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Castrol: Tough road ahead

Jul 10, 2003

Castrol India is one of the leading players in the lube oil industry. The lube oil industry is divided into two categories, the bazaar segment and the retail segment. By bazaar segment, we mean lube oils available at non-petrol pump outlets. Retail segment encompasses lube oil available at petrol pumps. Castrol is a leader in the bazaar segment while the major players in the retail segments are IOC, BPCL and HPCL. This is also because, the PSU refining and marketing majors, did not allow Castrol to sell through their own outlets and hence Castrol had to develop the non-petrol pump segment to generate business. In the current article we take a look at the business of Castrol India.

The business of Castrol can be classified into two broad segments: one automotive and the other industrial. In automotives, the consumers are commercial vehicles (trucks), agriculture related (tractors) and personal vehicles (two wheelers and four wheelers). On the other hand, in the industrial segment we have Original Equipment Manufacturers (OEM), machinery and transport equipments and non-equipment segment (mining, cement, etc.) as the key consumers.

The automotives account for a major portion of the net sales (about 86%), while the non-automotive segment contributes remaining 14%. In the category of automotives, personal vehicles account for about 16% of net sales. This segment is likely to grow in future on account of increasing affluence levels and also increased consumer desire for owing personal vehicles. Increased growth in this segment directly increases the demand for lube as this is correlated to the auto industry.

On the other hand, the commercial and agricultural segments, which constitute the bulk of lubricant market, have been under pressure since last few years. This was on account of over capacity, increased fuel prices and stagnant freight rates. This led to the reduction in frequency of lube change and also usage of low quality lubes. This apart, increased use of new euro norm compliant engines, which consume less lube, also adversely affected growth prospects. Due to draught like situation continuing for the third consecutive year, the sales of tractor have declined and consequently affected lube demand.

Industrial segment has shown some signs of recovery since the third quarter of 2002 and it is expected that it will continue in 2003 also. This will drive growth in non-automotive segment going forward. This apart, growth in personal vehicles and increased tendency to use better quality lube oil for maintenance will also improve the demand scenario for the company.

But the biggest threat for Castrol has come in the form of pro-active PSU oil refining majors. In the last couple of years, the big 3 oil refining and marketing companies, HPCL, BPCL and IOC have become market savvy and have focused on brand building for their lube products. Also, their retail outlets (petrol pumps) are being spruced up for customer attraction. This has undermined Castrol's marketing push. Moreover, going forward, companies like Shell and Reliance are set to make their debut on the marketing front by opening a chain of new petrol pumps. Shell already has its own brand of lube. Though Reliance does not have its own brand of lube, it is not difficult for it to create one owing to its refining strengths.

(Rs m) 1993 1999 CAGR 2002 CAGR
Sales 4,006 11,956 20.0% 13,389 3.8%
Net Profit 404 2,044 31.0% 1,529 -9.2%
OPM 16.4% 20.6%   17.6%  

To put things into perspective, while the company's topline saw a CAGR of 20% in the seven-year period between 1993-1999, its bottomline improved by an encouraging 31% during the period. With the increased activism shown by oil PSUs and sluggish economy, the scenario changed completely for Castrol from then on. Case in point, from 1999-2002, the topline CAGR slowed down to a sobering 4%. What's more, the net profit during this period actually declined at 9% CAGR.

At Rs 202, the company is trading at a P/E multiple of 17.4x its 1QFY04 annualised earnings. The Castrol product range is known for its quality and marketing push. With the acquisition of BP brand under its portfolio, the product offering has enhanced further. But the company will have to think fast on strategies to take on current as well as upcoming new competition, or else it may lose its privilege position on the consumer's mind space.

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