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Castrol: A disappointing quarter

May 13, 2014

Castrol India Ltd has announced results for the quarter ending March 2014. The company has reported a net sales growth of 4.1% year on year (YoY) while net profits for the quarter declined by 19.4% YoY.

Performance summary
  • Revenues for the quarter registered a growth of 4.1% on a year on year (YoY) basis.
  • Operating profits declined by 14.9% YoY during the quarter (with margins at 17.9% as compared to 21.9% in the 1QCY13). The decline was on account of stagnated volumes , higher base oil prices, rupee depreciation and higher staff and advertising expenses.
  • Net profits for the quarter declined by 19.4% YoY with net profit margins at 12.3% versus a net profit margin of 15.8% in 1QCY13.
  • As per the scheme of reduction of share capital, the company has reduced the fully paid-up face value of equity shares from Rs.10 per share to Rs. 5 per share. As such, during the quarter, the company has paid Rs 5 per share to the eligible shareholders as on the record date of March 3, 2014.

Standalone financial summary
Rs m 1QCY13 1QCY14 Change (%)
Net sales 7,847 8,170 4.1%
Expenditure 6,130 6,708 9.4%
Operating profit (EBDITA) 1,717 1,462 -14.9%
EBDITA margin (%) 21.9% 17.9%  
Other income 212 156 -26.4%
Interest 5 4 -20.0%
Depreciation 71 84 18.3%
Profit before tax before exceptional items 1,853 1,530 -17.4%
Profit before tax margin (%) 23.6% 18.7%  
Tax 610 528 -13.4%
Profit after tax/(loss) excluding exceptional items 1,243 1,002 -19.4%
Net profit margin (%) 15.8% 12.3%  
No. of shares (m)   495  
Diluted earnings per share (Rs)*   9.8  
P/E ratio(x)*   29.3  
*On the basis of trailing 12 months earnings

What has driven the performance in 1Q CY14?
  • The company reported a muted growth of around 4% YoY during the quarter. This was mainly on account of lower volumes and weak demand in the auto, industrial and construction sector. As per the management, despite the tough environment, the company has been able to recover increase in the input costs through better pricing decisions and sales mix.

  • The operating profits during the quarter declined by 15% YoY with margins slipping to 17.9%, down by around 400 basis points (4% YoY). Apart from a lackluster performance at the topline level, the margins declined on account of rupee depreciation, high cost of base oil, higher staff expenses and increase in the advertising spend.

    Cost breakup
    Rs m 1QCY13 1QCY14 Change (%)
    Raw materials 4,429 4,882 10.2%
    as a % of sales 56.4% 59.8%  
    Advertisement and Sales promotion expenses 545 621 13.9%
    as a % of sales 6.9% 7.6%  
    Staff expenses 335 391 16.7%
    as a % of sales 4.3% 4.8%  
    Other expenses 821 814 -0.9%
    as a % of sales 10.5% 10.0%  
    Total expenses 6,130 6,708 9.4%
    as a % of sales 78.1% 82.1%  

  • The net profit for the quarter declined by around 19% YoY on account of a weak operational performance and higher effective tax rate.
What to expect?

The slowdown in the overall economy has impacted Castrol's business. Further, a weakness in the rupee and high cost of raw materials has pulled down the company's margins during the quarter. However, as per the management, the company is witnessing growth in the personal mobility segment, which includes two-wheeler as well as passenger car engine oils, and showed robust underlying growth.

As per the management guidance, the challenges are likely to continue for Castrol in the near future. Going forward, economic headwinds, uncertainty in the crude and base oil prices will remain a cause of concern for the company. Castrol is a company with robust long term fundamentals. However, at a current PE (trailing 12 months Price to earnings multiple) of around 29 times, we believe that the stock is trading at expensive valuations. Hence, we maintain a "Sell".

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