Anant Goenka's CEAT-Zensar balancing act

Zensar has over the last decade grown relatively slowly in terms of topline growth, at less than 10 percent CAGR, as compared with its large cap or mid cap peers. Its profitability too has been lower than the industry average, says Anmol Das, head of research at Teji Mandi, a subsidiary of Motilal Oswal Financial Services. Since the Covid-19 crash in the market, the stock did have a huge rally though it was not as much led by its visible fundamentals as it was by an industry tailwind.

“Currently trading somewhere around its median 10 year P/E (price-earnings), which lies somewhere below 15x, the stock has very much been hammered down to its true fundamental strength. Hopefully, the appointment of Mr Anant Goenka brings about some changes in their business strategy as the historical financial performance does not make it look attractive for ultra-long term investments,” says Das.

The company is in the midst of implementing a focused and disciplined margin improvement programme. The programme includes multiple levers, including an improvement in service mix, improvement in commercials, improvement in utilisation, optimisation of the pyramid, support costs and cost of talent acquisition, explains Goenka.

He adds that the company has already called out bottoming of margins in their Q2FY23 result and they expect meaningful margin improvement going in the next couple of quarters. Zensar has delivered six quarters of consistent sequential growth in constant currency (CC) terms. Further, execution of strategy, especially around strategic growth opportunities (SGOs), mergers and acquisitions (M&A), deal win and client solutioning have gained momentum in the past 18 months.

“We have signed marquee logos over the last 4-5 quarters. Ajay [Bhutoria] and Zensar’s leadership team had already designed the strategy 5-6 quarters back, and the same is under execution. We do not see any shift on that front, in fact that is precisely why I have stepped in to ensure that the Zensar leadership executes the pre-designed strategy while I support and guide them as and when needed,” says Goenka.

Established in 1979, the Rama Prasad Goenka Group, commonly known as RPG Group, had a cumulative turnover of over Rs 30,000 crore in FY22. With companies such as KEC, CEAT, Zensar Technologies and RPG Life Sciences under its umbrella, the Harsh Goenka-led group is one of the oldest entities in the country and is known to have made some noteworthy buyouts. The group’s focus now is on technology, digital and growing the company with professionals who have significant expertise in various markets.

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The Way Ahead at CEAT

Before he took over at CEAT, Goenka started his journey at the group with KEC International, an RPG Group firm that makes transmission towers, where he managed operations in supply chain management, manufacturing, planning and quality control. Prior to joining the RPG Group, Goenka had worked with Hindustan Unilever, Accenture and Morgan Stanley. With an MBA from the Kellogg School of Management and a BS (Economics) from the Wharton School, University of Pennsylvania, Goenka led CEAT to win the Deming Prize in 2017, one of the world’s most prestigious awards in quality management.

Goenka’s focus has been on high-margin products, bringing about quick innovation and marketing aggressively. He changed the product mix at the company, prioritising sales of high-margin two-wheeler and SUV tyres over the low-margin crossply tyres used in commercial vehicles.

Mumbai head-quartered CEAT produces over 15 million tyres a year and produces a wide range of tyres for bikes, passenger cars, trucks, buses, agricultural vehicles as well as giant off-roaders. It also exports to over 130 countries. The share of exports currently stands at 17 percent. The company, which recently ventured into North America, is targeting to generate 25 percent business from the international market in the coming years.

India’s fourth-largest tyre maker by tonnage is targeting markets in Europe, the US, Canada, South America, Australia and New Zealand for its car radials, truck and bus radials, two-wheeler tyres and tyres for agriculture machinery. “It is a very competitive industry. Restricting yourself within the country, you will only have limited challenges. And when you see global competition in your country, you will find it difficult to adapt. We are going to see much more emphasis on global,” says Arnab Banerjee, chief operating officer and whole time director at CEAT. With Goenka temporarily taking over at Zensar, finance and human resources are some additional responsibilities that have fallen to Banerjee who has been with the company for 17 years.  

For tyre makers in India, experts are expecting some headwinds for the growth of exports from geographies like Europe and Africa in the medium term considering winter-driven higher energy prices in Europe. Companies with a majority of their business in India too will be able to reap the benefits of a robust domestic economic scenario. “Healthy demand from both channels, OEMs and replacement markets, earlier only urban, and now rural regions as well inflation coming down and a good agri output, all these signal good future prospects for Indian tyre makers including CEAT,” says Das of Teji Mandi.

With six manufacturing plants in India, Ceat will cater to the international markets from its plants in India, and later set up warehouses in the target markets. During April-September FY22, export revenues accounted for 19 percent of CEAT’s turnover, up from 14 percent in the same period in FY21.

The tyre maker reported a 17 percent decline in standalone net profit at Rs 29.9 crore for the second quarter which ended in September. Revenues from operations stood at Rs 2,886.37 crore in the period under review, which is an increase of 18.7 percent compared to Rs 2,432.32 crore posted in the year-ago period. Earnings before interest, tax, depreciation and amortisation (Ebitda) margin stood at 7.1 percent.

In the recent quarter, the company said they have taken price hikes of 4 percent, and may take another 1 percent hike in Q3. Besides, a softening of rubber and other raw material prices may help improve their margins by somewhere between 200 and300 basis points (BPS) in the next couple of quarters, says Das. “Also, CEAT’s revenue growth has been very good among the tyre makers with a major market share in India, so that will also help them achieve a higher bottom line in FY23, thereby improving margins as well as return on equity (ROE) of the company.”

CEAT has been well able to maintain its market share as the third most sold tyre manufacturer in Indian markets along with JK Tyres, offering an almost equal number of products for all kinds of automobiles. CEAT’s revenue mix includes trucks and buses tyre sales at 30 percent, 28 percent of tyres in the two- and three-wheeler market and 18 percent in the passenger cars segment. “In H1FY23, CEAT has been the second fastest in terms of revenue growth among major tyre makers in the Indian market, showing signs of good revenue growth for FY23, maybe almost +20 percent for full FY23,” adds Das.

CEAT will diversify its product portfolio by offering technologies for connected vehicles and electric vehicles, says Goenka. CEAT was one among 75 companies to have been selected to seek benefits under the Centre’s production-linked incentive (PLI) scheme to boost domestic manufacturing. The scheme has a budgetary outlay of nearly Rs 26,000 crore.

The Indian multinational tyre maker is also in the process of introducing technology that could identify bad driving and send alerts to truck fleet owners on the condition of tyres. Already in its pilot phase, the company is working alongside truck fleet owners to provide real-time solutions that would impact the overall condition of the vehicles. Fleet owners will be provided with details about the tyre condition, including the driving behaviour, with break-ins and high acceleration, inadequate tyre inflation and wear-in of tyres.

“We are moving towards manufacturing 4.0 as they call it, where again, with sensor prices having come down and connected devices, what they call as IoT, with all of this kind of coming in, we are taking advantage of these technologies, and working towards improving our various parameters. Now, the goal is eventually to improve efficiencies. And what we look at is productivity, quality, cost, delivery, safety and morale,” Goenka told Forbes India.

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CEAT is also keeping up with the sustainability trend by using more sustainable and green materials to improve the fuel efficiency of vehicles. The company launched tyres in all categories, from two-wheelers to trucks for electric vehicles that have no noise and can take faster pick-up with limited strength. Besides, in the future, Goenka also hints at considering selling tyres in the Metaverse, a virtual-reality space in which users can interact with a computer-generated environment and other users.

Goenka’s temporary role at Zensar has also raised questions around the RPG Group’s succession planning. But he reaffirms that his role at Zensar is an interim arrangement only. “As stated earlier, I am not diluting my position at CEAT in any way. I will continue to lead CEAT in the same capacity and with the same focus. It is an additional interim role which was taken up considering exigent circumstances. Zensar has a highly capable leadership in place with clearly defined roles that are focused on executing the strategy.”

Harsh Goenka, chairman of RPG Enterprises too points out that they are trying to be prepared for all eventualities. Succession remains one of the most critical yet is somewhat understated as a priority in many organisations, he says. “Ideally I would like to see ourselves fully prepared for all possible eventualities. Our processes have achieved that to a good extent. There is room to fine tune it further. We have mapped out potential successors for all leadership positions for both emergencies and for anticipated needs. Moreover, we try to exhaust internal possibilities before we consider external hiring.”