Considered to be the pioneer of the bazaar segment, Castrol India Ltd. (CIL) revolutionised the way lubricants are bought in India. The company successfully transformed lube-buying behaviour from petrol pumps to a more effective parallel channel including garages, service stations and auto spare part shops.
With private manufactures denied access to fuel retail outlets, the development of the above strategy enabled the company to race ahead of industry, recording strong growth rates in the nineties. To get a perceptive of performance over this period, bearing in mind that industry volumes for most part of the decade were flat, CIL registered compounded growth (CAGR) in top and bottomline of 21% and 20% respectively, which also suggests that margins were not compromised. Over a ten-year period the company announced 5 bonus issues. An investor having purchased 10 shares at the start of 1991 for Rs 500 would today have 164 shares in the company valued at Rs 31,800. With such performance and sold to a branding story, stock markets could not but view the scrip as a FMCG, which explains the current P/E rating in the range of 18x-22x earnings.
However, as said and sadly, all good things must come to an end, or so it seems. Over the past two years, the company has recorded low single digit topline growth with slide in post-tax earnings. More so, the company was hit by a double whammy, as heated crude oil markets led to rise in basic feedstock -- base oil -- prices. Being an importer of the raw material, a depreciating rupee further ate into margins. Imports constitute an estimated 90% of base oil consumption and 29% of sales. As a result 1% depreciation in the rupee could cut pre-tax profits by an estimated 2%.
We reckon, the break in performance is likely due to downturn in the auto and capital goods industry, increase in refill times and threateningly near-saturation in 'bazaar' penetration. Since deregulation, 'bazaar' segment has steadily captured market share from petrol pumps in lube sales. CIL, pioneering the effort, saw market share increase from an estimated 6% to 20%. As per reports, current market share of CIL is an estimated 25%.
Recognising the challenges, the company, over the past two years, has taken initiatives to counter industry developments. With topline under pressure and operating costs escalating, CIL seems to have reviewed operations. In the two years, the company shut blending operations at Wadala, Mumbai and Hosakote, Karnataka. However, CIL has not indicated its intentions regarding the future of the Karnataka plant. These are likely to have been older plants incurring higher operational costs.
Gains in the nineties was led by better consumer understanding, brand positioning, communication and other marketing tools. CIL continues to enjoy this competitive advantage. Identifying innovative strategies for extending distribution reach, a key competitive force, the company has entered into strategic alliances with vehicle manufacturers for getting its products endorsed. This is expected to give the company access to the manufacturers sales & service network and possibly first fill opportunities. Currently, the company has an understanding with Telco and LML. With poor consumer awareness of lubricants among passenger vehicles, this could be an effective strategy to ensure consumer loyalty.
The commercial vehicle (CV) segment is the cream of the lubes business accounting for an estimated 70% of the lubricants market. However, one does not see a lot of media commercials, especially television, targeting this segment. One explanation could be the low T.V penetration among the target market. But more likely, companies directly market lubes to fleet and individual CV owners. CIL is adopting a similar endorsement strategy for the above segment.
For the industrial segment, the company has started offering value added services under the 'Castrol Plus' programme. Under this initiative the company will offer Chemical Management Services and Lube Management Services, which will manage the customer's entire chemical requirements. The service is aimed at facilitating increased productivity and reduced costs for customers. Some of the clients include Maruti Udyog Ltd., Cummins India and Delphi Automotive.
The management has provided investors with exemplary returns and also issues sizeable dividends. Nevertheless, efforts are constrained as the company operates in a slow-growth industry. That said the company could benefit from the current upturn in the auto industry. Also, over the medium-term, with deregulation in petroleum marketing lube manufacturers could gain access to fuel retail outlets. Global lubricant majors tend to be classified as automotive consumer product companies, as they offer a range of car care and accessory products. Presence in these segments, which more closely resemble FMCG buying behaviour, could help ease stress on valuations.