up by about 11% during the quarter due to higher debt and also due to increase in the interest rates. As part of our annual review of credit rating, our credit rating agency, India Ratings affirmed AA with stable outlook for long-term, and A1 plus for short-term. We’re also happy to share with you that Government of Madhya Pradesh awarded the Best GST Compliant Company Award to CEAT for the year 2021-2022. The Honorable Chief Minister handed the Certificate and Cash Award of INR10 lakhs to our taxation team last Friday.

With that, I conclude. We can now open the floor for Q&A.

Questions and Answers:

Operator

Thank very much. [Operator Instructions] We have our first question from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead.

Ashutosh Tiwari — Equirus Securities — Analyst

Yeah, hi. Sir firstly, you mentioned that obviously in the second quarter truck demand was sluggish quarter-on-quarter, that was seasonality, but how are things looking at I think in October month and all, is the truck improvement very down?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yeah, truck demand looks to be okay, I’d say that there were some challenges in international business, through down that we did see. Again, Indonesia market where Kuta continues to be a challenge, some areas around the subcontinent, and that has caused a larger impact more than domestic. Domestically, demand seems to be relatively okay on the truck.

Ashutosh Tiwari — Equirus Securities — Analyst

Is it [Indecipherable] in truck?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yeah, October was relatively a soft month because of festive activities. We are back to normal from beginning of November onwards.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And in exports, Indonesia is by far the market size, you know, the ones which probably build over last few years, are they still growing for us?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yeah. So currently we are seeing some recessionary pressure. Year-on-year, I think we are a seeing positive growth, but quarter-on-quarter there is a slowdown with respect to European markets.

Ashutosh Tiwari — Equirus Securities — Analyst

And on the RM side you mentioned 2.5% to 3% decline you’re having in this quarter, but in terms of price increase how much we have taken last quarter and then I think so on the basis it will be not effective for the full quarter, so that should also — impact should also come through in this quarter, right?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

We’ve taken a price increase of about 4% effective price increase in the quarter. And we expect to take maybe another 1% or so between October-November of quarter three on average across the board.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And these pricing increases are stable like it was one that was last taken in the Q2?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

These were spread-out, between July-August September it was quite spread-out. The largest price increase we took was of motorcycles, scooter in replacement of about 8% to 9% early August.

Ashutosh Tiwari — Equirus Securities — Analyst

Early August.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

That would have had the largest impact, the balance would be the routine anywhere between 1% to 2% in other categories.

Ashutosh Tiwari — Equirus Securities — Analyst

And lastly, on this capex that you announced INR395 crores in the [Indecipherable] so are you going to implement it right on from let’s say in the times or you will take call and take the capex other than required?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

So, there may be certain machinery which will be very long-lead time, some amount of advances and payouts will happen I think in the next three months for that, but most of the expense will come in next year. If we decide to go head, there is a little bit of a question mark on Europe at this point of time, so by the time the demand really — I mean the plant comes up, it will not be before April ’24, so that’s when we hope even Europe etc. bounces back to normalcy or it will happen soon after that and then the ramp-up and all will also take a few months. We are trying to see how to marry the two in terms of few and develop the recession coming to an end and us being able to have the capacity ready as well.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. Thank you. Okay.

Operator

Thank you. We have our next question from the line of Jinesh Gandhi from Motilal Oswal Financial Services Limited. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Yeah. Thanks. Hi, my question pertains to the volume growth up 17% Y-o-Y which we saw in the second quarter, any breaking down between replacement and OEM for 2Q on Y-o-Y basis, how it came?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yes, so largest growth has come — our larger growth has come on the OEM side, largely export and replacement both had been relatively flattish, whereas the balanced growth has come mostly from the OEM side, so 20% plus growth on OEM in a year-on year basis.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Okay. And do you expect this flattish trend in replacement to continue given that the base would be normal for last year and primarily overall trends, I mean overall inflationary impact will also be seen in coming quarters in the domestic market so, on replacement side do you expect flattish trend, or you do expect Y-o-Y growth there?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

No, so there will be a value growth certainly, on volume terms we expect at least on a quarter-on-quarter think to be growing positively, for monsoon time, our quarter two anyways is a slightly weaker quarter for us, so things should get better in quarter three and quarter four, not substantially, maybe 200 basis points, 300 basis points improvement from quarter two.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Okay. So, which effectively will mean on Y-o-Y basis why this is it could be even less flattish?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yeah, slight growth or flattish, yeah. Year-on-year for the quarter, I don’t take quarter three of last year, but quarter-on-quarter is easier to share.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Right. Okay. I mean, considering a reduction in commodity prices, would it be fair to say that the price increases which we will be taking in November and October months, for the quarter, is that we don’t need to take any material price increase and more or less, I mean, it will be done with the recovery as well?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

So currently, we don’t see a price increase opportunity coming up, besides as I shared maybe 1% to 2% in certain categories only, that which we expect to take in quarter three. Beyond that nothing else at this point.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Okay. And lastly, can you share the utilization levels for two-wheelers this year and truck [Indecipherable]?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yeah, utilization is somewhere between 75% and 80% capacity utilization on average, most of the under-utilization is on the truck-bus buyers, kind of areas. But we look at about 70% to 80% in PCUV and two-wheeler because we still have upside on Chennai and two-wheeler also, we still have about a 20% upside in terms of growth.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Great. And TBR between 80% or…

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Above 75% to 80%.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Okay. So, in the foreseeable future we don’t need to go back to our deferred capex on TBR side?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

No, we don’t need to.

Jinesh Gandhi — Motilal Oswal Financial Services Limited — Analyst

Great. Got it. Thanks, and all the best.

Operator

Thank you. We have our next question from the line of Rishi Vora from Kotak Securities. Please go ahead, sir.

Rishi Vora — Kotak Securities — Analyst

Yeah. Thank you for taking my question. For the cost, on the other expenses was INR10 crores, I recollect that last quarter expenses were higher mainly on account of higher marketing spend on during IPL. So, on a sequential basis volumes are also still further up, assuming that marketing spend for the quarter would have come down, so is there any other inflationary pressures we’re seeing on other expenses, and if you could highlight on total basis?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Okay. See, largely the increase — on a sequential basis increase in other expenses was on account of increase in power and fuel cost, and I would say volume was little higher in quarter two vis a vis quarter one, okay, so therefore that led to increase in the expenses, otherwise we are more or less in line.

Rishi Vora — Kotak Securities — Analyst

Got it. So, you expect it to maybe the outsourcing revenue to normalize in the third quarter?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yes, yes.

Rishi Vora — Kotak Securities — Analyst

Okay. And my second question is, sir, how do you expect competitive intensity now to pan-out given that we are seeing deflationary pressures across RM basket, so you expect to retain most of the benefits or how is the competition reacting to it in November or maybe what do you expect going forward or will there be some price cuts that can come through, if there is a let’s say a little bit of slowdown in the replacement segment?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

I think difficult to give an answer here. I would say that, currently margins are still not at desirable levels, so clearly there is no desire to take any price cut, but if there is something that, I mean, if there is a competitive action, we may have to respond. It depends on our strength on that category and so very difficult to give an answer. But I think there is still, margins are far from where they should be, so we are still playing a catch-up game which needs to fully reach a certain level of margin.

Rishi Vora — Kotak Securities — Analyst

Understood. And sir, [Indecipherable]

Operator

Sorry, we are you able to hear you, Mr. Vora.

Rishi Vora — Kotak Securities — Analyst

Sorry.

Operator

Your voice was breaking. Please go ahead now.

Rishi Vora — Kotak Securities — Analyst

Yeah sir, last question on debt trend, you highlighted that you expect debt levels to go up in third and fourth quarter. Obviously, we’ll see operating performance of the company will improve, so do you expect capex tends to increase materially in the second half or [Indecipherable] debt levels to?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Our capex guidance the beginning of the year for the current year was about INR900 crores. INR750 crores of project and INR152 crores approximately of normal maintenance capex. Okay, in the first six months we have spent INR450 crores, and out we continue to hold that capex forecast for the full year, which will be another INR450 crores will be spent in the second half, so it needs to be funded. So, our operating cash flow is lower than that level, however, it will depend on our performance in the next six months, and therefore the gap between operational cash flow and the capex required, we’ll have to — will translate to debt increase. I think that’s what we meant.

Rishi Vora — Kotak Securities — Analyst

Okay sir. Thank you. I’ll come back-in the queue.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yeah.

Operator

Thank you. We have a next question from the line of Nishit Jalan from Axis Capital. Please go ahead.

Nishit Jalan — Axis Capital — Analyst

Yeah, hi sir. Thank you for the opportunity. So, my first question is on the RM cost side, we have seen a good at 20% kind of a reduction in natural rubber prices. So, just wanted to understand why are we seeing only 2.53% benefit on the RM cost per kg? Is there any other commodity where we’re seeing higher inflation? And what is the trend that you are seeing in synthetic rubber, because we are seeing crude and rubber kind of moving in different direction. So, just wanted to understand how synthetic rubber prices — how in particular prices reacting to that.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Okay. In general, our RM cost — okay, both increase as well as reduction gets reflected in our books with a lag of about 3 months okay, because we hold inventory, we have some both finished goods inventory as well as RM inventory and we also have covers, so therefore, we expect our RM cost reduction to flow progressively month on month. And ss far as natural rubber is concerned, the international prices have come down, close to the number that you indicated, also partly impacted on account of currency depreciation, so currency depending on for the current financial year was closer to about INR75, today it’s about INR83. So that has also taken away some part of the benefit, and in the local market, natural rubber prices have moved down from one INR170, INR172 level to around INR150 rupees per kg level, so it’s about 12%, 13% kind of an impact.

So, this is flowing through, but progressively month-on month, so as far as the current quarter is concerned we expect the impact to be around the range that we had indicated. In case of synthetic rubber prices, also we are seeing a correction, but correction is a lag, okay, crude drops, then butadiene drops then the synthetic rubber drops, then after that we get that benefit, so there is a lag there as well. We have seen a drop in the synthetic rubber prices also in the double digits anywhere between 12% and 15% in the last 2, 3 months, and that benefit will also flow through subject to after adjusting for the currency impact, even if when we buy synthetic rubber from the local suppliers, it is an import parity kind of a pricing, so therefore, depreciation of rupee will have an impact on the delivered costs, so we have considered all of that while giving the RM cost guidance for the current quarter.

Nishit Jalan — Axis Capital — Analyst

Just to clarify, this 12% to 15% fall in synthetic rubber price is on INR terms, sir?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yeah. In case of synthetic rubber, yes approximately, 12% would be the INR terms.

Nishit Jalan — Axis Capital — Analyst

Sir, just wanted to understand, for parts you would be interacting with lot of diverse suppliers or generally you have a good sense, what according to you is the reason why rubber prices are softening the way it is, we are not seeing this kind of a trend in other commodities? Do you think China demand has a big role to play in this, and when China starts recovering, rubber prices starts going up or do you think that it’s a downtrend which can sustain for a slightly longer period of time, just your thoughts based on your understanding, your interaction with experts, how do you see that panning out?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Okay. As far as natural rubber is concerned, we’re broadly in agreement with what you said, okay, Chinese demand actually influences the prices of natural rubber, so therefore lower demand from China is the reason for drop in the international prices of natural rubber. So, in case of synthetic rubber, it’s a combination of both, overall global macroeconomic factors as well as the crude, so both of them influence. Natural rubber, it is largely because of lower Chinese demand.

Nishit Jalan — Axis Capital — Analyst

Okay. Sir, one last question on the balance sheet side, if I look at your payables, your payables are almost 80 days of sales and maybe about 120, 130 days of RM cost, which seems to be on the higher side, right, 4 months payables. So, just wanted to understand why is that? Are we looking to do some funding from payables, so that your debt doesn’t go up, or this is the normal in this kind of a credit period you’re getting from your suppliers because 4 months of credit period from suppliers look a bit on the higher side?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Okay. No, it’s a combination of good imports as well as local, and most of our local purchases are closer to both anywhere in the range of 75 to 90 days. That is kind of a credit period that we have with the local suppliers. And payable international, it is even higher than that, 120 days, 150 days is also possible. Sometimes, vendors, we do have vendor discounting schemes, particularly for priority sector suppliers, they are able to borrow at the lower rate of interest, say for example, natural rubber, where the credit period can be even higher, so it’s a combination of all three.

Nishit Jalan — Axis Capital — Analyst

Okay. Thank you. Thank you so much.

Operator

Thank you. We have our next question from the line of Mitul Shah from Reliance Securities. Please go ahead.

Mitul Shah — Reliance Securities — Analyst

Thank you for taking my questions. Sir, one clarification on raw material basket indication of, 2.5% to 3% reduction. In that assumption, are we assuming exchange rate current level of INR82 to INR83, or what was your assumption for that?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

No, we have assumed a current exchange rate INR82.50 to INR83.

Mitul Shah — Reliance Securities — Analyst

Okay. And second thing sir, you highlighted that outsourcing increased, so that’s why other expenses gone up. So, this increased outsourcing, then wouldn’t that be a part of the raw material post or you factor it in other expenses, how it was sir?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

See, in outsourcing our arrangement is conversion basis, so therefore raw material cost stays in our books, it’s only the cost of outsourcing that goes there. Overall, if you really look at all our other expenses, the increase is very marginal from INR553 crores to INR565 crores, since the question was, why has it gone up, I indicated that as one of the reasons, with the quantum of increase in even in outsourcing was marginal. And the entire outsourcing cost comes as other expenses, and the raw material goes as raw material cost in our books.

Mitul Shah — Reliance Securities — Analyst

Okay. Sir, one broader question in terms of product lifecycle, how it has take-up in last 2, 3 years after these improvement in quality, reduce friction, etc. for various categories or overall, what it was 3, 4 years ago or it’s now performing, overall lifecycle of the products, tyre?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

There has not been a dramatic shift in overall lifecycle of the product, what’s happened is that customers over the years have become more-and-more nuanced for which we have launched various platforms. For example, you have a long-life platform which is our mileage tyre, that certainly offers a much longer life than say that was in the past. Similarly, you have high-grip, or you will have electric vehicle platform, you have a comfort or a more premium platform. So, each of those have different offerings and that has changed to that extent, but I would say where life as changes particularly in our long-life platform there we have continuously invested in increasing life, which would be largely say for the taxi segment or other commercial vehicle segments that are there.

Mitul Shah — Reliance Securities — Analyst

So overall, on a broader basis there is no major change or no major increase in terms of number of months, so replacement cycle remains broadly, assuming that, right?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Largely similar, yeah.

Mitul Shah — Reliance Securities — Analyst

Sir, last question, sir, on the replacement side do you expect any of the segment which can grow high-single-digit or close to double-digit kind of number in next 6 months?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

We indicated some improvement, but any of the segment where we see more promising volumes.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yeah. I think the passenger car segment we’re doing well, we’ve seen continuous market share increase as well as growth out there, so we are quite excited about that space. OEM, there has been large demand across, so on a year-on year basis, OEM will continue to do well. Off-highway tyre segment also has seen 30% plus kind of growth level, so that too is continuing to do well. So, these are some segments that’s turned out. Quarter-on-quarter basis, two, three-wheeler also has relatively stood out. So, these are the four or five categories which we feel quite optimistic about.

Mitul Shah — Reliance Securities — Analyst

Thank you, sir, and all the best.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Chirag Shah from Nomura. Please go ahead. Mr. Chirag Shah.

Chirag Shah — Nomura — Analyst

Hello.

Operator

Yes, please go ahead.

Chirag Shah — Nomura — Analyst

Yeah, thanks for the opportunity. Anant, first question is on the price hike of 8%, 9% that you indicated for two-wheelers right, did I hear it correct?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

That’s right.

Chirag Shah — Nomura — Analyst

So, sir, a very strong price hike that you have taken, is it an industry phenomenon or it was — you are able to push the envelope further?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

So, I believe one or two players in the industry did take approximate price hike of a similar nature. Not everyone, so I’d say that it is kind of mixed with what I understood from the intelligence in the market. But on the other hand, if you look at the last say 12 months, all other categories have seen continues price hikes of 2%, 3% every quarter, whereas two-wheeler did not see it, so it was overdue on the two-wheeler side and it just happened to happen in a single shot.

Chirag Shah — Nomura — Analyst

Sir, what gave you the confidence to take such a price hike, because it’s — see taking 1%, 2% hike every quarter is a different thing and taking a three-quarter hike in one-go is a very big thing. So, what gives you confident that demand is so strong that the price will be absorbed, or it was more from your own cautious perspective that drove them, if there is the demand that can surprise negatively?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

No, it was a mix of competitor action as well as an overdue where margins had come under pressure, so we felt that this was something that could be done.

Chirag Shah — Nomura — Analyst

And you are able to hold-on the prices, right, there is no pushback coming from dealers etc.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Not yet, there could be a pushback of about 1%, 1.5%, 1% or so that could happen in the month of November.

Chirag Shah — Nomura — Analyst

Okay. Second question was on RMC, if I understood, there is an average 15% kind of a reduction in the RMC basket in general, so Q4 the benefit could be far bigger than Q3 that you have indicated or would it be right, because the 15% — 60% of 15% is around 8%, 9%, kind of RMC benefit that you expect assuming other things being constant, there is no major upward view in currency or the RMC basket? Could we expect Q4 much bigger number?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

With the beginning of quarter four, say January should be better, okay, largely covered for next three months from today. We would like to wait and then respond to this, because the commodity prices can bounce-back very quickly, and crude also went below $90, stayed at $85, $86 in terms of Brent, now it’s largely moving in the range of $95 to $100 so this thing will do have an impact. Some of our raw materials we fixed price for a quarter, okay, so therefore, I think in terms of trend quarter four should be lower than quarter three, but I think closer to quarter four has been I think we’d be able to provide more clarity. So, even in the current quarter also, we expect December prices to be lower than November and November to be lower than October progressively, and as we could also see in terms of what our January month prices could be, January could also be little less than December. That is a trend that we’re seeing for the next 3 months, including current month. For whole of quarter four, we would be able to comment, closer to that period.

Chirag Shah — Nomura — Analyst

Yeah. Last question is again I asked here on the import side given that the international freight rates have cooled off significantly, now catch that you have seen off late of imports, the imports are going up in the system?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

The raw material cost impact, when earlier someone asked the question, it was our — actually, we responded based on the delivered cost basis, okay, in the import, on import basis, approximately about $40, $50 per ton kind of a freight rate correction that we have seen in the last three months. For us, the impact, we were also impacted because of shorter transit times, and we ended up actually, there will be more inventory as of end September, where our total covers are lower, would there be any threat on account of freight, I don’t think so, yeah, even today as we speak the local, for example, local natural rubber prices are higher than import prices, okay and normally why there is on — whether the requirement is short-term or long-term, okay, so for a short-term that arbitrage between the two different sources can always exist, but we don’t expect any impact on account of lower import freight or ocean freight to have in terms of flow of materials from other sources. We expect the local prices to correct automatically based on the delivered cost which include the freight cost element also.

Chirag Shah — Nomura — Analyst

Yeah, I was also referring to with imports, are tyre imports effectively up or expected because there are some indications that imports could start coming back to some extent. Any color there we are getting from them.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

We have seen — there has been some increase in imports from Thailand. There has also been some wrong classification of tyres that we do see happening, where there are used tyres coming in, but they are actually fresh, so those are some pointers that I would say not enough necessarily to move the needle or worry us about.

Chirag Shah — Nomura — Analyst

And this will be largely in trucks, right into CRR or?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes, more than truck. There is, I believe, there is an anti-dumping duty on trucks, but despite that there’s some tyres coming in.

Chirag Shah — Nomura — Analyst

And last housekeeping one, ’24 capex how should we look at, it would be lower than this year capex, significantly lower, because last part of your capex program has largely been done?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes, so, we go through our annual planning exercise in December, after that we’ll be freezing into the capex, so maybe by Jan quarter, we will give you some clarity on capex for the following year.

Chirag Shah — Nomura — Analyst

But directionally, would it be lower than this INR950 crores, INR1,000 crores that you have been doing over last…

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes, it will be lower than INR950 crores, INR1,000 crores capex versus the past.

Operator

Thank you. We have our next question from the line of Siddhartha Bera from Nomura. Please go ahead.

Siddhartha Bera — Nomura — Analyst

Yeah, hi sir. Thanks for the opportunity. Sir, first question on the mix you have shared for the half of the year, so we have seen that OE mix has gone up quite substantially from 21%, 23%, 24% to 29% like on the margin side, you have sort of maintained on important and sequentially, so how to read this that is this impact getting offset by the higher mix of PCUV or quarter-to-quarter there is not much difference in terms of the mix?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

I’m sorry, I didn’t get your question clearly, one is you said OE is increasing higher than other categories, other markets and after that?

Siddhartha Bera — Nomura — Analyst

Yeah, so OE you see…..

Operator

Unmute the line please Mr. Bera.

Siddhartha Bera — Nomura — Analyst

Yes, OE mix is going up now over the quarters, but margins have largely been maintained, so is the negative impact of higher OE is getting offset by some other category or nothing more to read across here?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

So, OE certainly is having an impact on mix and, therefore, adversely affecting realization, but on the other hand, there are so many other factors we expect to price increases, so much catch-up that has to be done. Also, category mix does have a role to a certain extent. There has not been a dramatic shift in category mix at an overall level, just the way like OE have seen a substantial shift, here we’ve seen a larger sale on off-highway tires and some amount and PCUV which is slightly higher margin, but clearly there has been some adverse impact because of higher OE sales.

Siddhartha Bera — Nomura — Analyst

Got it. And the second thing is…

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

We cannot clean it because there are so many other factors at play.

Siddhartha Bera — Nomura — Analyst

Got it. And second on the employee side, so if you look at the cost, so when we were doing say probably at INR1,000 top-line we used to be sort of about INR180, crores but now at close to the INR1,000 top-line, we are at about INR160 crores in terms of employee, cost so how to look at this, I mean, VRS we have been paying-off for quite some time so, is that having any impact and when sort of can we expect the COGS again to go up, because of the new capacities and plants we are adding.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Right. So, on VRS, we did incur a VRS in this quarter, and to that extent that is reflected below EBITDA levels. That will have a marginal impact maybe on employee cost going forward but overall July onwards also you have your increment cycles so on so there will be or they can be a normalized increase in employee cost from quarter three versus the previous quarter.

Siddhartha Bera — Nomura — Analyst

Got it. Got it. So, one should expect another round of inflation to have come through the second half.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

Yeah, there will be. Okay. Got it, sir. Thanks a lot sir, I’ll come back in the queue.

Operator

Thank you. We have our next question from the line of Navin Mehta from Mahindra Manulife. Please go ahead.

Navin Mehta — Mahindra Manulife — Analyst

Yeah, hi sir. One question, as I understand on the export side you’ve mentioned everything that you’ve seen like EU and Americas are the focus areas for you. So, are you seeing any need significant opportunity especially as look people talk, let’s say, [Indecipherable] on power and fuel side, especially?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes, so we’ll have to look at it at a category level. In the U.S. we only sell-off highway tires at this point of time, so that category is going strong, and we have continued to be optimistic about U.S. sales in our filings. Also, we expect to see some headwinds, we are seeing some stresses, but this is also we are being able to maintain our sales growth and maintain our own internal budgeted numbers, so off-highway tyres, we continue to be optimistic about. It is largely in the passenger car segment we are beginning to see some slowdown to be overall, we expect to see some pressure in EU going forward. I mean the worst is yet to come of the recession as per economies. So, let’s kind of just wait-and-watch what will happen. On the other side, we continue to expand our range, we launched some TBR tires in EU, so hopefully limited impact. The other is that people may trade-down from the premium players to value players, and therefore, the overall impact may be a little bit lesser on us. But I still say growth overall will slow down because of the recession.

Navin Mehta — Mahindra Manulife — Analyst

Okay. So, as you mentioned, let’s say the shift down to value players from inside, is that a sizeable opportunity not now maybe over the two, three-year period or you think that this is transitionally that people will not make-do large changes in terms of their overall supply-chain environment?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

No. I think that this is a large trend that has been going in years, so 7, 8 years there has been a clear shift the value that we offer to the customers are very high in comparison to the price versus say the larger the premium players, so to that extent this is a continuous trend that we see happening in the longer-term.

Navin Mehta — Mahindra Manulife — Analyst

Got it, sir. Thank you very much, That’s it from my side.

Operator

Thank you. We have our next question from the line of Disha Sheth from Anvil PMS. Please go ahead.

Disha Sheth — Anvil PMS — Analyst

Hello.

Operator

Your volume is very low.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes. Hello Disha.

Disha Sheth — Anvil PMS — Analyst

Yeah, hi.

Operator

Disha, we are not able to hear you clearly, your volume is, very low.

Disha Sheth — Anvil PMS — Analyst

So, I wanted to say that since there’s this 8% to 9% price hike in two-wheeler, are you feeling that or you’re saying that’s high overall in two-wheeler, or you are able to take that such a big pricing?

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

No, so I has shared that there was a pending price hike, we have not taken any price hike or very limited maybe 1%, 2% in the last year, year and a half, then raw material has gone up by 25%, 30% plus kind of levels, so to that extent there was a large amount of price hike ending which we were able to take at this point of time. Its margins have gone down to relatively lower level, so it was a — that as well as competitive action that prompted us to be able to take that price increase.

Disha Sheth — Anvil PMS — Analyst

So, is it more from a margin perspective than demand perspective.

Kumar Subbiah — Executive Director, Finance and Chief Financial Officer

That’s right. But demand also is beginning to get a little bit better. So, we’ve seen, despite price increases, we saw a quarter-on-quarter growth in replacement and in OEM segment into the volume — in volume terms.

Disha Sheth — Anvil PMS — Analyst

And sir, in terms of just category-wise, you mentioned that commercial and tractor are still we saw that we see signs of improvement, and there are weaker monsoon even now, how is it looking?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yeah, so I think tractors hopefully should get better, or that if tractor saw a slowdown in business segment in this quarter, but monsoon having gone up well, we’re hoping that tractors pick up. Trucks, it’s anyway they are relatively lower kind of a period, a lean season, so again, by post-Diwali season with good collections and money coming into the. Please fleet and things should hopefully get better here as well.

Disha Sheth — Anvil PMS — Analyst

Then this year, both OEM and replacement momentum should continue?

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes. That’s okay.

Disha Sheth — Anvil PMS — Analyst

Yes, thank you and that’s it from me.

Operator

Thank you. We have our next question from the line of Nishit Jalan from Axis Capital. Please go ahead.

Nishit Jalan — Axis Capital — Analyst

Sir just one follow-up, you talked about imports, so government has put tyre imports the on restricted category, so then is there a change to that, just wondering how are imports coming from Thailand and all these places you mentioned structurally meaningful, but we have started to see some coming to, are they able to bypass the restrictions or government has eased off some restrictions in certain categories.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yeah. I think one is that by restricted category, I think importers have to apply for a license to import the tyres so it is not that imports are zero, there are imports coming, there are tyres coming in from Thailand, I think there is an anti-dumping duty from China, and therefore Thailand imports have gone up. Yeah, these are the two and then there is some amount of mis classification what we understand happens, where new tyres are coming in as used tyres.

Nishit Jalan — Axis Capital — Analyst

But according to you it’s still not meaningful and not permanent impacting the pricing power that we have…

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Yes.

Nishit Jalan — Axis Capital — Analyst

Okay. Thank you.

Operator

Thank you. As there are no further questions, I now hand the conference over to management for closing remarks. Over to you, sir.

Anant Vardhan Goenka — Managing Director and Chief Executive Officer

Well, thank you to B&K for hosting the call and thank you everyone for your time and interest in CEAT. Look-forward to meeting you once again same time next quarter. All the best.

Operator

[Operator Closing Remarks]