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Castrol: Cost savings drive the show
Feb 19, 2010

Performance summary
  • Topline increases by 14%YoY during 4QCY09 due to higher volumes as well as realisations.
  • EBITDA margins expand to 21%, from 14% in 4QCY08 on the back of a 17% (as a percentage of sales) decline in raw material costs.
  • Other income declines by 58% during the quarter.
  • Bottomline registers a whopping 72% YoY growth during 4QCY09 due to expansion in operating margins.
  • For CY09, topline clocks a 5% YoY growth, while bottomline increases by 45%.
  • The board announces a bonus issue of 1:1. Declares a final dividend of Rs 5 per share and a special dividend of Rs 10 per share.


Standalone financial snapshot
(Rs m) 4QCY08 4QCY09 Change CY08 CY09 Change
Net sales 5,396 6,124 13.5% 22,168 23,280 5.0%
Expenditure 4,652 4,845 4.1% 18,059 17,428 -3.5%
Operating profit (EBDITA) 744 1,279 71.9% 4,109 5,852 42.4%
EBDITA margin (%) 13.8% 20.9%   18.5% 25.1%  
Other income 74 31 -58.1% 307 263 -14.3%
Interest 10 14 40.0% 37 35 -5.4%
Depreciation 66 68 3.0% 257 272 5.8%
Profit before tax 742 1,228 65.5% 4,122 5,808 40.9%
Tax 272 420 54.4% 1,499 1,997 33.2%
Profit after tax/(loss) 470 808 71.9% 2,623 3,811 45.3%
Net profit margin (%) 8.7% 13.2%   11.8% 16.4%  
No. of shares (m)         123.6  
Diluted earnings per share (Rs)         30.8  
Price to earnings ratio (x)         21.5  

What has driven the performance in CY09?
  • The topline of Castrol grew by 5% YoY in CY09. However, EBITDA margins expanded by 6.6% due to 11% (as a percentage of sales) decline in raw material costs, especially base oil and a premium product mix. However, advertising cost and other expenditure have grown by 2% each (as a percentage of sales).

    Cost break-up
    (Rs m) 4QCY08 4QCY09 Change CY08 CY09 Change
    Raw materials 3,559 2,996 -15.8% 13,131 11,237 -14.4%
    % sales 66.0% 48.9%   59.2% 48.3%  
    Staff cost 220 250 13.6% 973 1,122 15.3%
    % sales 4.1% 4.1%   4.4% 4.8%  
    Advertising cost 210 462 120.0% 977 1,495 53.0%
    % sales 3.9% 7.5%   4.4% 6.4%  
    Carriage, Insurance & Freight 135 175 29.6% 700 703 0.4%
    % sales 2.5% 2.9%   3.2% 3.0%  
    Other expenditure 528 962 82.2% 2,278 2,871 26.0%
    % sales 9.8% 15.7%   10.3% 12.3%  
    Total cost 4,652 4,845 4.1% 18,059 17,428 -3.5%
    % sales 86.2% 79.1%   81.5% 74.9%  

  • Castrolís management has stated that it expects volumes growth going forward although inflation in input costs will affect margins. 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 the near term. 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 had earlier stated that it expected market demand to remain sluggish during the fiscal. This was expected to negatively impact Castrolís volumes in the short term. However, the benefit of raw material cost reduction is now being reflected in the companyís margins.

At the current price of Rs 664, the stock trades at a price to earnings multiple of 27 times our CY11 estimated earnings. We believe Castrol is richly valued at this juncture and advice against taking fresh positions in the stock.

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