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Castrol: Loses its way… - Views on News from Equitymaster
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  • Feb 7, 2001

    Castrol: Loses its way…

    Castrol has reported its full year results for FY01. This is the first year after FY92 that the company has reported a dip in net sales (-0.7%), however, gross sales have increased. The company has been affected by the negative growth in the lubricants industry.

    (Rs m) FY00 FY01 Change
    Sales 11,956 12,378 3.5%
    Other Income 231 187 -19.0%
    Expenditure 9,499 10,685 12.5%
    Operating Profit (EBDIT) 2,457 1,693 -31.1%
    Operating Profit Margin (%) 20.6% 13.7%  
    Interest 26 72 175.2%
    Depreciation 101 114 13.5%
    Profit before Tax 2,561 1,694 -33.9%
    Extraordinary items - (55)  
    Tax 517 295 -42.9%
    Profit after Tax/(Loss) 2,044 1,344 -34.2%
    Net profit margin (%) 17.1% 10.9%  
    No. of Shares (eoy) 124 124  
    Diluted Earnings per share* 16.5 10.9  

    In FY92 the imports of base oil were decannalised and transferred to the open general list. Consequently, the company imported its base oil requirements rather than procuring the same from its competitors. Prior to '92 the sales and profits of the company were more volatile as compared to post '92.

    The company has consistently increased its sales, profits and market share post '92. This is mainly because oil PSUs were not allowed to market their products through the 'bazaar' (read: auto and auto repair shops) segment prior to 1996. However, Castrol was compelled to tap this channel as private companies could not market their products through the conventional channel of fuel stations. During FY93 to FY97 the company increased its market share from 6% to 20%.

    FY01 has been a difficult year for the industry and more so for Castrol. The company has been hit by a double whammy. With soaring crude oil prices its basic feedstock - base oil - prices have been on the rise. Further, it imports the raw material and with the rupee depreciating the costs have spiraled further. Consequently, operating cost have risen more sharply than sales, adversely impacting its OPM, which is down 690 basis points.

    With oil PSUs becoming more marketing savvy and launching products at lower price points Castrol's ability to control consumer prices has diminished. Consequently, it has not been able to pass on the increased costs to the market.

    The Interest expense has increased substantially indicating increased borrowings for working capital requirements. Net profit has consequently declined due to the culmination of the all these factors.

    The stock price has surged over the last 3 months due to the announcement of a buyback. At Rs 284 the company trades at a multiple of 26x on FY01 earnings.



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