Price hike essential: Ceat

With rubber prices at Rs 106 per kg, MD of Ceat, PK Chowdhary says that they hope to get 9-10% hike from auto manufacturers.

He adds that they need a price hike basically because there is a steep price rise in most of their raw materials.

Excerpts from CNBC-TV18's exclusive interview with PK Chowdhary:

Can you confirm as to whom you are supplying to at this point, has there been a shortage between demand and supply?

We have been supplying to all the major vehicle manufacturers. There has been strong growth in demand this year in the summer. In the replacement market also, the demand growth has been good. There have been some difficulties with some of the vehicle manufacturers in the last two months to get adequate number of tyres.

There has also been talk that you have been talking to auto manufacturers to raise prices by up to 20%, is that true? Are you lobbing for a price hike as steep as that?

We had one price hike in April that was around 5 per cent approximately. Then we had a 12% price hike on June 1 and we are seeking another price hike on July 1. We are hoping to get anything between 9-10%. So all put together it works to about the figure you said.

This price hike is basically coming from a very steep rise in most of our raw materials. As rubber prices are hovering around Rs 106, an unprecedented kind of price for a commodity like that,  we have been constrained to seek price increases for this order.

Will the auto manufacturers agree, because they have been struggling with their margins as well? They have also been hit, not only by metal prices but a host of other raw material hikes. They need to preserve their margins as well. Do you think they will play along given that they have already given you 15% plus hike this year?

They have already given anything between 15-17% for different types of tyres. We hope to get another 9-10% if we have to protect our margins, or see some improvement in the margin, because our margins have been at all time lows in the last five years.

We are down to 5-6% gross profit before interest and depreciation. This is a very low figure and for us to be able to constantly upgrade the facilities and enhance our manufacturing base, we need to look for better margins than this. We are at a decimally poor level of margin at this point of time.

With 10% hike, how much impact will that have on your margins, or will it go down as net neutral because of the rubber prices?

It all depends on where rubber prices ultimately stay. The present hike that we are seeking will be covering us upto about Rs 100 of rubber prices. But I do not know to what extent rubber prices will change because there are all kinds of predictions.

There are predictions that rubber may hit Rs 140 later this year, there are also predictions that it may go down along with many commodities which have gone down offlate. So we really do not know what will happen. But if we get this price hike on July 1 we are at least covered up to about Rs 100.

Is this price hike something that you are speaking individually to with your suppliers, or are all tyre manufacturers pushing for a 10% hike?

There is no system of a joint discussion. We always talk to vehicle manufacturers on a one-on-one basis and every tyre company has their own relationships with different vehicle manufacturers. We have a very strong relationship with Tata Motors because we are both in Maharashtra.

So we are their natural suppliers. We keep talking to them and that's precisely what we are doing now. We understand their difficulty in giving us huge price increases but we are also equally constraint to protect our margins.

There have been some wild rumours over the last one month suggesting that Tata Motors could be looking at acquiring Ceat's tyre business, any truth to that at all?

I also heard these rumours but I think it is totally baseless. There have been no discussions of any kind whatsoever. 

How do you expect to resolve the shortage problem? Do you think higher capacity utilisation will do it, or do you need to add capacity over the next year or so?

The shortage has two facets; one is that in summer the demand for tyres is always very high in the replacement market, in the export market and also with vehicle manufacturers. Now the summer is behind us and we should see better capacity utilisation and better availability. So to a certain extent the problem will get sorted out.

But there is a bigger issue also; the tyre industry has had such poor margins in the last few years that there has not been much of capacity expansion. Capacity expansions have been constrained due to lower profits and lower market cap of tyre companies.

So the market has to correct to a certain level to be able to give an opportunity to tyre makers to expand. Unless this happens, substantial capacity will not get added up. So the demand and supply force will play its role and automatically it will come to a level where we see enough money to be able to expand.