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Castrol: A strong quarter - Views on News from Equitymaster
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Castrol: A strong quarter
May 19, 2015

Castrol India Ltd has announced results for the quarter and year ended March 2015. The company has reported a year on year (YoY) decline of 2.4% in the net sales while net profits for the quarter grew by 46.4% YoY.

Performance summary
  • Revenues for the quarter registered a decline of 2.4% on a year on year (YoY) basis.
  • Operating profits for the quarter grew by 30.4% YoY (with margins at 23.9% as compared to 17.9% in 1QCY14).
  • Net profits for the quarter grew by 46.4% YoY with net profit margins at 18.4% versus 12.7% in 1QCY14.

Standalone financial results
Rs m 1QCY14 1QCY15 Change (%)
Net sales 8,151 7,958 -2.4%
Other operating income 19 34 78.9%
Total income from operations 8170 7992 -2.2%
Expenditure 6,708 6,085 -9.3%
Operating profit (EBDITA) 1,462 1,907 30.4%
EBDITA margin (%) 17.9% 23.9%  
Other income 156 435 178.8%
Interest 4 3 -25.0%
Depreciation 84 111 32.1%
Profit before tax  1,530 2,228 45.6%
PBT margin (%) 18.7% 27.9%  
Tax 528 761 44.1%
Profit after tax/(loss)  1,002 1,467 46.4%
Net profit margin (%) 12.3% 18.4%  
No. of shares (m)   495  
Diluted earnings per share (Rs)*   10.5  
P/E ratio(x)*   44.1  
*On a trailing 12 months basis

What has driven growth in 1QCY15?
  • The company witnessed 2.4% YoY decline in the net sales on account of poor volumes in both automotive and non automotive segments that witnessed decline of 1.4% and 8.1% respectively in the net sales on a year on year basis.

    Segmental Summary
    (Rs m) 1QCY14 1QCY15 Change (%)
    Automotive Segment
    Revenues 7,197 7,098 -1.4%
    EBIT 1,254 1,960 56.3%
    EBIT % 17.4% 27.6%  
    Non Automotive Segment
    Revenues 973 894 -8.1%
    EBIT 145 173 19.3%
    EBIT % 14.9% 19.4%  

  • Operating margins for the quarter improved from 17.9% to 23.9% (YoY). This was mainly due to benign cost environment. On a sequential basis, the margins declined slightly mainly on account of high advertising expense. The personal mobility (two wheelers and cars) segment was the key driver for Castrol's business during this quarter. However, as per the management, the environment still remains challenging for commercial trucks and marine business. A drop in the crude oil translated to a lower base oil cost. Despite a decline in net sales, the raw material cost as a percentage of sales decline from 59.8% in 1QCY14 to 50.3% in 1QCY15. The industrial business witnessed 19.3% YoY growth in the operating profits and improvement in margins from 14.9% in 1QCY14 to 19.4% in 1QCY15. On an overall basis, the gains were offset to some extent on account of increase in promotion expenses, staff expenses and other costs (all as a % of sales).

    Cost breakup
    (Rs m) 1QCY14 1QCY15 Change (%)
    Raw materials 4,882 4,022 -17.6%
    as a % of sales 59.8% 50.3%  
    Advertisement and Sales promotion expenses 621 759 22.2%
    as a % of sales 7.6% 9.5%  
    Staff expenses 391 422 7.9%
    as a % of sales 4.8% 5.3%  
    Other expenses 814 882 8.4%
    as a % of sales 10.0% 11.0%  
    Total expenses 6,708 6,085 -9.3%
    as a % of sales 82.1% 76.1%  

  • The net profit for the quarter witnessed a growth of 46.4%. However, this growth also seems high because of the low base (as 1QCY14 net profit was down 19% YoY). Apart from a strong performance at the operating level, increase in other income (up 178.8% YoY) aided the growth.

  • The increase in 'other income' was mainly on account of write back of provisions no longer required. The depreciation expense for the quarter increased 32.1% YoY. The company has incurred an additional charge of Rs 5.2 m due to revision in the useful life of fixed assets (as per the provisions of Companies Act 2013). Because of the change in the useful life of assets, the bottomline has been dragged lower by around Rs 16 m.
What to expect?
This was a good quarter of the company mainly because of the lower costs as crude prices remained weak. The company launched new products for both commercial vehicle and industrial segment during the quarter.

As per the management, while lower crude costs could translate into lower raw material cost, the concerns on account of volatile rupee exchange rate remain. The management expects the demand to start improving during the second half of the year.

While Castrol is a fundamentally strong company, at current price, the stock is trading at trailing 12 months Price to earnings multiple of 44 times which we believe is expensive. As such, we suggest investors not to buy the stock at current levels.

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