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Castrol: Difficult days continue... - Views on News from Equitymaster
 
 
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  • Apr 19, 2001

    Castrol: Difficult days continue...

    The current fiscal does not seem to have started well for Castrol India. As per current reports, although the entire oil sector has witnessed sluggish sales in FY01 the lubricants markets is seeing increasing deceleration in growth. Consumption in the lubricants segment has reportedly declined by 12% in FY01. This number is higher compared to the earlier projected decline in consumption, which was in low single digits.

    Castrol is following up on a very difficult year. FY01 was challenging for the industry but more so for Castrol. The company was hit by a double whammy. With soaring crude oil prices its basic feedstock -- base oil -- prices were on the rise. Further, it imports the raw material and with the Rupee depreciating by 7% the costs spiraled even further. Consequently, operating cost rose more sharply than sales, adversely impacting its OPM, which came down 690 basis points.

    As if this was not enough the oil PSUs became more aggressive in their marketing strategy launching products at lower price points. Also, Castrol's ability to control consumer prices has diminished. Consequently, it has not been able to pass on the increased costs to the market. Therefore, there is pressure on the revenue as well as cost side, which depicts an ominous picture for margins.

    The first quarter of FY02 has not seen much change. The deceleration in growth seems to have increased. Consequently, pricing could come under pressure, as competition alter marketing strategy to counter declining volumes. Oil prices, although having dropped continue to hover in the $24 to $27 / barrel range. The good news is that much of the volatility, in oil prices, seen in the December '00 quarter has reduced. Castrol is said to enter into forward contracts, therefore, the benefits of lower procurement costs could be seen only in 2QFY02. While for the quarter ended March '01 the raw material cost scenario may not be different as the company could have locked into rates in the December '00 quarter when oil prices were ruling firm.

    The only development, which has not gone against the company is the forex market. The Rupee has remained fairly stable during the quarter ended March '01. Consequently, the company has not faced the difficulty witnessed in the previous year. However, other key determinants of the company's fortunes have not be so favourable. Castrol declares its results tomorrow but there does not seem much to cheer about.

    The share price of the company seems to have moved in tandem with the market. However, the key factor providing support is the open offer from BP Amoco, which acquired the erstwhile parent, Burmah Castrol, in March '00. Subsequently, on the directives of the SEBI the parent company made an open offer at Rs 311. This has been revised upwards to Rs 351 again on the directives of the SEBI.

     

     

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