rewrite this title and make it good for SEODebt & internal accruals to fund Ceat acquisition of Camso tyre biz from Michelin: Arnab Banerjee

Arnab Banerjee, MD & CEO, Ceat, says acquisition of this business will make Ceat’s international business contribution to cross 25%from day one and, this is EBITDA accretive and will contribute to the overall margin accretion of Ceat consolidated. OHT business will almost double in turnover post this acquisition and will be almost 23-24% of Ceat’s overall turnover from day one and progressively improve to 27-28, 30% over the next three to four years.

Ceat is going to acquire Camso tyres and tracks business from Michelin. This transaction aligns with your goal to expand internationally but from the numbers perspective, is this deal going to be EPS accretive and if yes, can you quantify the impact then?Arnab Banerjee: Yes, it will definitely be EPS accretive over a period of time. First of all, it will take about six months to complete the deal. We will get possession of the property by May-June of FY26 and thereafter we will start consolidating this result. So, in the initial period, there is offtake and a supply agreement with Michelin so that business continuity is mentioned. That is a very good arrangement and when we gradually start getting control of the entire operation, it will be EBITDA accretive first and then EPS accretive. So, in the initial two to three years, we might see a slight dip in EPS which will come back up.

How do you plan to fund this acquisition? Will this involve raising additional debt? Are there any other financing strategies which are in place?Arnab Banerjee: We are in a very comfortable position balance sheet wise now. Debt-equity is 0.5 and debt EBITDA is around 1. We have been pretty disciplined in our capex. Last year was only about Ra 850 crore, this year, it is about Rs 1050 crore. So, for our organic growth, the capex requirement will be in that range going forward as well. We plan to fund this acquisition with a mixture of debt and internal accruals, maybe roughly in 70-30 ratio and our projections tell us that we will be well within the board mandated ratios of debt equity and debt EBITDA. There is not much stress there and organic growth capex also may not be impacted even if there are a couple of low-margin quarters for us going forward.

How is the acquisition going to contribute to increasing your export share and boosting the off-highway segment’s contribution to your overall revenues?Arnab Banerjee: We have been vocal about liking to raise our international business contribution from 19-20% currently to about 25% saliency in two to three years. When we get this business in straight away on day one our international business contribution would cross 25% and, of course, this is EBITDA accretive so that will contribute to the overall margin accretion of Ceat consolidated and looking at OHT business it will almost double in turnover post this acquisition and we expect it to be almost again 23-24% of our overall turnover right from day one and progressively improve to 27-28, 30% even over the next three to four years.

We also understand that Michelin acquired Camso back in 2018 and this was at an EV to EBITDA multiple of over eight times. Is your deal price similarly or does the growth trajectory justify a higher valuation you think?Arnab Banerjee: The CY23 turnover is about $200 plus million, and the EBITDA was around 20%. Even though there may be a temporary dip we expect this to be a high EBITDA business, strong double-digit, high double-digit EBITDA business if not 20% and may cross 20% over a period of time. If you look at these figures, this is not highly valued, it is fairly valued and it was a win-win proposition. Both sellers and buyers are happy with the deal price and we look forward to getting a good ROI on investment over a period of time. With the recent change in the government in the US, do you anticipate increased demand for construction related products from that geography, what are your growth expectations in other regions like Europe and LATAM?Arnab Banerjee: The entire production currently is in Sri Lanka and we have a headroom of about 35% odd to further scale up in the same Sri Lanka plant with minor investments, no major investments, and Sri Lanka you would understand is the last country perhaps to attract any kind of punitive duty. Most of the duties are targeted towards China and some countries in Southeast Asia, maybe Mexico. But the Sri Lankan production will come maybe last in the queue, so we look forward to it as a low-risk event and I do not think it is going to come in any time soon.Rubber prices have declined by over 20% in Q3 to date. Do you think this trend is going to continue? How are you looking at your margin improvement, in terms of basis points, what is it that you are anticipating for Q3?Arnab Banerjee: We have inventory and it takes time for everything to pass through and though domestic rubber prices shot up actually in quarter one and quarter two and now sort of coming down, tapping season is upon us and so we expect this price to be soft. However, international rubber prices have climbed up from quarter two to quarter three, so in balance we have to see how the mix goes. The pass through of lower crude prices have not yet happened on crude derivatives. Overall, Q3 raw material prices will be flattish compared to Q2 raw material actuals and we may see some softening of the overall raw material basket that we consume from Q4. So, too early to say what will happen to margins. We will have to wait and watch.In Q2, you had mentioned plans for further price hikes in the third quarter across your portfolio, have you implemented any price increases and if so, in which segments? Arnab Banerjee: We have taken price hikes in the truck-bus radial segment, in passenger car segments. In OEM, it is indexed. In OEMs, we have got about a 4% price hike roughly on an average across categories. So, we would be looking up at opportunities to take up prices in our international business. We are not done yet.