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Castrol: Macro headwinds continue - Views on News from Equitymaster

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Castrol: Macro headwinds continue
Feb 19, 2014

Castrol has announced results for the quarter ending December 2013 and for full year (CY13). The company has reported a net sales and net profit growth of 6.4% YoY and 7.0% YoY during the quarter. The net sales and net profits for the year were up 1.9% YoY and 13.7%YoY respectively

Performance summary
  • Revenues for the quarter registered a growth of 6.4% on a year on year (YoY) basis. For CY13, the revenues were up by 1.9% YoY.
  • Operating profits grew by 1.7% YoY during the quarter (with margins at 21.3% as compared to 22.3% in the 4QCY12). For CY13, the operating profits witnessed a growth of 10.4% YoY, with margins at 21.6% as compared to 20.0% in CY12.
  • Net profits for the quarter were up 7.0% YoY with net profit margins at 15.6% (net profit margin of 15.5% in 4QCY12). For CY13, the net profits excluding exceptional gains grew by 8.6% YoY with net profit margins at 15.3% as compared to 14.3% in CY12. Including exceptional items, the net profits for the quarter grew by 13.7% YoY with margins 16.0%.
  • The Board of Directors has recommended a final dividend of Rs 3.5 per share, subject to the approval of shareholders. In addition, an interim dividend of Rs.3.50 per share was paid during the year.
  • As per the scheme of reduction of share capital, the company will reduce fully paid up face value of equity shares from Rs 10 per share to Rs 5 per share effective from January 20, 2014. The company will pay Rs 5 per share to shareholders in due course of time.

Standalone financial summary
Rs m 4QCY12 4QCY13 Change CY12 CY13 Change
Net sales 7,609 8,095 6.4% 31,209 31,796 1.9%
Expenditure 5,915 6,373 7.7% 24,981 24,920 -0.2%
Operating profit (EBDITA) 1,694 1,722 1.7% 6,228 6,876 10.4%
EBDITA margin (%) 22.3% 21.3%   20.0% 21.6%  
Other income 152 271 78.3% 722 836 15.8%
Interest 10 8 -20.0% 21 17 -19.0%
Depreciation 80 82 2.5% 266 305 14.7%
Profit before tax before exceptional items 1,756 1,903 8.4% 6,663 7,390 10.9%
Profit before tax margin (%) 23.1% 23.5%   21.3% 23.2%  
Exceptional items 0 0 nm   228 nm
Tax 577 641 11.1% 2,189 2,532 15.7%
Profit after tax/(loss) excluding exceptional items 1,179 1,262 7.0% 4,474 4,858 8.6%
Net profit margin (%) 15.5% 15.6%   14.3% 15.3%  
Reported Profit after Tax 1,179 1,262 7.0% 4,474 5,086 13.7%
Reported Net profit margin(%) 15.5% 15.6%   14.3% 16.0%  
No. of shares (m)         495  
Diluted earnings per share (Rs)*         10.3  
P/E ratio(x)*         28.8  
*On the basis of trailing 12 months earnings

What has driven performance in CY13?
  • The net sales for the quarter registered a growth of 6.4% YoY mainly on account of higher realizations. Segmentwise, sales in the auto segment increased by 5.6% YoY while sales in the non auto segment grew by 12.1% YoY. For full year, the sales grew by 1.9% YoY amid a weak macroeconomic environment and slowdown in the auto and industrial segment. For full year, the sales in the auto segment grew by 2.7% YoY while the sale in the non auto segment declined by 3.9%. As per the management, the Industrial business faced a tough environment with around 20% demand contraction in the core manufacturing sector. High interest rates and inflation led to two digit decline in vehicles sales (barring two wheelers and tractors).Despite this, volumes improved an on a year on year basis, driven by new customer acquisition, strong distribution network and production cost efficiencies.

    Segmental summary
    Rs m 4QCY12 4QCY13 Change CY12 CY13 Change
    Automotive segment
    Net Sales 6,662 7,033 5.6% 27,173 27,916 2.7%
    EBIT 1,562 1,578 1.0% 5,558 6,352 14.3%
    EBIT margin 23.4% 22.4%   20.5% 22.8%  
    Non automotive segment
    Net Sales 947 1,062 12.1% 4,036 3,880 -3.9%
    EBIT 108 215 99.1% 686 789 15.0%
    EBIT margin 11.4% 20.2%   17.0% 20.3%  

  • The operating profit for the quarter grew just by 1.7% YoY on account of an increase in the raw material expenses (base oil and other additives) and increase in advertisement and sales promotion expenses. For CY13, the operating profits grew by 10.4% YoY on account of lower cost of raw materials, improved gross margins and effective cost management.

    Cost breakup
    Rs m 4QCY12 4QCY13 Change CY12 CY13 Change
    Raw materials 4,345 4,727 8.8% 18,243 17,885 -2.0%
    as a % of sales 57.1% 58.4%   58.5% 56.2%  
    Advertisement and Sales promotion expenses 377 509 35.0% 2,237 2,164 -3.3%
    as a % of sales 5.0% 6.3%   7.2% 6.8%  
    Staff expenses 370 308 -16.8% 1284 1,460 13.7%
    as a % of sales 4.9% 3.8%   4.1% 4.6%  
    Other expenses 823 829 0.7% 3217 3411 6.0%
    as a % of sales 10.8% 10.2%   10.3% 10.7%  
    Total expenses 5,915 6,373 7.7% 24,981 24,920 -0.2%
    as a % of sales 77.7% 78.7%   80.0% 78.4%  

  • The net profits for the quarter grew by 7.0% YoY. This was mainly on account of effective cost management and around 78% YoY increase in the other income. For full year, the net profits were up by around 8.6% YoY. Apart from improved gross margins, around 16% YoY increase in the other income boosted the bottomline. The depreciation expense for the year was up 14.7% YoY. Including exceptional items, the net profit for the year grew by 13.7% YoY
What to expect?
The management expects the macroeconomic headwinds to continue in the calendar year 2014. The first half of the year is likely to remain volatile because of national elections. Currently, the management is focusing on its personal mobility business.

Going forward, economic headwinds, volatility in the exchange rates and uncertainty in the crude and base oil prices will remain a cause of concern for the company in the near term. Currently, the stock is trading at a trailing 12 months PE of around 29x which we believe is expensive in light of the above mentioned concerns. Hence, we maintain a 'Sell' recommendation on the stock.

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