CEAT Limited (CEATLTD) Q4 FY23 Earnings Concall Transcript

CEAT Limited (NSE:CEATLTD) Q4 FY23 Earnings Concall dated May. 05, 2023.

Corporate Participants:

Ronak Mehta — Investor Relations

Anant Goenka — Vice-Chairman

Arnab Banerjee — Chief Executive Officer

Kumar Subbiah — Chief Financial Officer

Analysts:

Ashutosh Tiwari — Equirus Securities — Analyst

Joseph George — IIFL Securities — Analyst

Chirag Shah — White Pine Investment Management — Analyst

Kuber Chauhan — Anand Rathi — Analyst

Sachin Kasera — Svan Investment — Analyst

Basudeb Banerjee — ICICI Securities Limited — Analyst

Disha Sheth — Anvil Shares & Stock — Analyst

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

Presentation:

Operator

Good day and welcome to the CEAT Limited Q4 FY ’23 Earnings Conference Call, hosted by JM Financial Institutional Securities. As a reminder, all participant lines will be in the listen-only mode 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. Ronak Mehta from JM Financial Institutional Securities. Thank you and over to you Mr. Ronak.

Ronak Mehta — Investor Relations

Hello everyone. Very good evening to all. Hope you all and your families are keeping safe and feeling well. I would like to thank the management of Ceat for giving us this opportunity to host this call. Today we have with us Mr. Anant Goenka, Vice-Chairman; Mr. Arnab Banerjee, MD and CEO; and Mr. Kumar Subbiah, CFO. With this, I would like to hand over the call to Mr. Anant Goenka for his opening remarks, over to you, sir.

Anant Goenka — Vice-Chairman

Yeah. Thank you. Good afternoon, everyone, and a warm welcome to CEAT’s Q4 FY23 Earnings Call. I’m Anant Goenka and joining on this call, we have Arnab Banerjee, MD and CEO; and Kumar Subbiah, CFO in this call with us. As you’re all aware, there’s been a change in CEAT management effective April 1, wherein Arnab has taken over as MD and CEO of CEAT, while I remain associated in the capacity of Vice Chairman of CEAT.

It’s my pleasure to introduce Arnab to this forum. Arnab has been associated with CEAT in multiple roles since 2005 and lastly, as the Chief Operating Officer.

Over the last 10 years, he has been the co-architect in CEAT’s transformation journey in establishing multiple growth engines at CEAT, reimagining the distribution network, our brand positioning and recall, strengthening the product portfolio, setting up manufacturing capacities, et cetera. I’m sure, under his able leadership, we will see these engines working at their full potential, making CEAT a much stronger and highly efficient organization.

I thank all of you for the support that you have extended to me over all these years, and we look forward — and I look forward to your continued support at CEAT. I’ll now hand over the call to Arnab for his comments.

Arnab Banerjee — Chief Executive Officer

Thank you very much, Anant, and good afternoon, everybody. It’s my pleasure to interact with all of you on this platform. I will be taking you through the business updates for the quarter and thereafter, will hand over the call to Kumar for his remarks on financial performance. Post that, we shall open the floor for question and answers. Let me start with the volume performance — quarterly performance, Q4. Q4 was a strong quarter for us in terms of overall performance.

We saw a healthy quarter-on-quarter growth in volume across markets. Replacement growth in volumes was 5%, OEM volumes grew by 8%, and export volumes recovered by an encouraging 15% over Q3 FY23. Overall volume grew by 7% over Q3. On the replacement side, commercial category has done good. Truck, bus, particularly truck, bus radial saw double-digit growth over last quarter. Healthy demand momentum in farm tires continued into quarter four as well. Demand uptick in passenger segments was relatively moderate. On the OEM side, commercial tires, especially farm and specialty, showed higher growth quarter-on-quarter, followed by two-wheeler.

Exports saw fairly broad-based volume recovery, though the volumes are still far from the last[phonetic] seen a few quarters ago. On a year-on-year basis, quarter four volumes were up healthy 6% despite the high base. If you look at the whole year, then we witnessed 11% volume growth over FY22. OEM grew — OEM segment grew exceptionally well, coming from a low base. Strong traction was seen in both commercial and passenger segment. On the replacement side, we made good progress in passenger tires, in line with our medium-term vision of market leadership in the category. Growth in other categories was relatively moderate.

Exports were impacted by multiple macro challenges, like the war on Ukraine, currency depreciation, dollar availability in some markets, and impending recession in developed markets like EU. Now, coming to demand outlook, current domestic demand looks stable. We are keeping our fingers crossed on the sustained demand uptick going into quarter one. There has been a sustained thrust on government-led infrastructure spends on the back of strong tax collections, coupled with increased visibility of private sector investments, which are good demand boosters.

On the other hand, inflation led stress across markets, especially rural markets, along with erratic weather patterns may have the ability to deflect demand. Two-wheelers, we expect to move in line with rural recovery. Truck and bus segment should see growth in line with the growth in economy and infrastructure push, which is continuing. On the passenger side, we are hopeful of carrying our momentum into next year. OEM volume growth should remain strong, especially in commercial and passenger segment.

Two-wheeler segment maybe a tad lower in OEM going forward. Growth, however, will moderate over high base of FY23 is what we feel. Exports may put up a stronger show vis a vis current year and will be a key contributor for next year’s growth. There has been an improvement in dollar availability in developing economies. Recessionary sentiments prevailing in Europe and North America is also a reality. But for a quality value player like CEAT, it may provide an opportunity. As channel destocking gets over, normal export volumes should return.

We are happy to inform that our newly launched truck-bus radial tires in Europe are seeing good traction. We are targeting to launch our passenger and truck-bus radial tires in US markets as well by the end of FY24. On the off-highway side, we have continued to expand our channel and product basket. So, all these initiatives, along with overall stability, will hopefully get our exports back on growth trajectory from the later part of FY24. Going on to margins. Our raw material basket costs reduced by approximately 8% to 9% over Q3. As a result, our EBITDA margin expanded by 422 basis points over Q3 to reach 12.9% on standalone basis.

We were largely able to hold on our prices in the market and hence, it helped in the recovery of margins. Basis our correct purchases and pipeline, we expect RM basket to move in a narrow band over Q1, maybe inching up slightly by quarter one end. As always, we are watching the raw material price movement closely and will take corrective actions if there’s a sustained run-up in any of the base materials. China demand will be the key variable, especially for natural rubber. Coming to capex, we incurred growth capex of around INR700 crores during FY23 and we have managed to keep the spend within these limits.

We have sufficient capacities at this moment to take care of near-term growth in most of our product segments. Hence we are reducing capex requirement for FY24. We expect growth capex to be around INR500 crores to INR550 crores for FY24, which is largely towards Ambernath agri radial expansion and downstream assets in Chennai and Nagpur. Coming to marketing, CEAT was proud to get associated with the first edition of Women’s Premier League as a strategic time-out partner. We also launched an advertising campaign for CEAT scooter tire around the same event featuring our brand ambassador Harmanpreet Kaur.

We remain associated with IPL as strategic time-out partner in the current edition as well and have launched a new campaign on SUV tires during this event. We have taken a lead in developing new digital channels, beta website with presence in marketplaces. As a result, D2C sales contributed roughly 6% of our replacement sales in FY23 in passenger category, with peak levels of 8% to 9% during the year. Electrification is a big trend, especially in two-wheeler tires. In two-wheeler OEMs, we continue to hold close to 50% share of business. We have significantly expanded our presence in electric vehicle passenger segment as well.

Four premium electric vehicle models, such as XUV400 by Mahindra, Citroen EV, MG ZS EV, MG Comet, were launched on CEAT tires, and we are waiting for more nominations. We’re also the first tire company in India to get OEM approval for EV specific range of tires for commercial vehicles. A few awards and recognitions. We are proud to receive three important recognitions from our OEM partners for [technical issue] performance. We got the Award for Overall Performance from Maruti Suzuki, Annual Supplier Excellence Award from Mahindra, Best Performance Award from Renault Nissan. CEAT’s Chennai and Ambernath plants have received Five Star in Occupational Health and Safety audit by the British Safety Council.

CEAT also featured amongst the top 25 in India’s Best Workplaces in Manufacturing by Great Places to Work for 2023. On sustainability, we continue our progress towards our sustainability vision for 2030. We achieved approximately 10% kind of reduction in overall carbon emissions per metric ton of production in FY23 over FY22. Currently, 33% of our plant power requirements are through renewable sources vis a vis 26% in the previous year. We plan to increase this contribution further to 37% by the end of current fiscal. 12 additional products have received BEE Five-Star rating for energy efficiency during quarter four. As of now, 37 of our products are Five-Star rated.

During the year, we also achieved 17% reduction in water consumption per metric ton, which is in top of 29% reduction achieved in FY22. About 24% of our natural rubber requirement was sourced — that was sourced during the year was transported through alternate methods with lower carbon footprint. So, margins are inching back to normalcy after a long and difficult phase on the back of inflated commodity prices. There has been a sustained reversal in RM cost over the last few months, which gives us confidence on the margins remaining in a comfortable range in the near term.

We have made remarkable progress on multiple fronts, with product premiumization, stabilizing new capacities, industry 4.0 practices, process improvements amongst others. As RM stability prevails, we will be able to demonstrate effects of these initiatives in coming quarters in terms of margins, as well as our return ratios. Our focus continues to be on improving the product profile in line with customer expectation, deepening impact in focused markets, and bringing out efficiencies in operations on a sustainable basis, aimed at making us resilient and stronger.

Now, 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 quarter four earnings call. I’ll share some financial data points with you all, post which we can enter Q&A session. First, on revenue, our consolidated revenue for the quarter stood at INR2,875 crores, a quarter-on-quarter growth of about 5.4% driven by volumes; and year-on-year growth of about 10.9%, which has both price growth, as well as volume growth. FY23 was the third successive year of healthy double-digit growth — revenue growth for CEAT.

During the year, we crossed an important milestone of INR10,000 crores and ended the year with a consolidated net revenue of INR11,315 crores, growing by about 20.9% in FY — over FY22. We are happy to share with you that we have scaled up our revenue by 1.7 times pre-COVID levels. That is helping us to utilize the additional capacities that we have added in the last three years. Coming to gross margins, raw material scenario remained supportive during the quarter, yielding about 8% to 9% reduction in RM basket cost versus quarter three. As a result of lower raw material crisis and maintenance of our final product prices, we have reached our desirable gross margin range of about 40%. RM prices have been operating in a band since the last couple of months. There has been some increase in the domestic natural rubber prices and some other petrochemical derivatives that may have some impact on the RM prices towards the later part of quarter one.

Having said that, the global macro remained volatile with multiple variables at play. Expectations of a global economic slowdown is keeping a check on inflation for now. But geopolitical situation can take unexpected turns, creating short-term supply challenges and price spurts like what is seen in case of crude recently. We are now seeing — we are not seeing any clear direction in China demand. So, we will continue to keep a close watch on RM situation and see how it evolves over the next few months and quarters. Now, coming to our capex, we spent about INR210 crores of total capex during the quarter. That includes about INR128 crores of project capex.

Our capex for the year — overall capex for the year was about INR890 crores, largely in line with our broad guidance of about INR900 crores for the quarter. In FY24, we would like to keep our total capex in the range of about INR700 crores to INR750 crores, out of which our project and growth capex is expected to be in the range of INR500 crores to INR550 crores. For the sake of clarity, our regular capex consists of molds, plant maintenance, R&D, IT, digital, and efficiency improvement projects. Coming today [phonetic] we are happy to share with you that we were able to reduce our inventory by additional INR100 crores during quarter four.

Our payables also increased in line with our purchases during the quarter and hence, our net working capital reduced sharply by about INR221 crores in quarter four versus quarter three and, overall, on a full year basis, about INR170 crores, largely driven by lower inventories, higher payables, and efficiencies in receivables. Our quality of working capital has steadily improved in the last few years. Consistent improvement in our cash flow processes, covering all elements of working capital, normal capex, project capex, and operating costs, has brought efficiency in overall cash flow management that contributed in managing our debt and leverage ratio as well.

Our consolidated debt as of March 31, 2023 stood at INR2,093 crores, a reduction of about INR252 crores in quarter three. Our year-end debt of INR2,093 crores is marginally lower than the debt level of INR2,097 crores as of end of previous year. This, in one way, means that we have managed all our capital expenditure of about close to INR900 crores in the year only from our internal accruals. We are glad to inform you that we ended the year with a healthy debt/EBITDA level of 2.1 and debt/equity of about 0.6. Now, coming to expenses, our employee costs increased by 17% quarter-on-quarter due to higher level of activities in our factories and higher provisions towards leave encashment arising out of some settlements signed with our employees in two of our factories and some provisions relating to performance-related incentives.

Our marketing spend also increased during the quarter on new campaigns participation in WPL and initial bids of IPL. This advertisement spend is likely to increase in quarter one, as we have a larger presence around the IPL during the year. Coming to depreciation and interest costs, depreciation for the quarter increased versus quarter three due to capitalization of assets arising out of commissioning of our assets in our new factories. We expect our quarter four levels of depreciation to be there in the next one to two quarters. Our interest expenses remained similar to quarter three level. Effective interest rate increased by about 10 basis points in quarter four versus quarter three.

We expect interest rates to increase progressively anywhere in the range of 30 basis points to 50 basis points in the FY24. Coming to EBITDA, our consolidated EBITDA stood at INR375 crores, highest absolute EBITDA that we have achieved during the quarter, with a margin of about 13.1%, an expansion of about 458 basis points over the previous quarter. Our consolidated profit for the quarter stood at about INR132.42 crores, which compares favorably with previous quarter, as well as previous year. And we’d like to share with you that Board in the meeting yesterday approved a final dividend of about 120% for the year, and the same would be paid to shareholders on obtaining approval from our shareholders. And we also like — happy to inform you that we were awarded Best Risk Management Company in auto ancillary sector by CNBC 18 and Lombard recently. This is an affirmation of our robust risk management process. This is the second time that we have been awarded this award in the last four years.

Thank you. We can now open the floor for Q&A.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] Ladies and gentlemen, we will wait for a moment, while the question queue assembles. The first question is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead, sir.

Ashutosh Tiwari — Equirus Securities — Analyst

Yeah. Hi, congrats on good set of numbers. Firstly, on the volume side, in fourth quarter, you mentioned it’s a 6% growth Y-o-Y?

Arnab Banerjee — Chief Executive Officer

Yeah.

Ashutosh Tiwari — Equirus Securities — Analyst

And can you provide the breakup of the same like between OEM, replacement exports, how it is for the quarter and also for the full year Y-o-Y growth?

Arnab Banerjee — Chief Executive Officer

Yes. Y-o-Y replacement is around 5%; OEM would be higher, at about 20%; and exports, we have de-grown by around 11%.

Ashutosh Tiwari — Equirus Securities — Analyst

And for the full year?

Arnab Banerjee — Chief Executive Officer

And for the whole year, the same figure should be around 6%, 33%, and negative 3%.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And how is the like replacement market 5% growth of 6% for the full year, which segments have done well? Like, is it — has the PCR has done very well or all the two-wheeler and truck segment basically in this?

Arnab Banerjee — Chief Executive Officer

For the whole year?

Ashutosh Tiwari — Equirus Securities — Analyst

Yeah, yeah, whole year.

Arnab Banerjee — Chief Executive Officer

For the whole year, I think PCR has definitely done well in the replacement segment. Two, three-wheelers has middled in terms of single-digit growth in the replacement segment and off-highway, of course, has done quite pretty well, and truck-bus growth has been moderate in replacement segment for the full year.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And this 33% growth in OEM volumes, this is driven by mainly PCR? Is that the largest part of this?

Arnab Banerjee — Chief Executive Officer

No. In OEM, we have had a resurgence in our market share and acceptance for our truck-bus radial category, especially towards the second half of the year, and that has primarily led the entire OEM growth for FY24 — FY23. And off-highway also has moved up significantly in OEM for the last year.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And we were running I think this TBR capacity at pretty high inflation level, and we have not mentioned any capex for that in FY24. So, how will you manage that growth in that TBR category in ’24?

Arnab Banerjee — Chief Executive Officer

Yeah. So, TBR we have grown but there is significant amount of upside still left in Halol, which will provide growth in the immediate term and we — so, we are still having a wait-and-watch kind of a stance on TBR. There are two things. One is the capacity utilization in Halol. There is headroom there. And secondly, we are also looking at the product mix and the margin profile of the entire basket of TBR and we’ll continue to wait and watch till we take a call on further investment in TBR.

Ashutosh Tiwari — Equirus Securities — Analyst

What is utilization level in TBR last year, full year or maybe Q4?

Arnab Banerjee — Chief Executive Officer

Utilization level has inched up to around 80% in Halol right now.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And lastly on the capex side, you mentioned INR700 crore to INR750 crore capex for the full year. That would mean that our debt should start declining from this year remaining fully?

Kumar Subbiah — Chief Financial Officer

Yeah, I think it should not largely. We have one or two things that will happen in next year also. For example, from cash flow standpoint, we didn’t have any cash outflow with respect to income tax last year and however we may see some higher than ETR impact on cash flow in the coming year. There could be some dividend outflow. So we are watching it and in some cases materials — raw materials and finished goods, we have gone a little bit below our normal norms. So, we may have to normalize it. So ideally there should not be any significant increase in debt levels. But if we are able to contain at INR700 crores to INR750 crores level we should largely be able to maintain at that current level.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. Sure. Thank you.

Operator

Thank you. The next question is from the line of Joseph George from IIFL. Please go ahead.

Joseph George — IIFL Securities — Analyst

[Technical issue] the industry margin or individual tire makers margin so we have seen margins go up and down over the years depending on — primarily depending on how raw material prices have moved. And if you went back two or three quarters and when we have checked with you all, your target has been to get to a 12% to — sorry, 10% to 12% kind of a EBITDA margin. Now, we have already reached beyond that. Now — so, my question is, when you think about upcoming quarters or maybe the medium term, rather than the next one or two quarters, what is the margin band that you would like to settle at? I mean because as I said historically, it’s gone up. There is a target margin that typically companies have, which is a kind of a sweet spot, which you would like to stay in. So, what is that band, according to you?

Arnab Banerjee — Chief Executive Officer

Yeah. So, this quarter has been good and looking at the next quarter, let’s say, quarter one, we expect the raw material first of all to move in a narrow band, right? So in terms of the realization also we — it’s a competitive industry. There has been no significant erosion of realization yet. There have been some minor discounting here and there which is happening right through the year. So, we expect the margin to stabilize over the next couple of quarters at least in low-double digit kind of range and that will be the spot we would like to maintain continuously over the quarter.

Joseph George — IIFL Securities — Analyst

Understood. Thank you.

Operator

Thank you. The next question is from the line of Chirag Shah from wine — White Pine Investment Management. Please go ahead, sir.

Chirag Shah — White Pine Investment Management — Analyst

Yeah. Hi, thanks for the opportunity. Sir, so first a clarification. You indicated for full year, this year replacement demand, two-wheeler has seen a decline of how much, sir?

Kumar Subbiah — Chief Financial Officer

You’re referring to replacement or?

Chirag Shah — White Pine Investment Management — Analyst

Replacement. Replacement, replacement.

Arnab Banerjee — Chief Executive Officer

Replacement, the — replacement demand, in two-wheeler, we have grown. No, we have not declined.

Chirag Shah — White Pine Investment Management — Analyst

Okay. Grown by, sir?

Arnab Banerjee — Chief Executive Officer

Single-digital growth.

Chirag Shah — White Pine Investment Management — Analyst

Single-digital growth?

Arnab Banerjee — Chief Executive Officer

Yeah, full year.

Chirag Shah — White Pine Investment Management — Analyst

Okay. Sir, my question is on the OTR side. How are you looking at that side? Any update? Anything you would like to share incremental over there?

Arnab Banerjee — Chief Executive Officer

We are expanding the Ambernath plant, which manufactures agri radial, which is the most profitable part[phonetic] of the business. We have also put in some additional capacity in Bhandup for the bias part of the — the bias range of agricultural and OTR. So this will lead to sustained growth in both domestic, as well as export market in OTR. We are looking at range expansion also, putting in new products, which is very important for success in the business. And we are looking at getting into more OEMs and increasing the share of existing OEMs globally as we go forward. So, the outlook is pretty positive, both margin-wise, as well as volume-wise.

Chirag Shah — White Pine Investment Management — Analyst

Sir, what kind of expansion you are looking [indecipherable]? And when can we expect a sharp increase in the pace of expansion and pace of export? Because a lot of trial orders, a lot of efforts would have gone through over last few years. So when can we expect the next leg to take shape?

Arnab Banerjee — Chief Executive Officer

So, the expansion in the next couple of quarters, we will see at least 20% of the capacity getting installed further and the order book is good, so the sales will also catch up fast with the expansion to Ambernath. So we’ll go to about 105 odd tonnes per day in Ambernath, which will further expand to about 150 plus tonnes per day by the end of the year.

Chirag Shah — White Pine Investment Management — Analyst

Okay. You will go to 150 tonnes. Okay. And what kind of SKU additions you’re looking at? You alluded to that, you wanted to do some range expansion. So what SKUs you are looking to add, if you can add it?

Arnab Banerjee — Chief Executive Officer

Yeah. So, we have around 750-odd SKUs total, about 300 of radial, bias about 250-odd, then OTR also about 200-odd. And in the quarter that has gone by, we have added about 20-odd SKUs and 20 more will get added in quarter one as well. So, this is across product range we are getting into new areas also. So, we’ll get into forestry also in future, for example. We have got into lawn and garden tough range. We have got into agro-industrial application. We have got into puddling application. So, we’re getting into newer and newer niche applications, which have got these kind of SKUs, and the margins are also good.

Chirag Shah — White Pine Investment Management — Analyst

And I presume all of this is for export market, right, sir?

Arnab Banerjee — Chief Executive Officer

These are all for export markets.

Chirag Shah — White Pine Investment Management — Analyst

Okay. And in terms of size-wise, anything — any thought, any thinking that you have?

Arnab Banerjee — Chief Executive Officer

Size-wise, specifically, maybe we’ll come back on that?

Chirag Shah — White Pine Investment Management — Analyst

Okay. Okay. Thank you very much. All the best.

Arnab Banerjee — Chief Executive Officer

Thanks.

Operator

Thank you. [Operator Instructions] Next question is from the line of Kuber Chauhan from Anand Rathi. Please go ahead.

Kuber Chauhan — Anand Rathi — Analyst

Thank you for taking my questions. Two questions from my side. You talked about different kind of campaigns and ad spends, which you have done in FY23. So could you talk more about what’s your — I mean, what’s your funding for FY24 regarding ad spends and how you are taking it? And second question is on the RM prices. So we have seen crude getting from a peak of around $123 per tonne. Crude has been — crude has been fallen. So what’s your outlook on that and also on the rubber prices? Yeah.

Arnab Banerjee — Chief Executive Officer

I’ll take the first question. We have been maintaining a steady kind of investment in marketing, at the rate of around 2% of turnover. It’s been around that for the last year and it will be around 2%, again, for the coming year in FY24. So that will continue, and we didn’t reduce it substantially even during COVID. So, that has been a continuous investment on the brand, which will continue. As far as crude is concerned, Kumar, would you like to?

Kumar Subbiah — Chief Financial Officer

See, crude went up to, as you said, about $120 plus and now hovering in the range of close to about $75, okay? Normally, what we — goes into the raw material that is used in tires is[phonetic] crude derivatives, okay? So, for example, synthetic rubber has a derivative called as butadiene and nylon fabric has a derivative called caprolactam, so — similarly, carbon black has CBFS. So, what we have observed is, while CBFS, which is a direct refined product, has moved largely in line with crude, with respect to synthetic rubber derivatives and fabric derivative, they have not corrected to the extent of correction in the prices of crude. So, therefore — and therefore, we have not seen the kind of reduction that we saw in crude with respect to these materials, one. Number two, rupee has also depreciated, so — by about 9% to 10%. So when we have a — when we import these materials or when it is import parity cost, that also takes away the impact of fall in crude to that extent. So — and therefore, the question is that crude derivatives and raw material prices have not fallen in line with the fall in crude oil prices from peak to the current level.

Kuber Chauhan — Anand Rathi — Analyst

And sir about rubber, anything? Are we witnessing any kind of a correction in rubber prices?

Kumar Subbiah — Chief Financial Officer

See, rubber prices — in the international price is largely stable for the last two months. If you were to convert international prices into rupees per kg, it’s hovering around INR50[phonetic] to INR151 per kg for the last two, three months. Local natural rubber prices went down to around INR140 per kg in January and February, okay? In the last two months, it’s been steadily going up. As we speak today, it’s moved around INR150 to INR153 per kg. So, there is some increase in natural — local natural rubber prices. International rubber prices have been constant in the last two months in terms of rupees per kg.

Kuber Chauhan — Anand Rathi — Analyst

Okay, understood. That’s it from my side. Thank you, and wish you all the best.

Operator

Thank you. The next question is from the line Sachin Kasera from Svan Investment. Please go ahead.

Sachin Kasera — Svan Investment — Analyst

Yeah. Congrats for a good set of numbers. Couple of questions. One, how do you see your mix of OEM replacement and exports in ’24 versus ’23?

Arnab Banerjee — Chief Executive Officer

So, the mix is about 51%, 32%, 18%, currently; replacement, OEM, exports. We are putting in a lot of effort towards global sales and exports, both in specialty, as well as truck-bus radial and passenger category. So this 18% is going to improve. And this 18% is good for us in terms of EBITDA accretion. We are also putting in effort to improve our market share in truck-bus radial and passenger tires in replacement. So these, we are looking at almost 1.5 times market share gain in truck-bus radial. And we are looking at moving towards market leadership in passenger radials. It may not happen in the next — in FY24, but we will move close to it. So, coupled with these two initiatives — and we’ll maintain our business in OEM, because passenger radial has got — and as well as truck-bus radial has got a huge replacement benefit in the replacement market. A significant amount of customers replace the tires fitted by the OEM in their cars or even in truck. So we will maintain the business in OEM and therefore this ratio is going to gradually increase over the year and it will increase — improve towards replacement and international business in the coming financial — in the current financial year.

Sachin Kasera — Svan Investment — Analyst

So going forward, next two years, the share of replacement and expert in overall revenue pie should increase from where it is today?

Arnab Banerjee — Chief Executive Officer

Exactly.

Sachin Kasera — Svan Investment — Analyst

Okay. Secondly, you also mentioned in the opening remarks that one of the focus area is to improve the return ratios. So, now that probably we have seen the worst of the margins and we are now starting to see some improvement, over the next one to two years, what type of aspirations we are having in terms of [technical issue] return ratios?

Arnab Banerjee — Chief Executive Officer

Equity return sorry.

Sachin Kasera — Svan Investment — Analyst

Yeah. I’m talking about the ROEs and ROCE.

Arnab Banerjee — Chief Executive Officer

ROE, is it?

Sachin Kasera — Svan Investment — Analyst

ROE, ROCE, whichever you would like to comment about.

Arnab Banerjee — Chief Executive Officer

Okay. Okay. We focus a lot on ROCE. I’m sure, from equity shareholders’ point of view, ROE is also an important part. Okay, normally, I think — I’ll tell you, philosophically, what we do is whenever we get the — any capital proposal approved, okay, we look at some — a payback of about six to seven years as a upper end. That’s the level at which we would generally like to take up any of the capital proposals. That would normally translate to ROCE of — in the range of 12% to 15% That is the range at which we expect. Obviously, it happens with — after, say, year two or year three, depending on when the project gets completed. So, our ambition in terms of return on capital employed is in that range of about 12% to 15% progressively.

Sachin Kasera — Svan Investment — Analyst

Okay. Sir, just a more structural and a follow-up on this. When we look at the overall auto ancillary as a sector, we are very much — in terms of a B2C largely — almost 70% of our revenue comes from B2C. There are a lot of auto ancillary, which are primarily B2B, and they consistently deliver ROEs of — ROCEs of 20% plus. So, do you see this more as a structural issue with the tire industry, where because of whatever you may talk of, competitive reasons and whatever other things maybe, the industry structurally makes a much lower ROCE versus — despite being a predominantly a B2C industry versus some of the other component guys or auto industry guys who consistently make 20% plus ROCE despite being primarily a B2B player?

Arnab Banerjee — Chief Executive Officer

Yeah. So, in our industry, the margins and the ROCE financially is primarily delivered from replacement and international market, because margins are structurally lower in OEM. However, to get that margin from the replacement and international market, especially, domestic replacement market, it is imperative to do the OEM business at this margin, because, A, the entire technology development for the future happens through OEMs. That — there is a lead that the OEM has. For example, now — nowadays, it’s electric vehicles and the tires are different for electric vehicles. And number two is that, as I mentioned earlier, there is a significant amount of stickiness with the customer when they replace the tire in replacement market. If there is an OE-fitted tire of CEAT, there is a significant likelihood that the customer will go for the same tire. So the margin, therefore, holistically is recovered from the replacement business. Our entire international business is currently replacement business. And in future, when we have to increase our stakes in international business, we may have to get into OEMs in international also to kick start further premiumization into bigger cars and getting the higher-margin business in replacement. OEM entry may also be required there. So, as a overall construct, we get our ROCE and margins from the replacement business.

Kumar Subbiah — Chief Financial Officer

Okay. And one additional point is, see, since you are comparing one industry versus the other, one of the important drivers or levers for ROCE is that asset turnover, okay? In a tire industry, structurally, the asset turnover is a little on the lower side and it takes — once you put up an investment, because of very high upstream investment, okay, you start paying off after year three or year four. So you’ll have to invest and upstream in the beginning, downstream will happen over a period of time. This may not be necessarily be applicable for some of the other auto ancillary industry that you have in mind when you indicated 25%, 30% kind of an ROCE.

Sachin Kasera — Svan Investment — Analyst

Sure. So should we — if we look from a medium term, say, next three to five years, should we assume, like, as of now, 15% is like the upper end, beyond which, as of now, practically difficult for us to look sustainably better ROCE [technical issue]

Arnab Banerjee — Chief Executive Officer

We have significant upside in our installed capacity. So there is scope for operating leverage in this year itself and in the coming year. We have upside in capacity in two-wheeler, which is a high-margin business for us. We are investing in capacities in Ambernath. We have upside in passenger. Again, it’s a high-margin business for us. And as I mentioned, we have upside in TBR as well. So right now, our capex is tapering down in FY24, whereas we are looking for growth. So, ROCE, definitely we’ll see an uptrend during the next four quarters.

Sachin Kasera — Svan Investment — Analyst

Sure. So just a follow-up on this. So, what type of utilization we would have on an average in FY23 and on overall basis what type of leverage we have in terms of improving utilization and improving to better ROCE?

Arnab Banerjee — Chief Executive Officer

Yeah. So, our largest factory in Halol where we are utilizing close to about 80% and we are at similar levels in let’s say Bhandup and Nagpur, so three of our factories. Ambernath is in an expansion stage, as we shared, which will progressively go up to about 150 tonnes. Chennai we have some more headroom left. We are at about mid-60s kind of utilization. So that kind of sums up for you. Mostly it is 75% to 80%, and we still have headroom left in most of the plants.

Sachin Kasera — Svan Investment — Analyst

Sure. Just one last question for.

Operator

Sorry to interrupt. Mr. Kasera, may we request that you return to the question queue for any follow-up questions? [Operator Instructions] The next question is from the line of Basudeb Banerjee from ICICI Securities Limited. Please go ahead.

Basudeb Banerjee — ICICI Securities Limited — Analyst

Thanks. Couple of questions. Sir, I just missed — you said Halol TBR utilization at 80% or overall Halol at utilization 80%?

Ashutosh Tiwari — Equirus Securities — Analyst

Overall and TBR, both are around 80%.

Basudeb Banerjee — ICICI Securities Limited — Analyst

Okay. Sir, just to understand like sequentially I can see your gross margin being up by 50 basis points. So, just wanted to understand overall math of how raw mat basket for you has moved sequentially, because one-third will be passed on to OEM. So, residual two-thirds helped by 50 basis point gross margin. So just to understand, for the quarters coming ahead with slight increase in natural rubber, as you said, but still how much was the raw mat basket benefit you got and whether it had any other benefit, like, lower inventory or something else in your just overall portfolio of purchase cost?

Kumar Subbiah — Chief Financial Officer

Okay. In the quarter four, our raw material costs were lower by about 8% to 9% versus quarter three. So therefore that’s one of the reasons for our gross margin expansion. In our overall pricing with respect to OEMs, raw material cost both ways, when it goes up as well as when it goes down, okay, it gets reflected in our final product prices. However, it varies depending on the category, the recipe, and things like that, with a one quarter lag. So therefore, when the raw material prices come down, we may pass it on with one quarter lag and the vice versa — and the reverse is also true. So, that is what it is. So going into quarter one, okay, it’s possible that some part of the raw material cost, we may have some implications on pricing with OEMs. Obviously, it depends on the category. The impact of 9% is not uniform for all categories and all our customers. So that correction will happen and — otherwise, the mix will have some impact on gross margin, mix of — category mix, as well as our customer mix will have some implications with respect to this. Assuming raw material prices remain the same and realization remain the same, okay, as Arnab had indicated, our margin should be at double digit — maybe lower end of the double digit. That’s the way we see.

Basudeb Banerjee — ICICI Securities Limited — Analyst

Sure, sure. Thanks. That’s all.

Operator

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

Disha Sheth — Anvil Shares & Stock — Analyst

Sir, if you can throw some light on demand outlook for the coming year and quarter? If you can throw some light?

Arnab Banerjee — Chief Executive Officer

Yeah. So, the summer months are usually good months demand-wise, overall. But we’ve been looking at the whole year — first, I will talk briefly talk about the OEM. The commercial vehicle players are doing well. We expect the OE demand for truck-bus radials to be good, in single-digits, and generally mirroring the GDP pattern and similarly in replacement also, truck-bus tire demand will be in strong single-digit kind of growth through the year; summer maybe a little higher, a little lower in the monsoons, but will average out like that. Passenger car tire demand in OEM is showing some bullishness with some new vehicles coming up, EV coming up. So, they have crossed their pre-COVID level already pretty strongly. So we expect that to continue in the OEM. Replacement demand also will be somewhat single-digit kind of growth because of the past OEM trend about — replacement follows that trend with a two, three-year lag, but positive — positive single-digit growth because of new roads are coming up, people are traveling more, people have gone back to private vehicle usage. And so, that’s [indecipherable]. Two-wheeler demand is dependent on both urban and rural demand. Here, we shift — see some shift in growth of scooter tires maybe at the expense of motorcycle tires. And the overall growth here will be lower-single digit, because a significant part of the economy in the small towns have not yet recovered post COVID from the income hit that they took because of inflation and because of loss of income, loss of jobs. So, the non-farm part of the rural economy is yet to bounce back. As soon as — and we are seeing some recovery basis — some indicators, including FMCG growth in last quarter — last quarter four. So, if that happens, then two-wheeler may improve over the second half of next year — of this year.

Disha Sheth — Anvil Shares & Stock — Analyst

Q-on-Q growth, which we delivered, volume growth this quarter, the momentum should continue into Q1 is what we feel?

Arnab Banerjee — Chief Executive Officer

Yes. Q1, demand-wise, is a — is the most positive quarter. Actually, March is when the demand picks up. March to June is generally good in terms of seasonal demand uptick.

Disha Sheth — Anvil Shares & Stock — Analyst

That’s great. Thank you so much, sir. Sir, and the capex should be funded by internal accruals, right?

Kumar Subbiah — Chief Financial Officer

Sorry, capex should be?

Disha Sheth — Anvil Shares & Stock — Analyst

Funded by internal accruals, since we have a good cash flow because of margin expansion.

Kumar Subbiah — Chief Financial Officer

Look, as we indicated, we will have to normalize working capital, one. We will see some outflow in the form of income tax, some outflow in the form of dividend, and things like that. So if we are able to sustain this level of margin in the year, we should largely be able to manage through internal accruals. If 1% or 2% drop in margins in the coming quarters may have marginal — debt may marginally go up.

Disha Sheth — Anvil Shares & Stock — Analyst

Okay. And exports, sir, I missed the point you said. It is 18% of sales. So, since it has improved this quarter, you expect — you said double-digit growth in exports due to lower base, correct?

Arnab Banerjee — Chief Executive Officer

Yeah. Exports thrust is continuing on all sectors. So we expect exports to do well in this quarter — in the first quarter.

Disha Sheth — Anvil Shares & Stock — Analyst

Sir, and we export generally off-highway tires?

Arnab Banerjee — Chief Executive Officer

Off-highway tire, passenger car radial, as well as truck-bus radial a little bit.

Disha Sheth — Anvil Shares & Stock — Analyst

And more exposure is into Europe and Far East — East Africa?

Arnab Banerjee — Chief Executive Officer

Europe and the Americas constitute about 45%, 46% of our total export.

Disha Sheth — Anvil Shares & Stock — Analyst

Okay, okay. So sir just to get a view, Europe things are improving and what you feel since our exports have improved double-digits?

Arnab Banerjee — Chief Executive Officer

No, Europe, there is a headwind. There is recessionary headwind, especially felt by the agri radials sector, which is where the — we have been playing for a long time. It is also being felt on PCR relatively there, and TBR, we have just started. So — whereas the reverse is true for US, where we see a lot of white spaces and scope for growth. So between US and Europe, we expect to manage export through the next few quarters.

Disha Sheth — Anvil Shares & Stock — Analyst

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

Operator

Thank you. The next question is from the line of Abhishek from Dolat Capital Market Private Limited. Please go ahead.

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

Thanks for opportunity. In terms of iron sourcing, how much import versus domestic mix?

Kumar Subbiah — Chief Financial Officer

See, it varies from month to month and quarter to quarter, but it’s about 55% import and 45% local. And some of the local materials are also priced based on input parity.

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

But earlier, it was used to be 65% domestic side. So have you changed any policy in terms of the iron sourcing?

Kumar Subbiah — Chief Financial Officer

No, we have not changed the policy. I don’t know when it was 65% local. In fact, the local content has improved over last three, four years, because some new capacities got created in the — in synthetic rubber, which entirely was imported by the tire industry. In case of natural rubber, it’s possible that import would have gone up, because the local availability is limited. It’s only sheet rubber. So, as the industry has grown over the last three, four years, it’s possible that quantum of imports is — and also as a percentage of the total requirement would have undergone a change. It’s purely because of the fact that locally it is not available. As far as CEAT is concerned, we have moved down from around 65%, 70% to closer to 50% in the last three years — three, four years.

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

Okay. And how is the margin is structured in the off-highway tires, sir?

Arnab Banerjee — Chief Executive Officer

The margin structure is very good in agri radials, which we export. It is at the highest level. It is very high-double digit, I would say. And the domestic market is — will be — in quarter four, it would be double-digit and overall for the year, would be high-single digit. But very differential margins in the export market.

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

So it is in the range of 17%, 18%, or it is lower than that?

Arnab Banerjee — Chief Executive Officer

For agri radials? For agri radials, it would be more than that.

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

Okay. And as the other expenditures and freight cost is going down, so can we expect that it will cause for a 20% kind of the mark in line with its peers?

Kumar Subbiah — Chief Financial Officer

No. See, we are not able to give any guidance with respect to margins going into this. Generally, it is expected to be higher than the margins of other categories of tires. But we are not able to comment whether it will cross certain level in the coming quarters.

Abhishek Jain — Dolat Capital Market Private Limited — Analyst

Thank you, sir. That’s all from my side.

Operator

Thank you. That was the last question for today. I would now like to hand the conference over to the management team for closing comments.

Arnab Banerjee — Chief Executive Officer

Yeah. Thanks very much for attending this call, and I hope we have been able to answer all the queries satisfactorily and we shall keep in touch going forward, and see you at the end of next quarter. Thank you.

Operator

[Operator Closing Remarks]