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Castrol: Slippery road ahead - Views on News from Equitymaster
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  • Apr 2, 2004

    Castrol: Slippery road ahead

    Castrol India is a leading private sector lubricant major with a market share of 20%. However, over the past few years, the company's topline growth has been stagnating (growth of a mere 1.5% in FY04). The company's operating margins have reduced by 14% while the bottomline has suffered by 10% YoY.

    (Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
    Net sales 3,078 3,281 6.6% 11,543 11,712 1.5%
    Other income 37 53 45.6% 157 191 21.8%
    Expenditure 2,446 2,824 15.4% 9,188 9,691 5.5%
    Operating profit (EBDITA) 631 457 -27.5% 2,354 2,021 -14.2%
    Operating profit margin (%) 20.5% 13.9%   20.4% 17.3%  
    Interest 13 5 -61.7% 75 26 -65.5%
    Depreciation 35 37 4.6% 134 143 6.8%
    Profit before tax 620 469 -24.3% 2,303 2,044 -11.3%
    Tax 220 147 -33.1% 774 670 -13.5%
    Profit after tax/(loss) 400 322 -19.5% 1,529 1,374 -10.2%
    Net profit margin (%) 13.0% 9.8%   13.2% 11.7%  
    No. of shares (m) 123.6 123.6   123.6 123.6  
    Diluted earnings per share (Rs)* 12.9 10.4   12.4 11.1  
    P/CF ratio (x)         16.1  
    (* annualised)            

    The company's topline performance, though only a 6% growth in 4QFY04, is much higher than what we have seen during the course of FY04. Over the last three years, the company has been finding it hard to grow its topline in light of the aggressive promotions by PSU majors like IOC, BPCL and HPCL. Though Castrol continues to maintain its leadership position in the bazaar segment, it is slowly coming under threat. On the company sales front also (i.e. direct sales to auto manufacturers and the like), growth prospects remain challenging. However, on the back of the launch of CRB Plus, topline growth seem to have gained momentum as is reflected in the graph below.

    The company's vulnerability to rising raw material prices and the inability to increase prices to pass the rise in input cost is reflected in the operating margin in 4QFY04 as well for FY04 as a whole. Just to put things in perspective, raw material costs (primarily base oil) constitute around 55% of the topline. Although Castrol did benefit from the appreciating rupee, the overall impact of high operating expenditure outweighs the benefits, thereby resulting in a dramatic decline in EBIDTA margins YoY. While Castrol was able to control staff costs, high advertisement expenditure coupled with higher other expenditure impacted the margins adversely. Further, increasing competition and the fact of low entry barriers in the lubricants business, Castrol's performance is likely to deteriorate in the near term.

    The bottomline has declined by 20% during the 4QFY04 largely due to the trickle down effect of lower operating margins. However, the results would have been worse but for the low interest expenses during the quarter as compared to the corresponding period previous fiscal. To put things in perspective, Castrol was able to reduce its interest expenditure by 62% during the quarter.

    Currently, the stock is trading at a price to cash flow multiple of 16.1x its FY04 earnings. Going forward, we believe that increasing competition from existing players like IOC, BPCL and HPCL and likely entrants like Shell and Reliance would impact growth. Despite very strong brand equity on the bazaar side, Castrol shall find it tough to grow. All in all, we believe Castrol faces some serious challenge ahead. However, it remains to be seen how the MNC parent major, British Petroleum, shapes its future.



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