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Castrol: Lukewarm performance - Views on News from Equitymaster
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Castrol: Lukewarm performance
Apr 27, 2009

Performance summary
  • Topline increases by 3% YoY during 1QCY09.
  • EBITDA margins decline to 22.6%, from 23% in 1QCY08.
  • Other income declines by 20% during the quarter.
  • Bottomline registers a growth of 5% YoY due to lower interest charges and tax outgo.

Standalone Financial snapshot
(Rs m) 1QCY08 1QCY09 Change
Net sales 4,929 5,087 3.2%
Expenditure 3,795 3,936 3.7%
Operating profit (EBDITA) 1,134 1,151 1.5%
EBDITA margin (%) 23.0% 22.6%  
Other income 119 95 -20.2%
Interest 13 9 -30.8%
Depreciation 62 65 4.8%
Profit before tax 1,178 1,172 -0.5%
Tax 450 409 -9.1%
Profit after tax/(loss) 728 763 4.8%
Net profit margin (%) 14.8% 15.0%  
No. of shares (m)   123.6  
Diluted earnings per share (Rs)*   21.5  
Price to earnings ratio (x)*   15.1  
*On trailing twelve months earnings

What has driven the performance in 1QCY09?
  • The topline of Castrol grew by 3.2% YoY in 1QCY09 on the back of higher realisations despite significantly lower volumes due to the economic slowdown. Volumes declined during the quarter due to lower commercial transportation and manufacturing activity, the chief drivers for lubricant consumption.

  • On the cost front, the company was able to maintain its cost structure during 1QCY09, thereby protecting its margins. The company also had a lower tax outgo during the quarter, due to which it delivered a bottomline growth of 5%.

    Cost break-up
    (Rs m) 1QCY08 1QCY09 Change
    Raw materials 2,630 2,737 4.1%
    % sales 53.4% 53.8%  
    Staff cost 219 276 26.0%
    % sales 4.4% 5.4%  
    Advertising cost 199 207 4.0%
    % sales 4.0% 4.1%  
    Carriage, Insurance & Freight 183 164 -10.4%
    % sales 3.7% 3.2%  
    Other expenditure 564 552 -2.1%
    % sales 11.4% 10.9%  
    Total cost 3,795 3,936 3.7%
    % sales 77.0% 77.4%  

  • Castrolís management has stated that it expects a modest growth of around 10% going forward. 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. It has stated its two key priorities as: defend margins and attack inefficiencies.

  • Castrol is not looking at expansion in the distribution sector in CY09. 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. In fact, the company has joined hands with Tata Motors to co-engineer a special oil for its new Nano. Castrol oils will be used as first fill as well as service fill for all Nano cars. It has also entered into a partnership agreement with Volvo cars as well as with Volkswagen. It also runs Castrol BikeZone Ė a franchised motorcycle servicing concept. The management expects market demand to remain sluggish during 1HCY09. This is expected to negatively impact Castrolís volumes in the short term. However, a good agriculture season and the benefit of raw material cost reduction will eventually reflect in the companyís margins.

At the current price of Rs 325, the stock trades at a price to earnings multiple of 15 times its trailing 12 months earnings. We believe that the power of a strong brand provides the company with pricing power and a degree of control over its margins. However, the macroeconomic slowdown and intense competition limits its growth prospects. As such we believe the stock is fairly valued.

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