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Castrol: Bottomline falls 15%
Jul 16, 2012

Castrol India Ltd. has reported results for the second quarter of Calendar year 2012(2QCY12). The company has reported 7.7% year on year (YoY) increase in the topline and a 15% YoY fall in the bottomline. Here is our analysis of the results.

Performance summary
  • Topline increases by 7.7% YoY during the quarter.
  • The operating profits for the quarter declined by 13.2% YoY, with margins at 20.2% (versus 25.1 % last year).
  • The net profits for the quarter were down by 15.2% YoY, with margins at 14.2% versus 18.0% last year.
  • The company has declared an interim dividend of Rs 7 per share for CY2012.
  • The Board of Directors has proposed to issue bonus shares in the ratio 1:1 subject to the approval of shareholders.

Standalone performance summary
Rs m 2QCY11 2QCY12 Change 1HCY11 1HCY12 Change
Net sales 7,932 8,544 7.7% 15,464 16,387 6.0%
Expenditure 5,944 6,819 14.7% 11,657 13,068 12.1%
Operating profit (EBDITA) 1,988 1,725 -13.2% 3,807 3,319 -12.8%
EBDITA margin (%) 25.1% 20.2%   24.6% 20.3%  
Other income 194 131 -32.5% 472 440 -6.8%
Interest 2 3 50.0% 6 10 66.7%
Depreciation 63 60 -4.8% 126 120 -4.8%
Profit before tax before exceptional items 2,117 1,793 -15.3% 4,147 3,629 -12.5%
Profit before tax margin (%) 26.7% 21.0%   26.8% 22.1%  
Tax 692 584 -15.6% 1,356 1,191 -12.2%
Profit after tax/(loss) 1,425 1,209 -15.2% 2,791 2,438 -12.6%
Net profit margin (%) 18.0% 14.2%   18.0% 14.9%  
No. of shares (m)         247  
Diluted earnings per share (Rs)*         18.0  
P/E ratio(x)*         30.7  
*On the basis of trailing 12 months

What has driven performance in 2QCY12?
  • The net sales witnessed a 7.7% YoY increase on the back of 5% increase in volumes. As per the management, the consistent investment in brands and relationships has boosted the volumes. The company's CRB Plus and Castrol CRB Turbo franchise registered a cumulative market share gain of 15% year to date (YTD). Segmentwise, while automotive segment witnessed an impressive growth, the Industrial and Building & Construction lubricant segments were adversely impacted due to slowdown in the concerned sectors, delays in projects, cost cutting and stock downsizing in these sectors.

    Cost breakup
    Rs m 2QCY11 2QCY12 Change 1HCY11 1HCY12 Change
    Raw materials 4,378 4,974 13.6% 8,343 9,564 14.6%
    as a % of sales 55.2% 58.2%   54.0% 58.4%  
    Advertisement and Sales promotion expenses 534 659 23.4% 1,252 1,250 -0.2%
    as a % of sales 6.7% 7.7%   8.1% 7.6%  
    Staff expenses 297 339 14.1% 556 604 8.6%
    as a % of sales 3.7% 4.0%   3.6% 3.7%  
    Other expenses 735 847 15.2% 1506 1650 9.6%
    as a % of sales 9.3% 9.9%   9.7% 10.1%  
    Total expenses 5,944 6,819 14.7% 11,657 13,068 12.1%
    as a % of sales 74.9% 79.8%   75.4% 79.7%  

  • The business environment remained tough on account of high raw material prices and depreciating rupee. The operating profits as a result declined by 13.2% YoY and operating profit margins stood at 20.2%, down from 25.1% last year. The advertisement and sales promotion expenses also increased to 7.7% during the quarter versus 6.7% in 2QCY11. The staff expenses and 'Other expenses' were also registered marginal increase on a year on year basis.

  • The net profits for the quarter declined by 15.2% YoY. This was on account of overall increase in costs and a 32.5% YoY decline in the other income. The net profit margins slipped to 14.2% during the quarter (versus 18.0% last year).

What to expect?
As per the management, the company is still facing a challenging environment. Higher inflation and slowdown in economic growth has led to a sluggish growth in the lubricant market. Besides, the margins are getting impacted due to high costs of raw materials and rupee depreciation.

Going forward, the company will focus on volume growth through better distribution reach .We believe focus on volumes will be crucial. The company lost a considerable market share in the previous year price hikes (price hike has been its conventional approach to strengthen margins and has served it very well in the past. However, the hike in price by Castrol was not followed by the competitors and the company lost a considerable market share to its competitors last year)

Going forward, the rising raw material cost, slowdown in economic growth and volatility of the Indian rupee remains a concern. The stock is currently trading at 30.7x its trailing 12 months earnings. The stock price is already up 32%from the beginning of the current year. Within last month, the stock price has increased by 12%.We believe that the stock price has limited upside from here and suggest our investors to be cautious.

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