CEAT Limited (CEATLTD) Q2 FY24 Earnings Concall Transcript

CEAT Limited  ( NSE : CEATLTD) Q2 FY24 Earnings Conference Call dated Oct. 17, 2023

Corporate Participants:

Arnab Banerjee — Managing Director and Chief Executive Officer

Kumar Subbiah — Chief Financial Officer

Analysts:

Aashin Modi — Equirus Securities Private Limited — Analyst

Mitul Shah — DAM Capital Advisors Limited — Analyst

Raghunandhan NL — Nuvama Research — Analyst

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Siddhartha Bera — Nomura — Analyst

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Disha Sheth — Anvil Shares & Stock — Analyst

Rishi Vora — Kotak Securities Limited — Analyst

Akshay Karwa — Anand Rathi Shares and Stock Brokers Limited — Analyst

Vishal — Svan Investments — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the CEAT Limited Q2 FY ’24 Earnings Conference Call hosted by DAM Capital. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Mitul Shah from DAM Capital. Thank you, and over to you, sir.

Mitul Shah — DAM Capital Advisors Limited — Analyst

Yeah. Thanks, Rio. Good afternoon, good evening, good morning to all the participants. On behalf of DAM Capital, I welcome you all for CEAT’s Q2 FY ’24 post result conference call. Thank you CEAT for giving us the opportunity to host the call. We have with us CEAT management represented by Mr. Arnab Banerjee, MD and CEO; and Mr. Kumar Subbiah, CFO.

Without wasting anytime, we’ll invite Mr. Arnab Banerjee for his initial remarks. Over to you, sir.

Arnab Banerjee — Managing Director and Chief Executive Officer

Thank you. Good afternoon, and welcome to CEAT’s quarter two FY ’24 earning call. I’ll be taking you through the business updates for the quarter, and then hand over the call to Kumar Subbiah for his remarks on financial performance, post that we will be open for Q&A.

So let me start with the big news of CEAT winning the Deming Grand award. As you are aware, this is one of the most prestigious quality award presented by the Union of Japanese Scientists and Engineers called JUSE for excellence in total quality management. CEAT became one of the only 33 companies in the world, and the only tire company in the world to win this honor, since its inception in 1969. This award points towards consistency of customer experience across the globe and consistency in the — in market share gain and financial performance.

I’ll come to the performance proper for Q2. As the base is now normalized, we are reverting to more commonly referred year-on-year comparison for volume. Quarter two was a good quarter for us with overall volume growth of 7% towards last year’s quarter two. Exports are doing good and grew about 10% over the same period. Passenger car tires had a significant uptick followed by truck and bus tires. Off-highway volumes were a little subdued, due to slowdown in Europe. Replacement volumes grew about 4% year-on-year. Domestic off-highway grew very well with a strong double-digit growth followed by passenger cars — car tires. Two-wheeler and truck bus tires volume also grew in low single digits.

OEM business continued to witness healthy momentum with volumes growing by about 10% over last year. Truck and bus volumes grew by more than 35%, as a testimony to increasing acceptance of our truck bus radial tires quality wise. Two, three-wheeler sales have also done well, indicating a gradual recovery towards the end of last quarter.

Over Q1 FY ’24, volumes grew about 3.5% and despite quarter two being seasonally a low quarter, replacement was flattish while OEM registered double-digit growth in anticipation of festival sales. Exports saw a marginal drop. Demand outlook, as you know, monsoon overall has been good, but the spatial distribution and the timing were inconsistent. This is likely to affect the Kharif crop output in some states and could also adversely impact a nascent rural recovery. So we will wait and watch the situation closely.

As of now, replacement demand is stable across all categories with routine seasonal trends. On the OEM side, vehicle sales growth has been varied across category. Two-wheeler bikes degrew in quarter two. Four wheelers are doing well, which topped 2 million cars in half one. And truck and bus are growing in single-digit in quarter two. Export markets are improving, especially the markets around Asia and Africa. Europe is impacted by recessionary trends. And as I’ve said, traditional geographies for us like Middle East, Africa and SAARC are normalizing.

On margins, input prices remain benign during the quarter. The raw material basket — basket declined by about 2.5% to 3% vis-a-vis quarter one. We have largely been able to maintain our selling price Q-on-Q, and there was also a relative price positioning change in aftermarket in some categories. Both these factors, along with better product mix, contributed towards gross margin expansion over 200 bps quarter-on-quarter. And standalone margin — EBITDA margin for the quarter stands at 15% and net profit standalone was INR199 crore. Capacity utilization has been improving consistently and is about 80% overall. Better margins and higher utilizations have helped improve our ROC as well, and we will continue to focus on ROC by improving capital productivity and efficiency.

On the margin outlook, crude prices, as you are aware, has been going up steadily. If the current prices sustain, RM basket may be going up 3% to 4% over quarter two base. I think we are — we have bottomed out on RM prices. We are watching the situation closely and will take action as appropriate going forward.

CEAT is future-ready. We are looking at all the mega trends with focus like electrification, going global, premiumization and digital. As far as electrification is concerned, we continue our strong market share in OEMs in electric vehicle two-wheeler tires with more than 40% share of business. Recently, URBN electric e-Bike, e-Sprinto Amery e-scooter were launched on CEAT Tyres. In passenger market also, we are working with OEMs with several models launched or to be launched such as Mahindra XUV400, MG Comet, ZS Electric Vehicle, Citroen C3 and some upcoming launches like BYD Auto, Tata Punch EV, Kia couple of vehicles, Prevail [Phonetic] and EVA.

In commercial segment, electric vehicles such as Tata Motors Ace Electric Mini Pickup, as well as electric buses by Tata Motors, we are participating also with OEMs like Volvo, Eicher, Electra [Phonetic], PMI Electro. Second megatrend is of course going — second initiative, I would say, is a strong [Technical Issues]

Operator

Participants, please stay connected. We seem to have lost the line for the management. Please stay connected while we reconnect the line for the management. Participants, please stay connected while we reconnect the management line. Participants, thank you for patiently holding your lines. We have the line for the management reconnected. Over to you, sir.

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah, I would like to continue on our internal — international business pursuit. We have a run rate of selling more than 2 million passenger car tires internationally with nearly half of them going to Europe. This business is doing well. We are the largest imported tire brand in Brazil in the off-highway segment. We have also got into several flagship OEMs such as John Deere, CNH, AGCO in off-highway tires and we have added 40-plus SKUs in this vertical in quarter two.

Truck bus radial tires are doing well in Europe and Latin American markets. We are getting ready for US rollout by end of current financial year for both truck bus radial and passenger car radial. That program is going on schedule. About 200-plus SKUs will be launched across these two categories in the US. Sri Lanka macro situation is improving and quarter two had been a good quarter both top line wise and margin-wise in Sri Lanka.

The third major initiative is premiumization with launch of platforms such as CrossDrive, SportDrive, SecuraDrive and SecuraDrive SUV. The passenger car radial portfolio is getting premiumized and the revenue share from these new platforms are — the revenue saliency continues to improve.

CEAT has started investing in a new brand property called CEAT Trials [Phonetic], which is about expedition. The first one happened over 22,000 kilometer from Mumbai to Siberia. This convoy went on CEAT CrossDrive and CEAT winter tires and it was the — the entire expedition went through India, Nepal, China, Mongolia and Russia, and it was completed successfully.

We strengthen — we continue to strengthen our association with Cricket. The 25th edition of CEAT Cricket Rating and Awards was held in Mumbai in this quarter. We are proud to share that we have onboarded Shafali Verma as our brand ambassador during this quarter. And with the onset of World Cup, we have launched season two of CEAT timeout series with Matthew Hayden. As the love of riding increases across the country, CEAT is expanding its portfolio and introducing new product platforms for rally, dirt biking as well as in upmarket steel radius.

Digitalization is the third major trend where CEAT continues to remain a leader. We are implementing Industry 4.0 practices across our plants. The Chennai plant went through the assessment of Lighthouse factory in quarter two. We are awaiting the result of the assessment. As far as end consumers are concerned, we are heavily invested in marketing CRM. We received 1.5 times more searches on SUV tires, 7.5 times higher brand mentions and 12 times higher interactions per post per month so far this year, vis-a-vis FY ’23. We are generating about 6% of our passenger car replacement sales from D2C channels.

Capex. Our overall capex for the year is likely to be about INR800 crores. Previously, we had mentioned INR750 crores. This expansion — all expansion projects are progressing as per plans, and we want to reiterate our strategy of doing bite-size capex every year. This will help us maintain consistency in margins as well as the return ratios.

Sustainability is an important pillar for us. We continue to reduce carbon footprint for the half year. Our ton — carbon dioxide emissions per metric ton of production was lower by 16% Y-o-Y. About 36% of our planned power requirement is through renewable sources and we intend to increase this contribution further during FY ’24. Water consumption per ton of production in half one reduced 8% Y-o-Y. Natural rubber was sourced by alternate source to the extent of 25%.

Living our purpose on safe mobility, CEAT has also created kiosks provided free tire service on the new Samruddhi highway, nearly 100 cars availed this service every day. This initiative was taken as the accidents on Samruddhi highway were increasing with tire bursts cited as the major cost.

So, the menial [Phonetic] raw material situation has helped us take faster strides towards making CEAT brands stronger as well as improving our return ratios. As demand remains buoyant, we are hopeful of managing the volatility in raw material basket in coming quarters. As a Deming Grand winner company, we want to become more and more consistent in our financial performance, despite the inherent nature of our raw materials and are working on several controllables, which help us navigate this better.

With this, I would like to hand over the call to Kumar for his remarks.

Kumar Subbiah — Chief Financial Officer

Thank you, Arnab. Good afternoon, ladies and gentlemen, and thank you for joining our call pertaining to quarter two. I would like to share some further financial data points with you all, post which we can enter into Q&A session.

First, revenue. Our consolidated revenue for the quarter stood at INR3,053 crores, showing a quarter-on-quarter growth of 4% and year-on-year growth of 5.5%, largely both driven by volumes. As Arnab mentioned, our revenue crossed an important milestone of INR3,000 crores during the quarter for the first time.

Coming to gross margins, our gross margin for the quarter moved up from 41.1% to a healthy 43.3%, largely driven by lower raw material cost and better product mix. The raw material costs were lower in quarter two to the extent of about 2.5% versus quarter one. And the better product mix helped further in improving the gross margin and which to the tune of good overall 227 basis points.

Crude oil which was hovering around $75 to $80 range in quarter one has been slowly now largely operating at a higher end of around $90 to $95, since middle of August and the same has impacted the prices of feedstocks that go into making of tires. In general, as you are aware that any increase in crude oil prices have always had inflationary impact not only on crude derivatives, but also on many other commodities in general.

International rubber prices have moved up by about $100 in the last two months. Taking further into consideration the depreciation of Indian rupee in the last three months, we expect our raw material basket to increase by about 4% in quarter four — quarter three versus quarter two. As Arnab mentioned, we’ll continue to remain watchful of the RM situation and take corrective actions wherever possible.

Coming to debt, capex and working capital, we spent about INR170 crores of capital expenditure during the quarter. And with this, our overall capital expenditure in the first half is about INR390 crores. We expect our full-year capex to be around INR800 crores, marginally higher than our earlier estimate of about INR750 crores. Working capital has remained at similar level, which is about negative INR140 crores as we saw it in the previous two quarters.

We generated healthy operating and free cash flow during the quarter and cash that we generated, we used it to fund our entire capital — capex requirement fully and also to reduce our debt. Our consolidated debt stood at INR1,890 crores, a reduction of about INR103 crores over quarter one of current financial year.

Coming to leverage ratios, our debt/EBITDA now stands at a healthy level of under 1.2x and debt/equity to the tune of about 0.5x. And during the quarter, the annual credit rating review happened and our credit rating of AA for long term and A1+ for short term was affirmed by India Rating.

Coming to operational expenses. Employee cost increased by approximately 11% on quarter-on-quarter, largely on account of annual increment cycle effective July and also higher level of production activities in factories during the quarter vis-a-vis the previous quarter. The other expenses also moved up by about 4%, largely in line with increase in our volumes.

As regards to our Sri Lanka business, we are happy to inform you that our volumes have now started growing in line with the improvement in economic conditions in Sri Lanka leading to improvement in the profitability of the business also during the quarter.

Overall, our consolidated EBITDA for the quarter stood at INR463 crores, which translates to a margin of about 15.1%, almost 200 basis points higher than quarter one and almost double that of the same quarter of last year. Our standalone EBITDA of 15% is the highest in the last 60 years.

Our consolidated profit after-tax stood at INR207.76 crores, which compares favorably with the profit after-tax of INR6.44 crores, the same quarter of last year and INR144 crores in quarter one of the current financial year. And during the quarter, the company made an investment of approximately about INR20 crores in an entity called as TYRESNMORE through both primary and secondary route. With this investment, TYRESNMORE now has become a fully owned subsidiary of CEAT.

And depreciation and interest cost in quarter two is largely similar to quarter one. Effective interest rate has increased by about 5 basis points over quarter one. We expect interest rates to remain similar or slightly higher level in the near term. During the quarter, the company also paid 120% of dividend, translating to approximately about INR49 crores as approved by shareholders during the Annual General Meeting in July 2023.

With this now, we can now open the floor for Q&A. Thank you.

Questions and Answers:

Operator

Sure. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Aashin Modi from Equirus Securities. Please go ahead.

Aashin Modi — Equirus Securities Private Limited — Analyst

Hi. Thanks for the opportunity, and congratulations for a great set of numbers. Sir, my first question is regarding volumes. So could you please give us some understanding in the replacement 4% year-on-year growth, which we have talked about in flattish quarter-on-quarter? If you could give segment-wise, how replacement market performed and what is the outlook of different segment in the replacement market?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Hi. So in replacement market, Q2 is a seasonal quarter — seasonal downturn quarter as you would know. Y-o-Y, truck bus grew at single-digit kind of growth, low single digits. We had a very good growth in farm tires in replacement market. And two, three-wheeler as well as PCUV grew around mid single digits by volume in replacement Y-o-Y.

Aashin Modi — Equirus Securities Private Limited — Analyst

Okay. And secondly, sir, on the export side, if you could provide us more color on how Europe and off-highway is performing and what is the sequential recovery if we are seeing over there and what is the outlook on the export side?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yes. In export — in Europe, there is some kind of headwind because of a slowdown in the economy. We have felt this headwind primarily in the agri radial, which is not growing in Europe. However, on passenger car radial and truck/bus radial, where our base is small market share wise, but in the context of our volume, the base is pretty big because as I mentioned, about 1 million tire is the run rate of passenger car tires in Europe. So in that — in these two segments, we are not really experiencing the headwind because we continue to grow as we keep developing our channel in Europe.

Overall, Latin America, there has been some kind of headwind because of duties on TBR tires. But that is — now the market is adjusting to that new reality, and we expect to come back in the second half of the year in Latin America. The nearby markets of Africa and Asia are normalizing vis-a-vis last year and would — are already doing better than last year in the first half and we’ll continue to do well in half two.

Aashin Modi — Equirus Securities Private Limited — Analyst

Okay. Thanks. And sir, my last question is, so we — you mentioned that there has been some changing in pricing during the quarter. Could you please give us more color, which segments were they and any more pricing changes expected going forward?

Arnab Banerjee — Managing Director and Chief Executive Officer

In quarter two, I mentioned there’s a relative price positioning change, so I’ll explain. In passenger category, there was a straight price increase of 2% roughly in quarter two. And in truck/bus radial segment, there was a relative price change of 1%, which means there was a downward revision by competition, whereas we didn’t revise the price. So, in relative terms, these two categories were most impacted and there were other changes also in light commercial vehicle tires to the extent of about 1%. So that was quarter two. Quarter three, we will watch the situation, how the raw material moves, and given an opportunity now that our products are very well accepted across categories in terms of being superior by way of tire life and fuel efficiency, etc. We will have opportunities. We’ll wait and see what to do.

Aashin Modi — Equirus Securities Private Limited — Analyst

Okay. Thanks a lot, sir. I’ll join back the queue.

Operator

Thank you. The next question is from the line of Raghunandhan NL from Nuvama Research. Please go ahead.

Raghunandhan NL — Nuvama Research — Analyst

Congratulations, sir, on stellar numbers and also on the Deming prize. Sir, just wanted to better understand on the pricing situation. On the truck and bus, you indicated that competition reduced price by 1%. So just wanted to understand, is it a one-off case where in certain categories some discounting or price reduction is happening, or are you concerned about competition intensity increasing in the market?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. So to clarify, the price reduction by competition is by way of pricing as well as by a way of discounting. Yes, there’s a lot of competitive activity happening in the market. But as I mentioned that, we have been able to increase volumes in a low seasonal quarter, which is Q2 over Q1. Despite RMC going down, we have changed the relative price standing of our brand in truck bus radial and PCR. So, I won’t say we are not concerned, but this is an encouraging sign that we have been able — the market has absorbed this kind of pricing stance by CEAT and has rewarded us with higher volumes. So that’s encouraging, but the concern will stay if this continues.

Raghunandhan NL — Nuvama Research — Analyst

Understood, sir. And any sense you can provide, sir, in terms of the first few months of the year, how has the market share trend has been? Have you been able to sustain share?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yes. So one of the disadvantages of having this call so early in the next quarter is that we don’t have the entire data of market share. But I will give you some direction on that. I think, we are gaining market share in two-wheeler because the last four to five months have been really great in terms of motorcycle and scooter sales in replacement market. And on PCR, I would think that our market share will be steady in the sense that there will not be significant gains or significant losses in two, three wheelers. And in truck/bus bias, we would have gained a little bit of market share. And in truck/bus radial, it would be consistent market share. In farm, we would have gained market share in replacement is what we believe.

Raghunandhan NL — Nuvama Research — Analyst

Got it, sir. And sir, on the electric vehicle, how would your market share be?

Arnab Banerjee — Managing Director and Chief Executive Officer

Electric vehicle, the market shares are relevant for OEMs only because in replacement, the demand is still not anything significant. In two-wheeler, as I mentioned, two-wheeler OEMs, our market share would be 40%-plus. We are there in almost all the leading brands of the country, big and small traditional players as well as new players such as Ola. In four-wheelers, I mentioned some of the models where we are working with OEMs closely and we have high double-digit kind of market share in four-wheeler OEMs. Both these are slated to improve in the next two years.

Raghunandhan NL — Nuvama Research — Analyst

Got it, sir. And one of the focus area was discontinuation of smaller diameter tires and focus on the larger tires. Can you update on the efforts because of this, would we be lagging the industry growth and going forward, do you expect volume growth to be similar to the industry?

Arnab Banerjee — Managing Director and Chief Executive Officer

So, our exit from smaller rim-size tire is complete. All that has to be — that was on the cards has happened. Our Q2 volumes incidentally are in OEM are better than Q1 volumes with a better mix of higher rim-size tires. This volume recovery will continue through Q3 and Q4. And by next year, we will be at a significant growth over lower base, obviously, because this year the transformation is happening and that will be very good for growth in replacement market as well.

Raghunandhan NL — Nuvama Research — Analyst

Got it, sir. Just a last question. Can you help us with segment-wise capacity utilization, two-wheeler, four-wheeler, truck and bus?

Arnab Banerjee — Managing Director and Chief Executive Officer

So overall, it’s improved to nearly about 80%. The outliers here are truck/bus radial where utilization is in excess of 90%. And in farm radial, we have just completed one round of expansion. So, optically, the capacity utilization is low, but there’s a big demand in US, Latin America, etc. So here the capacity utilization would show as around 65-odd-percent. But this is slated to go up in second half and into next year. Otherwise, it’s around 80%.

Raghunandhan NL — Nuvama Research — Analyst

So two-wheeler, four-wheeler would be around 80%?

Arnab Banerjee — Managing Director and Chief Executive Officer

Roughly around 80%. I’m giving you an average figure across categories.

Raghunandhan NL — Nuvama Research — Analyst

Got it, sir. Very helpful, sir. I’ll get back to the queue. Thank you.

Operator

Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal. Please go ahead.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Hi, sir. Congratulations on Deming Grand prize as the first company on the tire side. Quickly on the capacity question. So, the expansion which we are doing this year, the INR800 crore capex that is predominantly towards the OTR tire, right? Or are we also investing now for TBR?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Kumar, would you like to share the breakup?

Kumar Subbiah — Chief Financial Officer

Yeah. Okay. See, approximately this — the revised number of INR800 crores that was communicated includes about INR200 crores of our normal routine capex, which is R&D, IT, digital, molds and plant-related maintenance-related capex. So, we are talking about balance INR600 crores. And here, we — our truck and bus radial, we expect to spend little over INR100 crores, okay, and we expect our OTR to be in the range of about INR250 crores. And we also are spending something on downstream of our Nagpur two-wheeler, passenger car radial two-wheeler. And in addition to that, we also have some small portion of the debottlenecking that we had undertaken in Halol factory. So these things add up to around INR800 crores.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay, okay. And what kind of capacity addition do we expect from this INR800 crore investment?

Kumar Subbiah — Chief Financial Officer

No, the major upstream capacity expansion is happening at Ambernath, which is specialty. There we are going up from 105 tons per day to 160 tons per day. That plant will be ready in the next year. And balance, all of them except some debottlenecking at Halol are mostly downstream capacities, upstream remain constant.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay, okay. And our strategy of this bite-size capex, how long can we sustain that before we get onto a proper brownfield or a greenfield capex? I mean, what I’m trying to understand is, how long can we sustain these kind of INR800 crore to INR1,000 crore of capex before we have to invest materially in large capacities?

Kumar Subbiah — Chief Financial Officer

See, broadly, if you look at our bias type capacity, truck and bus bias, we don’t expect any requirement in the future. Passenger call and truck and bus radial tires, both of them, we have enough space in our Chennai factory. And therefore, we don’t expect any greenfield opportunity in terms of going outside that particular location. As and when we add, we’ll add it in the existing location. So, truck and bus radial is more a brownfield.

And in case of two wheelers, it’s more about downstream. So under two years, I don’t think we would need any greenfield outside the existing location. So we don’t expect any new greenfield investment required based on our long-term demand and supply plan for FY ’25 and FY ’26? And brownfield — upstream capacity addition you are aware of, Ambernath is one. And then second is truck and bus radial is another one. Other than that, we are not adding any other — we don’t expect to add any upstream capacity in the brownfield for the next two years.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Got it. And this TBR INR100 crores is for upstream or that’s for downstream?

Kumar Subbiah — Chief Financial Officer

Yeah. It’s a new project. We are adding about 45,000 tires of capacity per day, okay. It’s upstream and downstream. It’s a brownfield in an existing PCR location at Chennai.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Okay. Got it, got it. And in that context, if I look at our debt evolution, so from where we are today at close to INR1,900 crore, we should be easily able to reduce this well below INR1,000 crore by end of next financial year based on our current plans? Would that be a fair expectation?

Kumar Subbiah — Chief Financial Officer

No. See, we have reduced the debt to the extent of about INR450 crores in the last three quarters, okay? And — but we don’t have plan to bring it down to INR1,000 crores. We are currently at a healthy level, okay. And our debt EBITDA is currently hovering around 1.1, 1.2. So which is a very healthy level. And we would like to utilize the cash that we generate beyond capex plan that we have to reduce the debt. So which would be like 100 — INR100 crores is what we have done in the last two quarters. If the performance sustains and if you maintain the capex level, that is the kind of direction in which we would like to move debt to, but we don’t have any plans to bring it down to INR1,000 crores. We would like to utilize that cash to productively invest.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

Fair enough. And lastly, given the expectation of increase in commodity basket by 3 percentage points to 4 percentage points, do you see market being conducive enough to absorb that kind of price increases, say over two quarters or so, and in turn maintain our margins above 14%? Is that a likelihood which we are looking at? Or given that you talked about competitive intensity being higher, there could be some risk to margin going forward?

Arnab Banerjee — Managing Director and Chief Executive Officer

So, Kumar I’ll answer that.

Kumar Subbiah — Chief Financial Officer

Yes, Arnab.

Arnab Banerjee — Managing Director and Chief Executive Officer

So, what we are realizing is as the — as the situation is evolving more towards the passenger side where we — about two-third of our sale is non-truck, there the pricing is increasingly getting detached from the underlying raw material movement. Not completely, but it is much more than let’s say five years back. So there is some pricing freedom there if I may call so. And say, so — it is not so much available on the commercial vehicle side. So, we’ll wait and see how the raw material behaves and two-third of our portfolio we have demonstrated that we can take some calls. So, we will see if the market can absorb at least for our brand, we will evaluate it should the RMC play up in quarter three.

Jinesh Gandhi — Motilal Oswal Securities — Analyst

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

Operator

Thank you. The next question is from the line of Siddhartha Bera from Nomura. Please go ahead.

Siddhartha Bera — Nomura — Analyst

Yeah. Hi, sir. Thanks for the opportunity, and congrats again on the prize and a good set of numbers. Sir, my first question is on this export plan, which you plan to sort of push from the last quarter of this year. Will it be fair to assume we might see pickup or improvement on the exports as early as Q4 of this year, so that it is visible for the entire next year? Or do you think some of the entry into US, the benefits from that in terms of the revenues might take longer to sort of be visible? So, some more thoughts on that.

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. So, the entry into US should happen by end of quarter four or early quarter one next year. So, the impact of ramp-up in US will be available throughout FY ’25. That’s one. Secondly, there is — there was a lot of inventory with the trade and in the smaller and bigger OEMs as well in Europe for agri radial stocks, which should come down. And though at lower levels, but normal procurement will start, I think by end of quarter three or quarter four. So Europe should also be better even if the market situation doesn’t change throughout FY ’25 or FY ’24. And as I said, Latin America, we are taking some steps to broadbase our network there, so that market should as well improve and some markets in the near vicinity have already normalized to a great extent. So we can expect to see a step up in exports next year.

Siddhartha Bera — Nomura — Analyst

Got it, sir. And one question on the cost side. So if you see the other cost line items are also steadily inched up even in this quarter, despite any sort of major events. And I think in the current quarter, we have a few events also. So, first, some thoughts on why it has inched up and can we see a bigger jump in the current quarter given that the events are there?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Kumar?

Kumar Subbiah — Chief Financial Officer

Yeah, see, largely, if you look at other expenses, mostly it consists as far as we are concerned, one is our marketing-related expenses. Second is the supply chain related expenses. Third is outsourcing related costs. And fourth, broad head is our — all our operating expenses like travel. If you look at this, there was some drop in marketing costs in quarter two versus quarter one, okay. We had spent a little more money in quarter one on IPL and related marketing costs. Where it went up in quarter two versus quarter one? They’re broadly in three different areas. Our quantum of outsourcing volume in quarter two was higher than quarter one, particularly in two-wheeler tires.

And number two is, we moved the tires from a factory location to the distribution location. We had incurred a SVC cost. It wouldn’t have a profit and loss impact, but on a line item wise, it will show as other expenses, but it is normally part of the closing inventory. Third, our travel costs were a little higher. Our conferences happened in quarter two. People started traveling more, so we had incurred a little higher level of travel cost.

Coming to your question whether you’ll see a higher level of other expenses in quarter three and quarter four. I think other expenses will go up in the — the activity increase if there is a quantum jump in volume in quarter three versus quarter two or quarter four. However, otherwise, it should not go up from this level of base into quarter three and quarter four.

Siddhartha Bera — Nomura — Analyst

Got it, sir. Sir, lastly, on the working capital also, as we started the year, you had told about that it might go up in the year and we don’t expect any sort of decline there. But I think in the first half, we have managed quite well. So do you think in the second half, given the demand how it is, you — the working capital levels can still go up or you believe it may continue to remain where they are?

Kumar Subbiah — Chief Financial Officer

See, we continue to exercise tight control in this quarter one, quarter two. Normally, quarter four is when our working capital would be at its best because of higher level of sales in quarter four and our debtors come down, we end up normally with a little lower level of inventory. We maintain that discipline coming into quarter one and quarter two, both on our raw materials and finished goods. So that really helped is lower than what we had originally envisaged, keeping in mind the service levels. Our endeavor is to maintain at this level, okay. And in the event that we want to improve our service level, or if we see some delay in the transit of materials, particularly in the case of international business, we may have a little higher level of inventory. Otherwise, our endeavor is to keep it closer to our current levels.

Siddhartha Bera — Nomura — Analyst

Got it, sir. Thanks a lot. I’ll come back in the queue.

Operator

Thank you. [Operator Instructions] The next question is from the line of Chirag Shah from White Pine. Please go ahead. Chirag Shah, you may go ahead with the question.

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Yeah. Am I audible?

Operator

Yes, please go ahead.

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Yeah. Thanks for the opportunity. So, first question is, actually I was disconnected in between, so apologies for repeating. So volume growth for the quarter?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah, volume growth Y-o-Y is about 7%.

Chirag Shah — White Pine Investment Management Private Limited — Analyst

And sir, this is in standalone or this is including the Sri Lanka at consolidated level?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah, it is standalone.

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Standalone. Okay. And sir, second question is just a clarification on this OTR side. So you explained what’s happening in the US, how you are looking at it, okay. But if you look at ’25 and maybe ’26, how should one look at the geography mix for the OTR between — on the export side?

Arnab Banerjee — Managing Director and Chief Executive Officer

Can you please repeat your question?

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Sir, on the OTR, if we take ’26 as a year, how once you look at the geography mix between say, Europe and US, how do you envisage that playing out for you? ’25 being the year of feeding the US market, that’s why. So, how should one look at the mix between US and Europe for your OTR business?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. So OTR and agri radial business, we are already in the US market. When I said we’ll launch in the US, it is passenger radial and truck/bus radial. In US, we have already started growing, creating the network. We have a team of local team there in the US. Already we have started getting to the OEMs. But in Europe, we are ahead of US. So, we have to see how these two geographies behave, but we are quite bullish on US market as well.

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Okay. But is it possible — so internally, are you looking at the kind of a equal split between the two geographies or one geography could have a higher share for next two, three years?

Arnab Banerjee — Managing Director and Chief Executive Officer

Both are very big markets in their own ways. The product ranges are different. We are catching up on the product range on the US side because we entered that market later. But I think, both will be equally big. I mean, not exactly equal, but both will be of equal dimensions going forward.

Chirag Shah — White Pine Investment Management Private Limited — Analyst

Okay. Great. Thank you, and all the best.

Operator

Thank you. The next question is from the line of Disha Sheth from Anvil Shares & Stock. Please go ahead.

Disha Sheth — Anvil Shares & Stock — Analyst

Good afternoon, sir. Sir, you mentioned that OEM demand has been varied in Q3. So can you — if you can just throw a light on segment-wise? As you said, replacement is stable over Q2 in terms of outlook. Hello?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Yes. So I mentioned about OEM demand in Q2 actually. Yes, it was varied. So just to give you some description category-wise. Two-wheeler, I think the OEM demand was flat to slight degrowth. The OEM volumes grew only in the month of September and still they are far, far below the FY ’19 peak pre-COVID, that’s two-wheeler. Four-wheeler is doing well, growing well. They have topped an all-time high of 2 million tires in half one. And this industry is slated to cross 4 million cars — 4 million cars in the entire year. So that’s doing very well. The truck segment dipped very unexpectedly in the month of June, but it has recovered in quarter two and it is growing at single-digit. So that’s the kind of lay of the land in OEM in Q2. Hello?

Disha Sheth — Anvil Shares & Stock — Analyst

Hello.

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah, could you hear me?

Disha Sheth — Anvil Shares & Stock — Analyst

Yeah, sorry. So the outlook remains on the similar lines for Q3 and the year in terms of your order book?

Arnab Banerjee — Managing Director and Chief Executive Officer

See, Q3 is usually people are — OEMs are very optimistic because of the festive demand in October and November. So, retail offtakes are reported to be good in the month of September. We also track their retail offtakes. We have to see how their production comes up because that’s what decides our demand. So, optimistic in the first two months. But then December is a winter month where again, demand slows down and it picks up again by Feb and March. So, it’s a cyclical seasonal thing. For Q3, may be good if the festival thing works out well and if the monsoon effect is good.

Disha Sheth — Anvil Shares & Stock — Analyst

And sir, in Europe, in terms of off-road, the demand is still weak or there are signs of improvement?

Arnab Banerjee — Managing Director and Chief Executive Officer

No, the trade and the OEM destocking has still happened over Q2. We expect the demand to improve by end of Q3 and Q4. That’s the current expectation.

Disha Sheth — Anvil Shares & Stock — Analyst

Okay, sir. Thank you so much, sir. That’s it from my side.

Operator

Thank you. The next question is from the line of Rishi Vora from Kotak Securities. Please go ahead.

Rishi Vora — Kotak Securities Limited — Analyst

Yeah. Thank you, sir, for giving the opportunity, and congratulations on good set of numbers. Just one thing on the natural rubber procurement. Can you just give us a sense on how much of the natural rubber requirement is met through domestic market and how much is imported? And also, lately, we have seen that international prices, rubber prices have surged quite significantly. So, what is the reason behind it? And do you expect that domestic natural rubber prices because of the higher international rubber prices can inch up? Like how has been the historical trend of the commodity, that would be helpful.

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Kumar?

Kumar Subbiah — Chief Financial Officer

Yeah. See — see, there are two grades of — broadly two grades of rubber that go into tires. One is called as block rubber and another one is called as sheet rubber. Indian production is largely sheet rubber, almost 95%-plus is sheet rubber, okay. And that is what we buy from the local market. And almost all of our sheet rubber we buy locally. And block rubber is what we import from the international market. So, our overall — If you look at the split between block rubber and sheet rubber, okay, approximately 60% of our rubber would be block and 40% of that would be sheet. So, that’s normally the average distribution between block and sheet.

You are right. The international prices have moved up in the last two to three months. And in the previous three months, actually international prices were lower than the local market, okay. So, therefore, there’s always in a commodity an arbitrage between the two sources of similar kind of materials. There are three possibilities. One is that, natural rubber prices move towards international prices or international prices come down and natural prices move up and they strike a balance, okay. There is always a difference of about INR2, INR3 per kg between two sources of rubber. So, being a consumer of natural rubber, you would prefer international prices to come down rather than expecting local prices to go up. So only time will tell. The reasons — there are no strong fundamental reasons for the international rubber to go up except the fact that sometimes, there is a sympathy towards crude oil prices and therefore it has a rub-off effect on block rubber.

And last is the reason for international prices to be higher than local rubber is also because of the fact that currency Indian rupee which was around INR81 to a dollar is now around INR83.20, INR83.50. That itself has had about 3%, 3.5% kind of an impact. So it’s possible there could be a midpoint between a local and international rubber and that’s the way the market could unfold. And that midpoint could be local rubber going up, if international prices remain the same — remain at the same level.

Rishi Vora — Kotak Securities Limited — Analyst

Understood. And sir, what would be the difference between the current lended cost of international rubber and the domestic rubber prices today? Like any sense you have?

Kumar Subbiah — Chief Financial Officer

See, look, you know it’s a commodity. There’s no one fixed price. But however, I’ll give you a broad range. International could be around 157, 158 [Phonetic] landed, and local could be 150, 151 [Phonetic] landed, something like that.

Rishi Vora — Kotak Securities Limited — Analyst

Understood. And just lastly, on this — on the volume growth and the revenue growth, so on a Y-o-Y basis, you indicated the volume growth is 7% and revenue growth is a little bit lower. So, there has been an ASP decline, and my understanding was that over the last one year, we would have taken price increases. So what is the reason behind ASP decline on a Y-o-Y basis is just a mix, or is there any other reason?

Kumar Subbiah — Chief Financial Officer

Arnab, you want me to take?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah, you can.

Kumar Subbiah — Chief Financial Officer

Yeah. Okay, I’ll take part of it. Maybe Arnab will be able to substantiate even more. As was explained, the realization from our — one of the three segments, which is original equipment manufacturers is linked to the movement in the raw material prices. So, in a scenario where if raw material prices come down, a realization also comes down with a lag of three months, and the reverse is also true. So that’s one of the main contributors for a little bit of higher level of volume growth on the total value growth and maybe a marginal decline in a price growth at the company level.

Rishi Vora — Kotak Securities Limited — Analyst

Understood, sir.

Kumar Subbiah — Chief Financial Officer

Yeah. Because of that OEM mix impact on the total realization.

Rishi Vora — Kotak Securities Limited — Analyst

Understood, understood. Thank you, and all the best.

Operator

Thank you. The next question is from the line of Akshay Karwa from Anand Rathi. Please go ahead.

Akshay Karwa — Anand Rathi Shares and Stock Brokers Limited — Analyst

Hi, sir, good evening. Thank you so much for the opportunity. Just one question on the margin side. Sir, now that we have stopped our manufacturing with small-rim tires, and we will be focusing on the larger tires? How do we see the margins going forward in the next two years, let’s say by FY ’26? I mean, in this — this quarter, we did around 14.9% adjusted EBITDA margin. So where do you see that trend shaping up, sir?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. So, when I said we are exiting small rim-size to higher rim-size, it is for passenger segment and in OEMs. So in the OEM segment as it is the margin is low across rim sizes, the impact will come from higher replacement demand of higher rim sizes where the margins are definitely high. And the impact of passenger, the saliency of passenger car tire in our overall business is, let’s say, around 20% or so. So, the impact will take time to come. It will come gradually, but it will be positive as things now stand now, the higher rim-size margins are significantly superior to the smaller rim-size margins.

Akshay Karwa — Anand Rathi Shares and Stock Brokers Limited — Analyst

So, can we like — so, in order to model, so can we assume like — something like 17% margins going forward like in the next — after like two, three years or something like that or –?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah, yeah. It will take at least two years to translate into significant improvements.

Akshay Karwa — Anand Rathi Shares and Stock Brokers Limited — Analyst

Got it, sir. That’s all from my side, sir. Wish you all the best.

Operator

Thank you. The next question is from the line of Vishal [Phonetic] from Svan Investments. Please go ahead.

Vishal — Svan Investments — Analyst

Thank you for taking my question, sir. I had few questions. First, regarding, sir, in terms of RM prices, what possible action you would be taking to reduce the impact of RM increase, which is happening right now through product mix or geography mix or channel mix?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. So, as the RM price creeps up, we are already seeing over the last two years, we are focusing on the non-truck side, which is two, three-wheeler, four wheelers, and off-highway tires. So the saliency of this is going up, and it will continue to go up quarter-on-quarter as we speak. So that is one. Plus there are some micro-management of product market mix, which we’ll also be focusing on. The last resort, and definitely a good option also. If there’s a significant rise in RMC, we’ll look at pricing, because as I mentioned a while earlier, on the passenger side, there’s a little bit more pricing freedom than the commercial side. So we’ll look at that as well to mitigate the RMC hike, which looks like inevitable that’s going to happen.

Vishal — Svan Investments — Analyst

Okay, okay. Sir, my next question is regarding what kind of peak revenue you can get from the current capacity which you have?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Kumar, would you like to comment on that?

Kumar Subbiah — Chief Financial Officer

Yeah, yeah. No, see, we had shared this in the earlier call based on — based on 31st March situation, based on the assets that we had commissioned, without taking into consideration truck and bus radial addition and the OTR Ambernath addition, I think our revenue potential is little in excess of INR14,000 crores. Okay. So that was a kind of a headroom, without taking into consideration what we are adding this year and next year. So that is the level up to which we can go.

Vishal — Svan Investments — Analyst

Okay. Sir, post that in FY ’25 and ’26, that’s the kind of capacity expansion you are taking, you shared the debottlenecking plans. So what kind of peak revenue you can generate from — once those capacities come in line?

Kumar Subbiah — Chief Financial Officer

No. Okay. See, we are adding about this year — last year, we added about INR900 crores of capex, okay. Only to the extent of assets commissioned, we have taken into consideration, we said the commissioned assets would give us a revenue potential of INR14,000 crores. Approximately without going into specific details, depending on how we commission assets, whatever we are going to add this year, what we added last year but not commissioned and what we are going to add next year, another INR2,000 crore kind of — plus kind of a revenue opportunity is there by FY ’26 plus INR2,000 crores plus kind of an opportunity, should we use all the assets to a 90%-plus kind of a capacity utilization.

Vishal — Svan Investments — Analyst

Great, sir. Great, great. Sir, one small question regarding the OTR ramp-up. You said that 160 tons will be completed by FY ’24 end.

Kumar Subbiah — Chief Financial Officer

[Speech Overlap] Yeah, it will be in quarter one or quarter two of next financial year. It is likely to be there at that time.

Vishal — Svan Investments — Analyst

Okay. Sir, post that in FY ’25 and ’26, what kind of expansion you are planning for this segment?

Kumar Subbiah — Chief Financial Officer

Arnab, would you like to respond?

Arnab Banerjee — Managing Director and Chief Executive Officer

So right now, we are at 105 tons, which is completed, which we intend to ramp up and fill by quarter one of next financial year. In the meantime, 105 tons itself is getting expanded to 160 tons [Phonetic]. So, we are evaluating at what point of time we will run it up to 85%, 90% capacity and then take up the next expansion. So we are waiting and evaluating at this point of time, 160 tons is visible.

Vishal — Svan Investments — Analyst

Okay, okay. Sir, how much the gross margin improvement happened in Q2 was because of this mix improvement maybe in product, geography or channel?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. So, the overall improvement is 2.2% roughly. About half of that would have come from product market fit improvement.

Vishal — Svan Investments — Analyst

Okay. Sir, my last question regarding what kind of internally you are targeting ROE — ROC improvement by next two years, FY ’25 and ’26?

Arnab Banerjee — Managing Director and Chief Executive Officer

Yeah. Kumar?

Kumar Subbiah — Chief Financial Officer

I think, we had broadly explained our logic, okay. And our endeavor is to be somewhere in the range of 14% to 16% kind of ROC. Eventually, when we cut down our investments, when we commissioned all of the assets, when the commodity environment is stable, that’s the kind of a range at which we would like to evaluate — reach. Most of our new investments that we have made in the last three years or so, we had a visibility to that.

For example, we always looked at capital investments or a capex which gave us a payback of five, six years and that translated to this kind of ROC. So that is the direction in which we are moving. I think we are not looking at destination as of now. We are looking at many milestones which we would like to cross in this journey and then keep moving towards that particular direction.

Vishal — Svan Investments — Analyst

Fantastic, sir. Thank you. Thank you, and all the best, sir.

Operator

Thank you very much. We’ll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

Arnab Banerjee — Managing Director and Chief Executive Officer

Thank you very much, and wish you all the best for the festivities coming up in quarter three and see you next quarter. Thank you.

Operator

[Operator Closing Remarks]