CEAT (RPG Group's tyre maker) reported Q1 FY27 results on July 16: consolidated revenue rose 22% YoY to ₹4,318 crore, but consolidated net profit collapsed 96% to just ₹4 crore (from ₹112 crore a year ago), as raw material costs surged and forex losses hit overseas subsidiaries. Shares fell ~9% the next day.
Revenue up 22%. Profit down 96%. On the surface that sounds impossible — until you understand that revenue and profit are separated by costs, and costs can move independently of sales.
Here is how a CFO reads this. The first line a CFO checks isn't revenue — it's gross margin. CEAT's gross margin fell from ~36.8% to ~33.9%, a drop of nearly 300 basis points. EBITDA margin (earnings before interest, tax, depreciation and amortisation — a proxy for operating efficiency) cratered from ~11% to ~8.6%. Rubber and crude-linked raw materials spiked because of the West Asia conflict, and the company could only pass on part of that cost through price hikes. The CFO himself confirmed: 'We have not passed on the entire increase in raw material cost and therefore the gross margin saw a drop of about 5.8 per cent.'
This is the COGS trap. COGS (Cost of Goods Sold) is the direct cost to make what you sell. When COGS rises faster than revenue, gross profit shrinks — and every rupee of operating leverage works in reverse. Add forex losses on dollar-denominated debt at the Sri Lanka subsidiary (~₹50 crore hit) and startup losses from new warehouses, and the bottom line essentially vaporises.
A CFO would also flag the timing: CEAT just approved a ₹1,205 crore capex expansion, funded partly by debt — at exactly the moment margins are at a multi-year low and finance costs are already elevated. Expanding when gross margins are compressed is the high-wire act every operator eventually faces.
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