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Castrol a FMCG?

Feb 14, 2001

Castrol (India) recently reported its results for the full year ended December 2000. The company reported a marginal drop in net sales and its earnings were down by 34.2%. The performance of the company slid on the back of negative growth in the lubricants industry, which impacted the topline. Higher feedstock prices due to the surge in crude oil prices took its toll on the operating margins and the depreciation of the rupee added to its woes.

In FY92, the share price of Castrol rose significantly as imports of base oil (feedstock) were decannalised and transferred to the open general list. Consequently, the company did not have to depend on its competitors for procuring its raw material. With decanalisation, sales and net earnings of the company witnessed less volatility, corroborating the share price movement.

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%.

In line with FMCG
(Rs m) Castrol (I) HLL Cadbury Burmah
Castrol*
CMP 274.8 207.9 522.6 1,167.5
Sales 12,378.0 114,089.0 6,038.0 205,175.9
EBIDTA 1,694.0 13,919.0 970.0 19,794.8
Market Cap 33,937.8 457,504.7 18,656.8 254,194.3
Enterprise Value 33,544.1 451,173.3 18,706.8 276,101.0
No. Of shares 123.5 2,200.6 35.7 217.7
EPS 11.8 5.8 15.0 53.5
BVPS 34.5 11.1 63.0 166.7
OPM 13.7%12.2%16.1%9.6%
NPM11.7%11.2%8.9%5.7%
P/E Ratio 23.3 35.8 34.8 21.8
Market cap / sales 2.7 4.0 3.1 1.2
CMP/Book value 8.0 18.7 8.3 7.0
EV/EBIDTA 19.8 32.4 19.3 13.9

Post FY96 the company has felt the heat of increased competition with oil PSUs becoming more marketing savvy and launching products at lower price points. This has diminished Castrol's ability to control final consumer prices, which could be seen this year as the company has not been able to pass on the increased costs to the market.

Castrol is valued similar to a consumer products company. This is due to the innovative marketing strategy that the company has adopted (internationally) to boost sales. The company aims at developing brands, consequently, the advertising costs are similar to those incurred by consumer product industry. Internationally too the segment is viewed as a non-cyclical industry. However, with lesser ability to control prices and fortunes fluctuating with feedstock prices one may need to reconsider its current industry status.

The valuation of Burmah Castrol is based on the acquisition price offered by BPAmoco in March '00. The offer price was at a 60% premium to the market price. If the premium is removed the parent trades at a multiple of 13x with a market cap to sales of less than 1 and price to book value of 4.4x. Consequently, does Castrol need to be viewed differently?

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