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Castrol : Margins remain under pressure - Views on News from Equitymaster
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Castrol : Margins remain under pressure
Feb 15, 2012

Castrol India Ltd. has reported results for the fourth quarter of Calendar year 2011(4QCY11). The company has reported a 10.7% year on year (YoY) increase in the topline and a marginal increase of 0.8% YoY in the bottomline. Here is our analysis of the results.

Performance summary
  • Topline growth rises to 10.7% YoY during the quarter. For the full year (CY11), the sales were up 9.1% YoY.
  • The operating profits for the quarter declined marginally by 0.4% YoY, with margins at 20.2% (versus 22.5% last year). For CY11, the decline was more prominent at 8.6% YoY with margins at 22.4% versus 26.7% last year.
  • The net profits for the quarter gained a marginal 0.8% YoY with margins at 13.8% (versus 15.2% last year). For CY11, the bottomline declined by 1.9% YoY with margins at 16.1% (versus 17.9% last year).
  • The board of directors of the company has recommended a final dividend of Rs. 8 per share for the CY11, subject to the approval of the shareholders of the company.

Standalone Performance summary
(Rs m) 4QCY10 4QCY11 Change CY10 CY11 Change
Net sales 6,981 7,727 10.7% 27,429 29,932 9.1%
Expenditure 5,411 6,164 13.9% 20,097 23,234 15.6%
Operating profit (EBDITA) 1,570 1,563 -0.4% 7,332 6,698 -8.6%
EBDITA margin (%) 22.5% 20.2%   26.7% 22.4%  
Other income 87 114 31.0% 313 731 133.5%
Interest 7 4 -42.9% 24 19 -20.8%
Depreciation 62 63 1.6% 243 251 3.3%
Profit before tax before exceptional items 1,588 1,610 1.4% 7,378 7,159 -3.0%
Profit before tax margin (%) 22.7% 20.8%   26.9% 23.9%  
Tax 529 542 2.5% 2,475 2,349 -5.1%
Profit after tax/(loss) 1,059 1,068 0.8% 4,903 4,810 -1.9%
Net profit margin (%) 15.2% 13.8%   17.9% 16.1%  
No. of shares (m)         247  
Diluted earnings per share (Rs)*         19.5  
P/E ratio(x)*         24.6  
*On the basis of trailing 12 months

What has driven performance in 4QFY12?
  • Despite a decline in demand, the topline recorded a growth of 10.7% YoY on account of aggressive pricing moves that the company undertook during the year.

  • The operating margins declined during the quarter to 20.2% from 22.5% last year on account of increase in the cost of raw materials (base oils and additives) which could not be fully passed on. During the quarter, the raw material costs increased to 60.2% of sales from 52.1% of sales last year. The situation became more challenging on account of depreciation in rupee against the dollar. As such, the company faced a decline in gross margins. However, this was to a considerable extent offset by decrease in other expenditure from 11.2% last year to 7.3% (as a % of sales) this quarter, a decline in advertisement expenditure to 6.1% from 7.3% ( as a % of sales) and decline in staff costs to 3.7% from 4.4% last year. Overall, the operating expenses increased to 79.8% from 77.5% last year (as a% of sales).

    Cost breakup
    (Rs m) 4QCY10 4QCY11 Change
    Raw materials 3,634 4,654 28.1%
    % sales 52.1% 60.2%  
    Staff cost 306 285 -6.9%
    % sales 4.4% 3.7%  
    Other expenditure 784 565 -27.9%
    % sales 11.2% 7.3%  
    Advertisement & Sales Promotion costs 509 469 -7.9%
    % sales 7.3% 6.1%  
    Carriage, Insurance and Freight 178 191 7.3%
    % sales 2.5% 2.5%  
    Total cost 5,411 6,164 13.9%
    % sales 77.5% 79.8%  

  • The net profits for the quarter were up marginally by 0.8%. This was mainly due to a 31% YoY increase in ‘Other income’. However, the margins for the quarter declined to 13.8% from 15.2% last year due to increase in raw material costs, depreciation of rupee and demand decline.

What to expect?
We expect the challenging business conditions to continue for the company. The company lost considerable volumes due to increase in the price gap versus other competitiors for a significant duration of the year. However, we expect volumes to stabilize going forward as the competitors have finally gone for price hike. We expect base oil prices to ease in the medium term from existing levels. Despite all the adversities, the company has got a very strong balance sheet and has been very pro active in taking strategic decisions regarding product and price mix. We expect this to continue in future as well.

While the management expects the first half of CY12 to remain challenging on account of weakness in the rupee and economic slowdown (affecting consumption of auto lubricants), it has given guidance for an improved business environment in second half. The stock is currently trading at a Price to earnings (PE) multiple of 24.6.The stock has gained around 14% in last one month. We maintain a cautious outlook.

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