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Castrol: Driven by strong margins
Apr 16, 2010

Castrol has announced its 1QCY10 results. The company has reported a 29% YoY and 54% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline increases by 29%YoY during 1QCY10 due to higher volumes as well as realisations.
  • EBITDA margins expand to 27%, from 23% in 1QCY09 on the back of a 5% (as a percentage of sales) decline in raw material costs.
  • Other income declines by 15% during the quarter.
  • Bottomline registers a whopping 54% YoY growth during 1QCY10 due to expansion in operating margins.


Standalone financial snapshot
(Rs m) 1QCY09 1QCY10 Change
Net sales 5,087 6,560 29.0%
Expenditure 3,936 4,760 20.9%
Operating profit (EBDITA) 1,151 1,800 56.4%
EBDITA margin (%) 22.6% 27.4%  
Other income 95 81 -14.9%
Interest   9  5 -44.4%
Depreciation 65 58 -10.8%
Profit before tax 1,172 1,818 55.1%
Tax     409    646 57.9%
Profit after tax/(loss)     763 1,172 53.6%
Net profit margin (%) 15.0% 17.9%  
No. of shares (m)   247.3  
Diluted earnings per share (Rs)   17.1    
Price to earnings ratio (x)*     22.3  
* On a trailing 12 months basis

What has driven the performance in 1QCY10?
  • The topline of Castrol grew by 29% YoY in 1QCY10. The growth was driven by volumes due to its investments in brand and marketing. EBITDA margins expanded by 4% due to a 5% (as a percentage of sales) decline in raw material costs. Besides favorable cost of materials, a combination of premium product mix and higher unit realisation also helped. The company is also reaping the benefits of a strong cost cutting program in the recent past. However, advertising cost has grown by 3% (as a percentage of sales) due to the marketing program built around Castrol's global FIFA World Cup 2010 sponsorship.

    Cost break-up
    (Rs m) 1QCY09 1QCY10 Change
    Raw materials 2,737 3,224 17.8%
    % sales 53.8% 49.1%  
    Staff cost 276 216 -21.7%
    % sales 5.4% 3.3%  
    Advertising cost 207 464 124.2%
    % sales 4.1% 7.1%  
    Carriage, Insurance &Freight 164 220 34.1%
    % sales 3.2% 3.4%  
    Other expenditure 552 636 15.2%
    % sales 10.9% 9.7%  
    Total cost 3,936 4,760 20.9%
    % sales 77.4% 72.6%  

  • Castrol's management has stated that it expects volumes growth going forward although inflation in input costs will affect margins. The company intends to focus on the strategic growth areas like cars, motorbikes and tractors, where it expects to grow in volume and value terms. The industrial and marine segments are likely to take a backseat.

  • Castrol is not looking at expansion in the distribution sector in the near term. Instead it plans to focus on improving the productivity of its existing network of 270 distributors, which service its 70,000 outlets.

What to expect?
Castrol 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. It also runs Castrol BikeZone - a franchised motorcycle servicing concept.

The benefits of a growing economy and the company's marketing push are showing in its topline growth. However, the benefit of raw material cost reduction now reflects in the company’s margins and is likely to shrink with an upward trend in crude oil prices.

At the current price of Rs 380, the stock trades at a price to earnings multiple of 31 times our CY11 estimated earnings. We believe Castrol is richly valued at this juncture and advice against taking fresh positions in the stock.

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