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Castrol: Lower input costs boost margins - Views on News from Equitymaster
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Castrol: Lower input costs boost margins
Mar 3, 2015

Castrol India Ltd has announced results for the quarter and year ending December 2014. The company has reported a net sales growth of 6.2% year on year (YoY) while net profits for the quarter grew by 4.6% YoY.

Performance summary
  • Revenues for the quarter registered a growth of 6.2% on a year on year (YoY) basis. For CY 14, the net sales were up 6.8% YoY.
  • Operating profits for the quarter grew by 20.2% YoY (with margins at 24.2% as compared to 21.4% in 4QCY13). For CY14, the operating profits were up 4.2%, with operating margins at 21.2%, down from 21.7% in CY13.
  • Net profits for the quarter grew by 4.6% YoY with net profit margins at 15.4% versus 15.7% in 4QCY13. For CY14, the net profits declined by 6.7% YoY, with net profit margins at 14%, down from 16.1% in CY13.
  • The Board of Directors has recommended (subject to shareholders' approval) a final dividend of Rs 4 per share (vs. Rs 3.5 per share last year). Along with interim dividend, the total dividend stands at Rs 7.5 per share (versus Rs 7 per share last year).

Standalone financial results
Rs m 4QCY13 4QCY14 Change (%) CY13 CY14 Change (%)
Net sales 8,063 8,559 6.2% 31,661 33,808 6.8%
Other operating income 32 34 6.3% 135 115 -14.8%
Expenditure 6,373 6,523 2.4% 24,920 26,756 7.4%
Operating profit (EBDITA) 1,722 2,070 20.2% 6,876 7,167 4.2%
EBDITA margin (%) 21.4% 24.2%   21.7% 21.2%  
Other income 271 108 -60.1% 836 481 -42.5%
Interest 8 6 -25.0% 17 24 41.2%
Depreciation 82 109 32.9% 305 361 18.4%
Profit before tax  1,903 2,063 8.4% 7,390 7,263 -1.7%
PBT margin (%) 23.6% 24.1%   23.3% 21.5%  
Exceptional items       228    
Tax 641 743 15.9% 2532 2518 -0.6%
Profit after tax/(loss)  1,262 1,320 4.6% 5,086 4,745 -6.7%
Net profit margin (%) 15.7% 15.4%   16.1% 14.0%  
No. of shares (m)         495  
Diluted earnings per share (Rs)*         9.6
P/E ratio(x)*         48.2  
*On a trailing 12 months basis

What has driven growth in 4QCY14?
  • The company witnessed 6.2% YoY growth in the net sales, mainly driven by better realizations as volume growth came in at 1% YoY. The sales growth does not look impressive and was pulled down by slow growth in the automotive segment (mainly because the CV segment did not perform well) , which comprises around 86% of the topline. However, non automotive segment performed better with 11.2% growth in the revenues.

    Cost breakup
    (Rs m) 4QCY13 4QCY14 Change (%) CY13 CY14 Change (%)
    Raw materials 4,727 4,767 0.8% 17,885 19,375 8.3%
    as a % of sales 58.6% 55.7%   56.5% 57.3%  
    Advertisement and Sales promotion expenses 509 512 0.6% 2164 2333 7.8%
    as a % of sales 6.3% 6.0%   6.8% 6.9%  
    Staff expenses 308 373 21.1% 1460 1616 10.7%
    as a % of sales 3.8% 4.4%   4.6% 4.8%  
    Other expenses 829 871 5.1% 3411 3432 0.6%
    as a % of sales 10.3% 10.2%   10.8% 10.2%  
    Total expenses 6,373 6,523 2.4% 24,920 26,756 7.4%
    as a % of sales 79.0% 76.2%   78.7% 79.1%  

  • Operating profits grew mainly in account of higher unit gross margins, as raw material cost (as a % of sales) came down from 58.6% in 4QCY13 to 55.7% in 4QCY14.

  • The growth in the net profits was much below the growth in operating profits due to 60% decline in the other income and higher depreciation expense and increase in the effective tax rate, .

  • For the full year, operating profits grew by 4% YoY despite an increase in the cost of raw materials. However, the net profit for full year declined by 6.7% due to lower other income and higher depreciation and interest costs. The decline looked sharper due to one off gains of Rs 228 m last year.

    Segmental Summary
    (Rs m) 4QCY13 4QCY14 Change (%) CY13 CY14 Change (%)
    Automotive Segment
    Revenues 7,033 7,386 5.0% 27,916 29,537 5.8%
    EBIT 1,578 1,754 11.2% 6,352 6,174 -2.8%
    EBIT % 22.4% 23.7%        
    Non Automotive Segment
    Revenues 1,062 1,207 13.7% 3,880 4,386 13.0%
    EBIT 215 250 16.3% 789 776 -1.6%
    EBIT % 20.2% 20.7%   20.3% 17.7%  
What to expect?
This was a good quarter of the company mainly because of the lower costs as crude prices remained weak. Despite overall demand slowdown in the core manufacturing sectors, the non automotive segment witnessed good growth due to growth in volumes. The company has launched two new brands for the scooter segment and medium light commercial vehicles segment.

Going forward, while a weakness in crude prices will ease cost pressure, volatility in exchange rates in crude prices are likely to remain. The management expects demand to pick up in personal mobility, CV and industrial segment from the second half of the coming year if the economic environment improves,

While Castrol is a fundamentally strong company, at current price, the stock is trading at trailing 12 months Price to earnings multiple of 48 times which we believe is expensive. As such, we suggest investors not to buy the stock at current levels.

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