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Castrol: Doing the basics right

Feb 1, 2002

The lubricants market over the past twenty four months has faced challenging times. In FY01, the size of the pie contracted by an estimated 10%. Castrol India Ltd. (CIL) has indicated that it expects the automotive lubes sector to grow by only 2.5% p.a over the next four years. Considering this background, the company has managed to post relatively impressive topline growth. In FY01, net sales grew by less than 1%.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net Sales 2,732 2,845 4.1% 10,201 10,627 4.2%
Other Income 27 87 226.4% 187 162 -13.4%
Expenditure 2,363 2,405 1.8% 8,508 8,867 4.2%
Operating Profit (EBDIT) 369 440 19.1% 1,693 1,761 4.0%
Operating Profit Margin (%)13.5%15.5%16.6%16.6%
Interest 20 17 -17.3% 72 58 -19.8%
Depreciation 30 33 11.0% 114 127 10.9%
Profit before Tax34647637.8%1,6941,7382.6%
Extraordinary items (3) (20)596.6% (55) (92)68.4%
Tax 62 135 119.3% 295 489 65.8%
Profit after Tax/(Loss) 281 321 14.1% 1,344 1,157 -13.9%
Net profit margin (%)10.3%11.3%13.2%10.9%
No. of Shares 124 124 124 124
Diluted Earnings per share*9.110.410.99.4
P/E Ratio 18.5 20.5
* annualised

At the topline, Castrol had an impressive start to fiscal '02 with YoY sales growing by in the high single digits. In the next two quarters, QoQ, sales growth declined, indicating a possible worsening in the environment. However, the company has managed to stem the slide in topline growth and is likely to have beaten industry growth for the quarter and year ended December '01. Effective excise duty has reduced for the concerned quarter and fiscal, which has buoyed net sales further. Considering the increased competition in the sector and low/no industry growth, realisations are likely to have remained under pressure. Growth in sales is likely to have materialised from improved volumes.

For the quarter and fiscal ended December '01, operating costs have been under control. That said, the company has benefited from cooler oil markets in the current fiscal. Strengthening oil prices over the past two years did put pressure on the company's operating margins, especially last fiscal with operating costs rising at a much faster clip compared to sales. Cooling off in oil markets, with prices declining from $30/ barrel to $19/ barrel, has led to lower base oil prices in FY02. Raw material costs have declined by 35% and 10% for the quarter and year ended December '01. This has enabled the company to maintain its operating margins despite, if any, pressure on realisations. Advertising expenses as percent of net sales have remained flat YoY.

Interest expense, YoY, has declined over the past three consecutive quarters. A reduction in inventory value could have reduced net working capital requirements. Also, the company has implemented an enterprise resource planning system to further streamline business operations. This could have tightened the working capital cycle.

The extraordinary items pertain to voluntary separation costs incurred by the company. Over FY01 and FY02 the company closed down operations at its Wadala, Mumbai and Hosakote, Karnataka blending plants. The costs are to be amortised over a period of five years. Other income for 4QFY02 has aided bottomline growth. Adjusting for other income and extraordinary items -- analysing quality earnings -- bottomline would have declined by 1% and 10% for the concerned periods, which is largely due to higher tax.

Effective tax of the company has jumped up considerably over the concerned periods. This is due to reduced fiscal benefits from the Silvassa plant. Also, the tax provisioning for the quarter and fiscal '02 is inclusive of deferred tax. The cumulative deferred tax liability upto December '01 will be adjusted against reserves for year ended FY02.

Lubes business in India is largely dominated by the automotive segment. In FY02, automotive lubes contributed to 86% of the company's topline. Consequently, performance of the industry depends on the transportation industry. With auto majors reporting improvement in sales, the industry could witness an improvement in demand. With the company stating industry growth in low single digits, topline of the company is likely to grow at current rates. Higher growth in bottomline could be achieved by making consumers uptrade. At Rs 192, the scrip trades on a multiple of 20.5x FY02 earnings.

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