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Castrol: Driven by strong volumes - Views on News from Equitymaster
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Castrol: Driven by strong volumes
Jul 17, 2010

Castrol has announced its 2QCY10 results. The company has reported a 16.5% YoY and 17% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline increases by 16.5%YoY during 2QCY10 on the back of higher volumes.
  • EBITDA margins decline marginally to 30.4%, from 31% in 2QCY09 due to a 4.7% (as a percentage of sales) increase in raw material costs.
  • Other income increases by 11% during the quarter.
  • Bottomline registers a 17% YoY growth during 2QCY10 in line with topline growth.
  • For 1HCY10, registers a 22% YoY topline growth and 31% YoY bottomline growth.
  • Allots 1:1 bonus shares on 13th April, 2010. Declares an interim dividend of Rs 7 for CY10.

Standalone Financial snapshot
(Rs m) 2QCY09 2QCY10 Change 1HCY09 1HCY10 Change
Net sales 6,402 7,458 16.5% 11,489 14,018 22.0%
Expenditure 4,419 5,193 17.5% 8,354 9,953 19.1%
Operating profit (EBDITA) 1,983 2,265 14.2% 3,135 4,065 29.7%
EBDITA margin (%) 31.0% 30.4%   27.3% 29.0%  
Other income 66 73 10.6% 161 154 -4.3%
Interest 6 6 0.0% 15 11 -26.7%
Depreciation 67 60 -10.4% 133 118 -11.3%
Profit before tax 1,976 2,272 15.0% 3,148 4,090 29.9%
Tax 692 769 11.1% 1,101 1,415 28.5%
Profit after tax/(loss) 1,284 1,503 17.1% 2,047 2,675 30.7%
Net profit margin (%) 20.1% 20.2%   17.8% 19.1%  
No. of shares (m)         247.3  
Diluted earnings per share (Rs)*         18.0  
Price to earnings ratio (x)*         25.4  
*On trailing12- months earnings

What has driven the performance in 2QCY10?
  • The topline of Castrol grew by 16.5% YoY in 2QCY10. The growth was driven by volumes due to its investments in brand and marketing. EBITDA margins contracted by 0.6% due to a 4.7% (as a percentage of sales) increase in raw material costs. The company tried to offset the higher cost of materials through a combination of premium product mix and pricing actions. The company is also reaping the benefits of a strong cost cutting program in the recent past. During 1HCY10, the company's marketing program was built around Castrol's global FIFA World Cup 2010 sponsorship.

    Cost break-up
    (Rs m) 2QCY09 2QCY10 Change
    Raw materials 2,810 3,621 28.9%
    % sales 43.9% 48.6%  
    Staff cost 296 244 -17.6%
    % sales 4.6% 3.3%  
    Advertising cost 426 361 -15.3%
    % sales 6.7% 4.8%  
    Carriage, Insurance Freight 181 227 25.4%
    % sales 2.8% 3.0%  
    Other expenditure 706 740 4.8%
    % sales 11.0% 9.9%  
    Total cost 4,419 5,193 17.5%
    % sales 69.0% 69.6%  

  • Castrol's management has stated that it expects volumes growth going forward although inflation in input costs will affect margins. With crude prices hovering around US$ 75 to US$ 80 per barrel it likely that raw material prices will harden in the future. The company intends to focus on the strategic growth areas like cars, motorbikes and tractors, where it expects to grow in volume and value terms. In fact, the company has recently intensified its activities in rural markets with the Sanjeevani programme aimed at directly contacting farmers in 35,000 villages to explain the benefits of Castrol CRB Plus for tractors. The industrial and marine segments are likely to take a backseat.

  • Castrol is not looking at expansion in the distribution sector in the near term. Instead it plans to focus on improving the productivity of its existing network of 270 distributors, which service its 70,000 outlets.

What to expect?
Castrol is into strategic alliances with OEM partners like Tata commercial vehicles division, Tata passenger cars, Mahindra and Mahindra, Ford, JCB and L&T. It has also entered into a partnership agreement with Volvo cars. It also runs Castrol BikeZone - a franchised motorcycle servicing concept.

The benefits of a growing economy and the company's marketing push are showing in its topline growth. However, the benefit of raw material cost reduction now reflects in the company's margins and is likely to shrink with an upward trend in crude oil prices.

At the current price of Rs 456, the stock trades at a price to earnings multiple of 29 times our CY12 estimated earnings. We believe Castrol is richly valued at this juncture and advice against taking fresh positions in the stock

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