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Castrol - In dire straits

Apr 20, 2001

The year has not started on a good note for Castrol India Ltd. As was expected the company's results are not anything to write home about. There has been a marked deterioration in financial performance of the company for the quarter ended March '01. Gross sales of the company have increased by 8% while net sales have reportedly grown by 6.4%. This is commendable considering that the industry has witnessed de-growth over the past twelve months. In fact, 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. The growth in topline could be one of the reasons for the stock price to have remained unchanged despite profits almost halving as it could indicate improved market share. Signs of increased market share is welcome news as Castrol has been losing market share over the past couple of years due to price competitive pressure mainly from PSU oil companies.

(Rs m) 1QFY01 1QFY02 Change
Sales 2,807 3,033 8.0%
Other Income 117 35 -70.3%
Expenditure 2,335 2,643 13.2%
Operating Profit (EBDIT) 472 389 -17.5%
Operating Profit Margin (%) 16.8% 12.8%
Interest 11 12 7.3%
Depreciation 27 30 11.9%
Profit before Tax 551 382 -30.6%
Extraordinary items (33)
Tax 109 105 -3.5%
Profit after Tax/(Loss) 442 244 -44.8%
Net profit margin (%) 15.7% 8.1%
No. of Shares (eoy) 124 124
Diluted Earnings per share* 14 8
P/E Ratio 29

Operating profits of the company have declined significantly. This is mainly due to the OPM falling by 400 basis points. Although the company may have augmented sales by capturing market share the sale realisations could continue to be under pressure due to increase in competition. The shrinking of market size could mean players adopting more aggressive marketing strategies to keep their heads above the water. Also, the PSU lubricant companies were known to have entered at lower price points to capture the market.

Procurement costs of base oil, the key lubricants ingredient, for the quarter ended may have continued to remain high. This could be due to the company entering into forward contracts for procuring base oil. Consequently, locking into rates in the December '00 quarter when oil prices were still ruling firm. With oil prices softening during the quarter ended March '01 the benefits of lower procurements costs could be reflected in 2QFY02. Castrol imports its feedstock and the stability in the Rupee for the quarter ende helped prevent any further damage, which was seen in the previous fiscal.

Extraordinary items refer to providing of voluntary retirement expenses incurred during the quarter. The company has stopped production at its Hosakote plant in Karnataka. All the employees have opted for the VRS. This is the company's second plant, which has stopped operations. Last fiscal the company offered a VRS at the Wadala, Mumbai plant and subsequently shut operations. Castrol, however, has not indicated its intentions regarding the future of the Karnataka plant.

Post tax profits have also been impacted by a higher effective tax rate and lower other income. The effective tax of the company has increased as the benefits arising from the Silvassa plant have reduced in the current fiscal. Other income though is sharply lower due to non-recurring gains in 1QFY01, which accrued from the sale of investments.

At Rs 230 the company trades on a multiple of 29x 1QFY02 annualised earnings.

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