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Castrol: Waiting for a silver lining - Views on News from Equitymaster
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  • Apr 24, 2002

    Castrol: Waiting for a silver lining

    The weather has not cleared for Castrol India Ltd., as it continues to operate in a tough business environment. Earnings growth of the company has been fluctuating over the past four quarters. Sales have declined in 1QFY03 which could indicate that the industry continues to sputter.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 2,512 2,386 -5.0%
    Other Income 35 43 23.3%
    Expenditure 2,123 1,893 -10.9%
    Operating Profit (EBDIT) 389 494 26.8%
    Operating Profit Margin (%) 15.5% 20.7%  
    Interest 12 15 24.6%
    Depreciation 30 32 7.0%
    Profit before Tax 382 490 28.1%
    Extraordinary items (33)    
    Tax 100 161 60.9%
    Profit after Tax/(Loss) 249 328 31.7%
    Net profit margin (%) 9.9% 13.8%  
    No. of Shares 124 124  
    Diluted Earnings per share* 8.1 10.6  
    P/E Ratio   17.2  
    * annualised      

    Industry experts believe that demand for lubricants is likely to remain static. Intensifying the competitive environment are the large number of players with aggressive marketing activities. Diesel engine lubes, which constitute the largest segment in automotive lubes, is experiencing sluggish demand, as improving engine technology reduces the need for frequent top ups. Also, the heat is more on private players, which are not permitted to sell through petro retail outlets. This channel accounts for an estimated 30% of lubricant sales. That said, deregulation in marketing of petro-products could lead to opening up of the channel for private players.

    The rise in operating profits is due to the much improved operating margins. The OPM has increased by 5.2 percentage points YoY in 1QFY03. The driver for better operating margins was lower base oil prices. Raw material costs, which account for 70%-80% of operating expenditure, declined by 25% YoY. As mentioned in earlier reports, the company, it seems, purchases base oil -- key feedstock -- in future markets. Consequently, CIL has benefited from weak oil markets, which reflect on base oil prices, in the last quarter of 2001. Crude prices fell by an estimated 30% YoY during that period. Additionally, stability in forex markets with softening oil prices is likely to have helped operating performance, as the company imports its base oil requirements. Having said that, the spike in oil prices in 1Q of 2002 and weakness in the rupee, could eat into the operating performance for the current quarter.

    The extraordinary item pertains to the voluntary retirement scheme (VRS) conducted during the previous fiscal. The amalgamation with Tata BP Lubricants India Ltd. is still pending approval from the High Court. Tata BP has accumulated losses of Rs 211 m till FY02. Losses for 1QFY03 amount to Rs 27 m. Adjusting for the same in the income statement of PIL, post tax profits would have grown by 21%. Effective tax of the company has increased over the concerned periods from 26.2% to 33%. This is due to reduced fiscal benefits from the Silvassa plant.

    At Rs 182 the scrip is trading on a multiple of 17.2x 1QFY03 annualised earnings. Trigger for the stock could be policy to allow private companies to utilise the petrol pump channel.



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