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Castrol: Growth slowing down

Apr 16, 2003

The first quarter results of Castrol India limited for FY04 has seen the topline rise by 2.5% while the bottomline has risen by a better 9%. Growth in bottomline was mainly on account of improvement in the operating margins of the company. Operating margins have improved by 170 basis points. Bottomline growth has been further precipitated by a 36% rise in other income.

(Rs m)1QFY031QFY04Change
Net Sales 2,386 2,446 2.5%
Other Income 43 58 35.7%
Expenditure 1,893 1,899 0.3%
Operating Profit (EBDIT) 494 547 10.7%
Operating Profit Margin (%)20.7%22.4% 
Interest 15 11 -26.5%
Depreciation 32 35 9.6%
Profit before Tax 490 559 14.1%
Extraordinary items - -  
Tax 161 201 24.7%
Profit after Tax/(Loss) 328 357 8.9%
Net profit margin (%)13.8%14.6% 
No. of Shares 124 124  
Diluted Earnings per share* 10.6 11.6  
P/E Ratio  17.1  
* annualised   

Nearly 70% of automotive lubricants are consumed by commercial vehicles. In the first three months of 2003, commercial and utility vehicle sales have been robust. This seems to have led to the growth in topline. while the topline growth seems to have come from the CV segment, the other automotive segments seem to have disappointed. Two wheeler sales have fallen in the first three months of 2003 and this seems to have affected the demand for lubricants. Also the increased use of 4-stroke technology has further reduced the consumption of lubricants.

Improvement in margins have been mainly effected by a lowering of other expenses. As a percentage of sales other expenses have fallen to 19% compared to the same period last year. Raw material and staff costs have however risen significantly. Increase in raw material costs seem to be the impact of rise in crude oil prices internationally during the war. Raw material accounts for a major share of about 80% in the expenditure. Since the crude oil prices are expected to fall, we expect that it will have a positive impact on the raw material cost and it may remain at lower levels. Base oil which is the key feedstock for the raw materials is dependent on the crude oil prices. Thus any decline in the crude oil prices will result in the lower raw material costs. The company has also implemented the enterprise resource planning system and this could have facilitated the streamlining of the business processes thus improving operational efficiencies further.

Interest expenses have gone down considerably in 1QFY04. Interest expenses have declined sharply by 26.5%. This may have been due to refinancing of existing debt at a lower interest rate. This has further contributed to the rise in net profits, which rose by 9%.

At Rs 198 the scrip is trading on a multiple of 17x 1QFY04 annualised earnings. Going forward the major concern regarding the prospects of the company is the slowing down of the commercial vehicles as well as the two wheeler sales growth. For a company which derives nearly 85% of its revenues from sales of automotive lubricants this is a cause of concern. Lower demand growth will also adversely affect the realisations of the company. Here on the fortunes of the stock will to a large extent be dependent on the fortunes of the Indian economy.

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