Ceat plans to pass Trump tariff hike to US customers for its Camso business

Ceat's exports to the US originate largely from its recently-acquired Camso's facilities in Sri Lanka, with its India units' exports to the country comprising only a 3% of its total shipments.

In a move that could set the tone for other Indian automobile component exporters to the world's largest economy, Ceat, part of the Harsh Goenka-led RPG Group, said it plans to fully transmit the impact of the tariff hike to customers, albeit with a lag.

The company has started consolidating the revenue of Canadian tyre brand Camso from September, following its acquisition in December for $225 million (around ₹1,900 crore) in an all-cash deal from France-based Michelin Group. Camso, CEAT’s largest international acquisition, earns nearly one-third of its revenue from the US, and had reported $213 million in revenue in 2023.

The deal has given Ceat a stronger foothold in the US market, which until now contributed only a small share of its exports.

Ceat’s chief financial officer Kumar Subbiah told Mint that the company had absorbed part of the tariff increase in the last quarter, as Camso’s revenue was consolidated into Ceat’s books only from September.

“This happened (tariff hike) in the previous quarter that some increase has been absorbed. Our endeavour is to pass on the entire incidence of tariff to the customers with a lag," Subbiah said on the company's plan to mitigate the tariff hike impact.

Ceat's net profit surged 53% in the June quarter to ₹186 crore, while its revenue from operations surged 14% to ₹3,773 crore. Ceat’s share price is up 16% so far this calendar year, lower than the 18% rise in the Nifty Auto index.

Through the acquisition, Ceat got access to two Sri Lankan plants owned by Camso, from where it exports its products to the US. Earlier, Sri Lanka was expected to be levied over 40% tariff, while India's would be lower due to its negotiations on a trade deal, making the company put in place contingency plans.

“We have our mitigation strategies in place in case trade deals do not materialize," Arnab Banerjee, managing director and chief executive, Ceat, had told Mint in May. One of the strategies was to shift the production of tyres for the US market from Camso’s plants in Sri Lanka to its Indian facilities and shift production for the European markets to the Sri Lankan plants.

However, the scenario took a different turn with the recent escalation in India-US talks and the announcement of a 50% tariff on India. The US now levies 20% tariff on Sri Lanka and 50% on shipments from India, even as talks on a bilateral trade agreement continue.

Camso is now owned by an Indian entity but it has two facilities in Sri Lanka, from where it exports to the US. Tariffs are applicable from the place the goods originate from, which in this case is Sri Lanka.

“The duty is 20% and there is no disadvantage for Sri Lanka versus the other countries from where the same product can be sourced because these are not locally manufactured in the US, so tariff is relative to any other source," Subbiah said.

However, the company is still assessing how the impact of passing on the cost increase due to the tariff hikes pans out on the overall demand from the US market and whether it would lead to a downturn. “Camso is a new baby, and it’s just been one month. Therefore, let us take a look at one more quarter. And maybe we will have a better understanding to respond," Subbiah said.

The tariff risk has been repeatedly highlighted by analysts, as the timing of the acquisition in December came just a few months before the Trump administration ramped up pressure on trade with tariff hikes since March.

For Ceat, the US has been an identified growth market, where it has been looking to expand.

According to a 1 May note of Kotak Institutional Equities, price hikes due to the tariffs could hit the company's overall sales in the US by 15%. "In that case, the rationale for the (Camso) transaction becomes difficult to justify," the note said.

To make the Camso acquisition worth it, Ceat is looking to ramp up the use of its facilities as their utilization level remains less than 50%. Ramping up capacity becomes crucial as the net debt of the company spiked up after the acquisition, which is likely to be lowered over a period of time.

“Camso will scale in a period of time. The current capacity utilization of its assets in Sri Lanka is below 50%. As we scale up, and as it is a profitable business, it should be having a positive impact [on debt]," Subbiah said.

Analysts have taken note of the company’s efforts to cut its debt level. “Net debt to rise from ~ ₹1,900 crore in FY25 to ~ ₹2,800 crore in FY26E due to the Camso takeover and moderate gradually to ~ ₹2,100 crore in FY28E on the back of positive free cash flows. Initial focus shall be on ramping up capacity (current utilization at 50%)," analysts at Nuvama Institutional Equities wrote in a 17 October note.

Ceat's larger rivals in India are MRF Tyres, Balkrishna Industries and Apollo Tyres. While none of the companies have clearly detailed their exposure to the US, exports constitute over two-third of Balkrishna's business, with the Americas accounting for 15% of overall sales.