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Castrol India: Cost pressures continue - Views on News from Equitymaster

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Castrol India: Cost pressures continue

Apr 16, 2012

Castrol India Ltd. has reported results for the first quarter of Calendar year 2012(1QCY12). The company has reported 4.1% year on year (YoY) increase in the topline and a 10% YoY fall in the bottomline. Here is our analysis of the results.

Performance summary
  • Topline increases by 4.1% YoY during the quarter.
  • The operating profits for the quarter declined by 12.4% YoY, with margins at 20.3% (versus 24.2% last year).
  • The net profits for the quarter were down by 10.0% YoY, with margins at 15.7% versus 18.1% last year

Rs m 1QCY11 1QCY12 Change
Net sales 7,532 7,843 4.1%
Expenditure 5,713 6,249 9.4%
Operating profit (EBDITA) 1,819 1,594 -12.4%
EBDITA margin (%) 24.2% 20.3%  
Other income 278 309 11.2%
Interest 4 7 75.0%
Depreciation 63 60 -4.8%
Profit before tax before exceptional items 2,030 1,836 -9.6%
Profit before tax margin (%) 27.0% 23.4%  
Tax 664 607 -8.6%
Profit after tax/(loss) 1,366 1,229 -10.0%
Net profit margin (%) 17.5% 15.1%  
No. of shares (m)   247  
Diluted earnings per share (Rs)*   18.9  
P/E ratio(x)*   28.5  
*On the basis of trailing 12 months

What has driven performance in 1QCY12?
  • The net sales witnessed a mere 4.1% YoY increase in the topline, up 1.5% on a Quarter on Quarter basis (QoQ). The slowdown in sales growth and lubricants demand is due to overall economic slowdown.

  • The operating profits during the quarter were down 12.4% YoY, up 2% QoQ. The operating margins for the quarter stood at 20.3%, almost same as that in the previous quarter versus 24.2% last year. The margins were down due to high cost of base oil and additives (raw material for Castrol and rupee depreciation.

  • At bottomline level, the company registered an annual decline of 10.0% (up 15.1% QoQ). The net profit margins for the quarter stood at 15.7% versus 18.1% last year and 13.6% in the previous quarter. The margins improved on a QoQ basis mainly on account of an increase in ‘Other income’ that was up from 1.5% of net sales in the previous quarter to 3.9% of net sales in the current quarter.

What to expect?
The demand of lubricants remains weak due to economic slowdown. We expect the challenging business conditions to continue for the company. Besides, the company is facing cost pressure due to high prices of raw materials (base oil and additives) and rupee remains weak .We expect these conditions to continue in near term. As per the management, the company will continue investing in technology, branding and marketing activities. It intends to drive volume growth by increasing distribution reach and strengthening advocacy amongst key stakeholders.

The stock is currently trading at 28.5x its trailing 12 months earnings. The stock price is already up 28%from the beginning of the current year. We believe the stock has limited upside potential from the current levels.

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