CEAT expansion | Going beyond boundaries

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The Presentation details the entry strategy that CEAT should adopt for entering in Bangladesh.

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CEAT expansion | Going beyond boundaries

  1. 1. Submitted by- Team Iguanas IIM Ranchi Pulkit Bohra | Pulkit Mathur | Tarun Gupta CEAT Expansion: Going beyond boundaries Phase II
  2. 2. Time is ripe for CEAT’s Entry into Bangladesh Market 60 % Road as a primary mode of transport 65 % Freight traffic served by Road networks 80 % Passenger traffic served by Road networks 90 % Transport Sector’s budget allocation for road dev. 0 No. of Automobile manufacturers 1 No. of Automobile Assemblers 50 % Market share of imported used/ reconditioned cars 12 % Tyre Industry CAGR Investment in Infra Improved Connectivity Demand for Automobiles and hence Tyres Multiplier effect on Economy Rise in GDP CEAT’s Rolling Wheel Support for Automotive Industry Increased Mobility Needs Road Infra Development in Process Increased Import Tax Rates Exchange Rate Volatility Electricity and Land Availability ChallengesOpportunities BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 1 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T Sources: BRAC EPL, February 2013
  3. 3. CEAT should sustain Existing Market Drivers while looking for New Opportunities COST FACTOR RATING OF PRIORITY TYRE QUALITY BRAND RECALL VARIANTS AVAILABLE SERVICES OFFERED ADJACENT TERRITORIES AVAILABLE FOR EXPORT MARKET Current Tyre Market Drivers Working In Bangladesh 0 55 Missing Tyre Market Drivers In Bangladesh 3 4 2 4 DISTRIBUTION CHANNEL 3 2.5 1 MARKET DRIVERS Unmanaged Cost Factor • Scarcity of Raw Materials – Rubber, Carbon and Yarn • 90% supply from imported tyres • High import duties raise prices • Scarcity of Electricity poses a big challenge Tyre Quality Major Tyre companies in Bangladesh offer similar Value Proposition – Quality at Reasonable Price The Heavy Import duty makes it difficult for local people to afford these tyres. Brand Recall The market players are established companies like Bridgestone, JK Tyres, MRF, CEAT etc. These companies have a ready brand value and recognition. Available Variants Many variants are available from each tyre company but the local customization has not been done. CEAT should target new market drivers in Bangladesh CEAT should sustain existing market drivers In Bangladesh Current Distribution Channel • Distribution Network is under tapped. • Major players offer less incentives to distributors as supplier’s bargaining power is higher New Export Markets To Target with Bangladesh as epicentre is unexplored. Un-explored Service Offerings like e-commerce, Tech. Training Sources: Asia Tire Industry Outlook to 2017, Ken Research; Tire Market In India, MarketLine BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 1 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  4. 4. Project Charter for the Phased Plant Commissioning & Business Expansion Phase I Plant Commissioning Phase II Commercial Production Phase III Marketing and Distribution Market Share Product Mix Quality Management Raw Material WarehouseInvest FinalizeTarget DealersPricing Strategies Consumer Preferences Distributor Locations Dealer Locations Gauge Decide Set up a Network Land Machinery Seed Marketing Identify Optimal Capital Structure Purchase Setup Start Finance Phase 0 Local Partner JV with AK Khan & Co Market Knowledge No Related Retail Outlets Local Partner Positive Challenge Rubber Plantation BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 1 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  5. 5. Chittagong Sylhet Dhaka BarisalKhulna Rajshahi Dhaka is the Ideal location for Plant; 3 Warehouses Required Dhaka Chittagong Khulna Rajshahi Sylhet Barisal Dhaka 297 256 197 222 114 Chittagong 297 437 400 406 156 Khulna 256 437 200 468 85 Rajshahi 197 400 200 337 259 Sylhet 222 406 468 337 288 Barisal 114 156 85 259 288 Total 1086 1696 1446 1393 1721 902  Start the plant in Dhaka – the heart of Bangladesh  Using P median approach (taking P=3), we found that warehouses can be developed at Chittagong, Sylhet & Khulna.  Chittagong being the port city will play a significant role in exports  Advantages of having one plant and three warehouses –  Low Inventory Holding Costs  Faster Replenishment  Effective buyback contracts  Shorter Lead Time Plant Warehouse Other Major Cities From warehouseFrom plant Distance between Major Cities (in Km) Mymensingh Exports BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 1 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  6. 6. Hubs and Shoppes in India States like Odisha and Chhattisgarh, which have rich mineral reserves have 17 and 12 hubs respectively compared to 3 and 1 shoppes respectively Chittagong Sylhet Dhaka BarisalKhulna Rajshahi 221 133 Exclusive CEAT dealer outlets for Trucks and Buses Segment Exclusive CEAT dealer outlets for Passenger Car Segment HUBSHOPPE Hubs and Shoppes in Bangladesh - Proposal 10 6 HUBSHOPPE 15 10 The proposed number of hubs and shoppes in 2014 are based on ratio of area of India and BD (22.3) while in 2019, it is based on ratio of GDPs (13.9) 2014 2019 HUB SHOPPE The hubs in Sylhet and Chittagong cover the surrounding mineral rich areas Source: CEAT website Proposed Hub & Shoppe Model BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 1 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T Sources: CEAT Website
  7. 7. 60: 40 D/E – Optimal Capital Structure for CEAT Bangladesh Methodology Assumptions Results RESULTS FROM ANALYSIS Current Optimal Change D/(D+E) Ratio 53.21% 60.00% 6.79% Beta for the Stock 1.83 2.08 0.25 Cost of Equity 22.23% 24.13% 1.90% After-tax cost of Debt 10.81% 7.97% -2.84% WACC 16.15% 14.43% -1.72% Implied Growth Rate 8.50% Firm Value 1510.6 1947.7 437.0 Value/share 206.4 334.0 127.6 • New investment of 65 million USD forms the 70% part of JV • Optimal Capital Structure is attained when WACC is minimized • Debt to be raised in India considering higher interest rates in Bangladesh • Existing debt is refinanced at new rates • Pre-tax cost of debt is taken from 5 year interest expense average 0 500 1,000 1,500 2,000 2,500 13% 14% 15% 16% 17% 40% 50% 60% 70% 80% FirmValue,INRCrore WACC WACC Firm Value Min. WACC, Max. Firm Value @ D/(D+E) = 60% Taken inputs from Balance Sheet and Annual Income Statement Analysed Interest Rates and Marginal Tax Rates in India & Bangladesh Calculated Default Spread using Interest Coverage Ratio: Credit Rating Changes with ICR but remain stable in a Band Financial Details Tax Rate Default Spread Optimal D/E Cost of Equity and Cost of Debt change with changing D/E. Optimal WACC was calculated to maximize Firm Value BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 1 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T Sources: Moneycontrol.com; CEAT Annual Report 2012-13
  8. 8. Determining The Product Mix At Bangladesh Plant : A Quantitative Model CEAT’s Market Share Growing at CAGR 54% in BD Each Segment Share Targeted in range 0-30% To Maximise Profit From production at plant 2015 2018 2021 11 % 40 % 40 % 2016 2017 2019 2020 2022 17 % 26 % 40 % 40 % 40 % YEAR Market Share Targeted by Value & Volume Marketsharestabilizes Bus (Cross ply) Bus (Radial) Truck (Cross ply) Truck (Radial) LCV (Cross ply) SCV (Cross ply) 3 Wheeler (Cross ply) 2 Wheeler (Cross ply) 2 Wheeler (Radial) Gross Profit is calculated with information on ton produced & Gross Profit per ton 5.17% 3.98% 4.01% 4.01% 16.24% 17.74% 4.66% 3.69% 3.53% 2.46% 1.95% 1.87% 4.01% 11.05% 12.52% 0.00% 10.00% 20.00% 2015 2018 2021 2 Wheeler (Cross ply) 3 Wheeler (Cross ply) SCV (Cross ply) LCV (Cross ply) Truck (Cross ply) Bus (Cross ply) 80% 80% 63% 60% IDENTIFIED TRENDS IN PRODUCT PORTFOLIO 3-WHEELERS should dominate the production 1 2- WHEELERS production grows 8% points in production 2 TRUCKS TYRES Grow sharply by 12 % points in production 3 LCV TYRES Is another lucrative product segment 4 2 wheelers 3 wheelers SCV LCV Trucks Buses BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 2 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T KEY PARAMETERS ANALYSIS (Using Excel Solver LP) Sources: Case Exhibits
  9. 9. Bangladesh Key Success Factor: Old Technology but New Segments Slow Radialization Maximizing @ 15% of CEAT BD Market Radial Tyres demand should be catered by Imports from parent factories in India & Sri- Lanka CEAT should use Cross ply Technology for its new plant in Bangladesh Tyre Technology Enter into New Segments Tractor & Farm Specialty & Industrial Insights Inference Recommen- dation • Bangladesh is predominately an agricultural country • Farm mechanization for crop production has become an important issue • Govt. to subsidise farm machinery purchase for farmers • Sizeable market for tractor / farm equipment tyres • Govt. subsidies to boost tractor & tillers sales • CEAT overlooking a major segment that is set to expand • CEAT should venture into Tractor & Farm segment in BD • Must leverage the price position to build market share • Tie-up with Progoti Industries (only tractor maker in BD) to supply tractor tyres • Due to current infrastructure crunch in BD, the govt. has planned the following projects over the next decade:  Deep Sea Port in Sonadia Island, New International Airport in Dhaka, Dhaka Mass Rapid Transit Development, etc. • Increase in demand for industrial equipment & tyres • Buying decisions for govt. projects will be price-based • CEAT should diversify into the Specialty & Industrial tyres in the BD market BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 2 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T Sources: www.unapcaem.org; BRAC EPL, February 2013
  10. 10. Key Drivers for Pricing Strategy BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 3 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T Pricing Strategy Price Sensitivity • Replacement Market is highly price sensitive • Price elasticity of demand for tyres in short-term is 0.9, i.e. For every 10% reduction in price, demand should increase by 9% Market Positioning Value Proposition • Better margins for Dealers and Customers • Enhanced Service Quality • Regularity of Supply Customer Life cycle Value • OEM : Quality & Timely Delivery, Enhanced margins. • Replacement Market: Empowering distribution channels, Build a strong brand loyalty, Offering localized tyre variants, Improved services. Sources: Demand Elasticity, Fort Lewis
  11. 11. Market positioning expected to be derived from changes in perceived quality & price Current Situation Reorder Market Dynamics PERCEIVED QUALITY PRICE RANGE 1 - 2 - 3 - 4 - - 1 - 2 - 3 - 4 Strategic Shift: Opening Plant In Bangladesh better service & quality offerings passing cost advantage to customers BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 3 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  12. 12. Price leader with Quality differential Import Duty Savings Better Service Infrastructure Higher Dealer Margins Cost benefit to Customers Tax holiday (Greenfield project, First 5 yrs) Profit/Debt service Products Expert Advice Service 6 CEAT SHOPPE 1.8 Cr/year Current Margin: 5-6% New Margin: 7-8% Benefit: 2% INR 70,18,225 INR 8,77,27,816 Current Positioning 2-3% Below MRF 3-5% Above Birla Proposed Positioning 2% Above Birla • 10 yr Amortization Schedule • 18.29% interest rate 55.32 Cr Yearly payment INR 6.086 Cr 25% cost savings Benefits: INR 70,18,225 BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 3 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  13. 13. Getting electricity for a new business establishment in Bangladesh requires 9 procedures, takes 404 days and costs 5193.8% of income per capita – World Bank, Ease of doing business report Key Takeaways • Cost-benefit analysis results in cost savings of 11.95 Lakh Rs per month • Can produce 90 MW of electricity from 900 tonnes of scrap tyre. • Environmentally safe and reduces tyres dump into land. • Tripura, Assam & Meghalaya are potential nearby states for importing rubber. • From South East Asia Thailand is a potential country for importing rubber to Bangladesh. Addressing the challenge of Electricity by making CEAT plant self sufficient in Electricity. Addressing the challenge of Raw Materials scarcity in Bangladesh. 0 5000 10000 15000 20000 25000 Tripura Assam Meghalaya Nagaland Manipur Mizoram Arunachal Rubber production in North East India (Mt.) Sources: PwC study on rubber production in North east , Business Today – tyre pyrolysis process CEAT can overcome Raw material & Utilities challenges by In-House Electricity Generation and Imports from North Eastern states of India Shredding and cleaning of tyres Solids separation and handling Pyrolysis (fixed- bed fire-tube heating pyrolysis reactor) Separation of oil and gas Oil Carbon Black Steel Wire Waste Tyre Feed BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 3 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  14. 14. Start Price War Excess Margins to Multi-Brand Dealers Set up Production Plants in Bangladesh Competitors Reaction – CEAT’s Potential Response • Bangladesh is a Price Sensitive market • Competitors can reduce price of their products to retain their market share • Take advantage of local production - save on high import duties and other tax breaks • Pass on price advantage to consumers • Competitors won’t be able to push beyond a point Expected Situation What should CEAT do? • Competitors may try to incentivize local dealers and distributors with extra discounts • No encouragement for dealers to switch to CEAT • Follow the suit; Associate with OEMs and their service centers • Launch exchange scheme to retain and attract customers • Majority players currently market tyres imported from other countries • They can copy CEAT to open their manufacturing plants and enjoy similar cost advantages as CEAT • Have long term contracts with rubber suppliers in North East • Leverage AK Khan’s rubber plantation business • Go for in-house electricity generation with supply contracts of scrap rubber Playing on Cost alone would invite competitors for a Price War. Making Services as the USP would make it Difficult for them to Compete! BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 3 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T
  15. 15. Brand promotion – sponsor cricket gears of BD national cricket team INDIA Dhaka Plant Raw material Sylhet – warehouse 1 Khulna – warehouse 2 Distribution centers – Barisal, Rajshahi, Mymens ingh OEMDealers Sub- distributors ForeignStrategicAlliancePartners Tyre Specialty Stores Service Stations Automobile Dealers Automobile Parts Retailers Automobile Repair Shops After Service Sales Shoppe Hub Passenger vehicles Trucks Domestic alliance – Progoti Industries, TagAz End Customer Exportafter4years M Product promotion – alliance with truck transport companies M M Product/Brand marketing Facility for radial tyres by 2020 Use of A K Khan’s superior local distribution channel to gain market share Business Model | Bangladesh Tyre Ecosystem Chittagong – warehouse 3 BD AUTO MARKET MARKET DRIVERS PHASED IMPLEMENTATION PHASE 3 COUNTRY CHALLENGES COMPETITORS RESPONSE ECO-SYSTEMC E A T

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