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Team Iguanas
IIM Ranchi
Pulkit Bohra | Pulkit Mathur | Tarun Gupta
CEAT Expansion: Going beyond boundaries
Phase II
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
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
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
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
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
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
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
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
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
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
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
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
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
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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CEAT expansion | Going beyond boundaries

  • 1. Submitted by- Team Iguanas IIM Ranchi Pulkit Bohra | Pulkit Mathur | Tarun Gupta CEAT Expansion: Going beyond boundaries Phase II
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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