CEAT Limited smashes revenue records in Q2 FY24-25 but faces margin squeeze—What’s next for the tyre giant?

In its Q2 FY24-25 financial update, CEAT Limited, a flagship company of the RPG Group, announced a consolidated revenue of Rs. 3,304.5 crore, marking a 3.5% quarter-on-quarter (Q-o-Q) growth and an 8.2% year-on-year (Y-o-Y) increase. Despite this remarkable revenue surge, the tyre manufacturer experienced a contraction in its operating margin, which stood at 11.1%, down by 102 basis points from the previous quarter.

The company’s Managing Director and CEO, Arnab Banerjee, highlighted that Q2 saw the highest revenue in CEAT’s history, primarily driven by strong performances in the Replacement and International sectors. Banerjee explained that although the company took selective price hikes to counter rising commodity costs, margins remained under pressure.

Revenue Surges Amid Cost Pressures

CEAT’s CFO, Kumar Subbiah, echoed similar sentiments, noting that despite achieving a standalone revenue of Rs. 3,298.1 crore, the highest to date, the increase in natural rubber prices and extended import transit times had led to a rise in the company’s debt levels by Rs. 280 crore. Subbiah mentioned that the increase was partly due to strategic raw material stockpiling and the payout of a Rs. 120 crore dividend.

Margins Take a Hit Despite Robust Sales

In a detailed breakdown, CEAT’s consolidated EBITDA for the quarter stood at Rs. 367.9 crore, translating to an EBITDA margin of 11.1%. This figure reflects a decline of 102 basis points compared to Q1 FY24-25 and 399 basis points Y-o-Y. The margin contraction was largely attributed to an increase in employee costs due to annual increments and higher raw material prices, which significantly affected gross margins.

The increase in employee costs by 11.9% Q-o-Q also impacted the company’s profitability. However, CEAT partially mitigated the impact by implementing judicious price hikes and operational efficiencies.

Expert Opinion: Balancing Growth and Margins

An industry analyst noted that while CEAT’s strategy of focusing on Replacement and International segments is yielding high revenues, the company’s margin contraction highlights the challenge of managing input costs effectively. He suggested that, moving forward, CEAT may need to explore further price adjustments and enhanced supply chain efficiencies to maintain profitability.

Debt Levels Rise Amid Strategic Investments

CEAT’s debt levels saw a rise to Rs. 1,885 crore due to increased working capital requirements and dividend payments. The company’s leverage ratio, however, remained stable, with a debt-to-equity ratio of 0.45x and a debt-to-EBITDA ratio of 1.19x. These figures indicate that while CEAT is expanding, it is also managing its debt sustainably.

Despite margin pressure, the outlook remains positive as CEAT prepares for the festive season, which traditionally boosts demand in the OEM segment. Banerjee expressed optimism for Q3, citing the momentum gained and strong inventory levels positioned to meet upcoming demands.

Sustainability Initiatives and ESG Performance

CEAT also highlighted its ongoing sustainability efforts. The company reported a 3% reduction in overall emissions per metric ton of production and continued to utilise renewable energy sources for approximately 37% of its plant power. These efforts align with CEAT’s commitment to achieving net-zero emissions, as outlined in its partnership with the Science Based Targets initiative (SBTi).

Outlook for Q3: Continuing the Growth Trajectory

As CEAT enters Q3, its strategic focus remains on maintaining momentum, particularly in the Replacement and International markets. With the festive season ahead, the company is poised for continued growth, although managing cost pressures will be crucial for sustaining profitability.