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Castrol: Tough times ahead - Views on News from Equitymaster

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Castrol: Tough times ahead

Mar 1, 2013

Castrol India Ltd. has announced results for fourth quarter of the calendar year 2012 (4QCY12). The company has reported a 1.5% year on year (YoY) decline in the topline and a 10.4% YoY growth in the bottomline for the quarter.

Performance summary
  • Revenues declined by 1.5% YoY during the quarter. For full year (CY12), the sales were up 4.3% YoY.
  • Operating profits grew by 8.4% YoY during the quarter (with margins at 22.3% as compared to 20.2% in the 4QCY12). For CY12, the operating profits were down by 6.8% YoY with operating margins at 19.7% versus 22.1% in CY11.
  • Net profits for the quarter were up by 10.4% YoY with net profit margins at 15.2% versus 13.6% in 4QCY11. For CY12, the bottomline declined by 7.0% YoY and net profit margins stood at 14.0% as compared to 15.7% in CY11.
  • For CY12, the adjusted dividend per share (DPS) amounts to Rs 7 per share (versus Rs 7.5 per share in CY11).

Standalone performance summary
Rs m 4QCY11 4QCY12 Change CY11 CY12 Change
Net sales 7,727 7,609 -1.5% 29,818 31,114 4.3%
Expenditure 6,164 5,915 -4.0% 23,236 24,983 7.5%
Operating profit (EBDITA) 1,563 1,694 8.4% 6,582 6,131 -6.8%
EBDITA margin (%) 20.2% 22.3%   22.1% 19.7%  
Other income 114 152 33.3% 846 817 -3.4%
Interest 4 10 150.0% 17 18 8.9%
Depreciation 63.00 80 27.0% 251 266 6.1%
Profit before tax before exceptional items 1,610 1,756 9.1% 7,160 6,663 -6.9%
Profit before tax margin (%) 20.5% 22.6%   23.3% 20.9% -10.6%
Tax 542 577 6.5% 2,349 2,189 -6.8%
Profit after tax/(loss) 1,068 1,179 10.4% 4,810 4,474 -7.0%
Net profit margin (%) 13.6% 15.2%   15.7% 14.0%  
No. of shares (m)         495  
Diluted earnings per share (Rs)*         9.0  
P/E ratio(x)*         35.2  
*On the basis of trailing 12 months earnings

What has driven performance in 4QCY12?

  • The net sales for the quarter declined by 1.5% YoY on account of overall weakness in the lubricant market. Segmentwise, the sales in the automotive segment (over 85% share in sales) were almost flat on YoY basis while sales in the non automotive segment declined by around 11.7% YoY. For full year, the sales registered a modest growth of 4.3%. This was mainly on account of better sales realisations and premium product mix. Segmentwise, the automotive segment registered 6.4% YoY growth in CY12 while non automotive segment's sales declined by around 7.9% YoY.

    Segmental summary
    Rs m 4QCY11  4QCY12  Change  CY11  CY12  Change
    Automotive
    Net sales 6,654 6,662 0.1% 25,550 27,173 6.4%
    EBIT 1,281 1,562 21.9% 5,614 5,555 -1.1%
    EBIT margin (%) 19.3% 23.4%   22.0% 20.4%  
    Non -automotive
    Net sales 1,073 947 -11.7% 4,382 4,036 -7.9%
    EBIT 233 108 -53.6% 1,048 686 -34.5%
    EBIT margin (%) 21.7% 11.4%   23.9% 17.0%  

  • The operating profits witnessed 8.4% YoY growth during the quarter with margins at 22.3% as compared to 20.2% in 4QCY11. The growth was on account of better product mix, stable rupee and softening in base oil prices. The cost of raw materials declined by 6.6% YoY during the quarter. The staff expenses and other expenses grew by 30.1% YoY and 8.7% YoY respectively, partially offset by 19.5% YoY decline in advertisement and sales promotion expenses. For CY12, the raw material costs were up 7.7% YoY. The advertisement expense, staff expense and other expense also grew on an annual basis. Segmentwise, the earnings before interest and tax (EBIT) grew by 21.9% YoY in the automotive segment and declined by 53.6% YoY in non automotive segment during the quarter. For full year, the EBIT for automotive and non automotive segment declined by 1.1% YoY and 34.5% YoY respectively.

    Cost breakup
    Rs m 4QCY11 4QCY12 Change CY11 CY12 Change
    Raw materials 4,654 4,345 -6.6% 16,945 18,243 7.7%
    as a % of sales 60.2% 57.1%   56.8% 58.6%  
    Advertisement and Sales promotion expenses 469 377 -19.5% 2154 2237 3.8%
    as a % of sales 6.1% 5.0%   7.2% 7.2%  
    Staff expenses 285 370 30.1% 1159 1283.5 10.7%
    as a % of sales 3.7% 4.9%   3.9% 4.1%  
    Other expenses 757 823 8.7% 2,978 3,220 8.1%
    as a % of sales 9.8% 10.8%   10.0% 10.3%  
    Total expenses 6,164 5,915 -4.0% 23,236 24,983 7.5%
    as a % of sales 79.8% 77.7%   77.9% 80.3%  

  • The net profits for the quarter grew by 10.4% YoY on account of a strong performance at the operating level. The other income and depreciation expense for the quarter grew by 33.3% YoY and 27.0% YoY respectively. The net profit margins for the quarter stood at 15.2%, up from 13.6% in 4QCY11. For CY12, the net profits declined by 7% YoY mainly on account of a weak performance at the operating level. The decline was further compounded by a fall in the other income and increase in depreciation expenses. The net profit margins for full year stood at 14.0%, down from 15.7% in CY11.

What to expect?
2012 was a challenging year with raw material costs rising and Indian rupee depreciating with respect to the dollar. The lubricant market witnessed no growth during the year. However, as per the management, Castrol has grown volumes and value share in key brands and is countering the slowdown through a combination of premium product mix and better sales realization. Castrol has also widened its distribution through a strong foray into the rural market and increasing presence in independent workshops. The company has been leveraging its strong partnerships with leading OEMs to gain share in the franchised workshop business. However, its non automotive segment dragged the performance in CY12.

The management expects next few quarters to remain challenging on account of muted demand and higher base oil prices. We expect the margins of the company to remain under pressure. Castrol is trading at a trailing 12 months Price to earnings (PE) ratio of around 35.2x which looks expensive. Hence, we suggest our investors to sell the stock.

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