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Castrol: Top-down, bottom-up - Views on News from Equitymaster
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Castrol: Top-down, bottom-up
Feb 21, 2008

Performance summary
  • Topline decreases by 1.2% YoY during 4QCY07.
  • EBITDA margins expand to 17%, from 15% in 4QCY06.

  • Other income zooms by 131% YoY during the quarter.

  • Bottomline registers a growth of 49% YoY owing to operating margin expansion, higher other income and lower interest expenses.

  • Topline and bottomline grow 8% YoY and 41% YoY respectively in CY07.

  • Final dividend of Rs. 9.50 per share declared totaling to Rs. 14 per share for CY07.

Financial snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 4,805 4,750 -1.2% 17,524 18,883 7.8%
Expenditure 4,094 3,931 -4.0% 15,324 15,587 1.7%
Operating profit (EBDITA) 711 819 15.2% 2,200 3,296 49.8%
EBDITA margin (%) 14.8% 17.2%   12.6% 17.5%  
Other income 48 111 130.8% 344 348 1.3%
Interest 22 1 -94.0% 41 38 -7.8%
Depreciation 47 59 24.8% 180 208 15.4%
Profit before tax 691 870 26.0% 2,322 3,398 46.3%
Tax 310 302 -2.4% 778 1,214 56.2%
Profit after tax/(loss) 381 568 49.1% 1,545 2,184 41.4%
Net profit margin (%) 7.9% 11.9%   8.8% 11.6%  
No. of shares (m)         123.6  
Diluted earnings per share (Rs)*         17.67  
Price to earnings ratio (x)*         16.0  

What has driven the performance in 4QCY07?
  • The improvement in operating margins to 17% for 4QCY07 has been due to a combination of pricing, improved sales mix and some reduction in the cost of materials. The core lubricant business is driven more by value than volume, as the company’s focus has centered on advanced formulations required for modern automobiles and machines. While these machines use lower quantum of lubes, they require higher specification lubricants that are premium in nature.

  • Raw materials costs declined by nearly 9% in 4QCY07, as a % of sales, while it declined by about 8% for CY07. This reduction was achieved primarily through an effective procurement strategy.

    Cost break up
    (Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Raw materials 3,123 2,668 -14.6% 11,631 10,977 -5.6%
    % sales 65.0% 56.2%   66.4% 58.1%  
    Staff cost 181 255 40.8% 703 909 29.3%
    % sales 3.8% 5.4%   4.0% 4.8%  
    Advertising cost 162 278 71.3% 648 913 40.9%
    % sales 3.4% 5.8%   3.7% 4.8%  
    Carriage, Insurance & Freight 166 138 -16.7% 659 633 -3.8%
    % sales 3.4% 2.9%   3.8% 3.4%  
    Other expenditure 462 592 28.2% 1,683 2,154 28.0%
    % sales 9.6% 12.5%   9.6% 11.4%  
    Total cost 4,094 3,931 -4.0% 15,324 15,587 1.7%
    % sales 85.2% 82.8%   87.4% 82.5%  

  • CY07 profits benefited from the twin approach of growth in top line and effective cost management. Topline growth was driven by better realisations while savings in raw material costs more than offset the rise in staff and advertising costs.

What to expect?
The company has improved operating margins this quarter, signaling its ability to maintain bottomline buoyancy. The company 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 who have just launched their vehicles in India. Castrol BikeZone is also set for fast expansion.

At the current price of Rs 283, the stock trades at a price to earnings multiple of 16 times CY07 earnings. Considering the dynamics and competitive landscape of the Indian lubricant industry, we believe that the valuations reflect the company’s growth prospects in the medium term. Hence we suggest investors to exercise caution at the current juncture.

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