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Castrol: Strong showing in CY08 - Views on News from Equitymaster

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Castrol: Strong showing in CY08

Feb 3, 2009

Performance summary
  • Topline increases by 13% YoY during 4QCY08.
  • EBITDA margins decline to 13.8%, from 17.9% in 4QCY07.
  • Other income remains flat during the quarter.
  • Bottomline registers a decline of 17% YoY owing to erosion in operating margins and higher interest and depreciation.
  • For CY08, topline clocks a 17% YoY growth, while bottomline increases by 20%, higher than our expectations.

Standalone financial snapshot
(Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
Net sales 4,786 5,396 12.7% 18,969 22,168 16.9%
Expenditure 3,930 4,652 18.4% 15,587 18,059 15.9%
Operating profit (EBDITA) 856 744 -13.1% 3,382 4,109 21.5%
EBDITA margin (%) 17.9% 13.8% 17.8% 18.5%
Other income 74 74 0.0% 262 307 17.2%
Interest 1 10 900.0% 38 37 -2.6%
Depreciation 59 66 11.9% 208 257 23.6%
Profit before tax 870 742 -14.7% 3,398 4,122 21.3%
Tax 302 272 -9.9% 1,214 1,499 23.5%
Profit after tax/(loss) 568 470 -17.3% 2,184 2,623 20.1%
Net profit margin (%) 11.9% 8.7% 11.5% 11.8%
No. of shares (m) 123.6
Diluted earnings per share (Rs) 21.22
Price to earnings ratio (x) 15.6

What has driven the performance in CY08?
  • The topline of Castrol grew by 17% YoY in CY08 on the back of higher realisations led by price hikes and product mix, despite a marginal drop in volumes due to the economic slowdown.

  • On the cost front, the company witnessed a sharp increase in cost of goods with raw materials cost increasing by 20% YoY. For 4QCY08, raw materials cost increased by 10%, while advertising cost declined by 2% (both as a % of sales). As expected, some of the benefits from the drop in base oil prices (down from US$ 1,550 a tonne in August 2008 to US$1,100 a tonne in December 2008) were offset by the sharp devaluation of the Indian Rupee against the US Dollar.

  • Besides higher realisations, the company maintained it margins and delivered a bottomline growth of 20% during CY08 on the back of better overheads management.

  • Castrolís management has stated that it expects a modest growth of around 10% going forward. The company intends to focus on the strategic growth areas like cars, motorbikes and tractors, where it expects to grow in volume and value terms. The industrial and marine segments are likely to take a backseat.

  • Castrol is not looking at expansion in the distribution sector in CY09. Instead it plans to focus on improving the productivity of its existing network of 270 distributors, which service its 70,000 outlets.

What to expect?
Castrol is into strategic alliances with OEM partners like Tata commercial vehicles division, Tata passenger cars, Mahindra and Mahindra, Ford, JCB and L&T. It has also entered into a partnership agreement with Volvo cars. It also runs Castrol BikeZone Ė a franchised motorcycle servicing concept. The management expects market demand to remain sluggish during 1HCY09. This is expected to negatively impact Castrolís volumes in the short term. However, a good agriculture season and the benefit of raw material cost reduction will eventually reflect in the companyís margins.

At the current price of Rs 330, the stock trades at a price to earnings multiple of 14 times our estimated CY10E earnings. We believe that the power of a strong brand provides the company with pricing power and a degree of control over its margins. However, the macroeconomic slowdown and intense competition limits its growth prospects. As such we believe the stock is fairly valued.

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