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Castrol: Beating the retreat

Jul 20, 2001

Although, Castrol (India) Ltd. has stated that the lubes industry milieu continues to remain challenging, the company has managed to post impressive results. The company has managed to stem the slide in bottomline after 4 consecutive quarters of YoY drop in profits. This reflects well on the management, as they have been able to come to terms with the challenging industry scenario.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Sales 3,312 3,469 4.7% 6,119 6,501 6.3%
Other Income 20 20 -2.5% 137 55 -60.2%
Expenditure 2,850 2,931 2.8% 5,185 5,574 7.5%
Operating Profit (EBDIT) 462 538 16.5% 933 927 -0.7%
Operating Profit Margin (%) 13.9% 15.5%   15.3% 14.3%  
Interest 25 17 -31.9% 36 29 -20.1%
Depreciation 29 32 11.9% 56 62 11.9%
Profit before Tax 428 508 18.7% 978 890 -9.0%
Extraordinary items (25) (12) -50.8% (25) (45) 81.5%
Tax 73 127 74.2% 172 232 35.1%
Profit after Tax/(Loss) 331 369 11.8% 782 614 -21.5%
Net profit margin (%) 10.0% 10.7%   12.8% 9.4%  
No. of Shares (eoy) 124 124   124 124  
Diluted Earnings per share* 10.7 12.0   13 10  
P/E Ratio   18     22  
* annualised            

The topline of the company, for 2QFY02 and 1HFY02, has increased by 4.7% and 6.3%. This is quite a notable performance considering the industry registered de-growth of 10% in the past 12 months, as indicated by the company. Over the same period of the previous year, sales had grown by 2.3% and 6.7% respectively. With a shrinking industry scenario and intense competition the registered growth in bottomline seems to have materialised through better realisations, as the company could have leveraged on its brand equity and high product quality to command premium prices.

Operating profits have registered an impressive jump for the quarter ended June '01. But for 1HFY02 they have declined marginally, which is mainly due to the fall in operating profits by 17.5% in 1QFY02. The improvement in OPM for 2QFY02 by 160 basis points could be driven by better realisations and strict vigil over costs, which is reflected in the moderate increase in total expenditure. However, for the first six months of the current fiscal the OPM stands reduced by 100 basis points (1QFY02 OPM fell by 400 basis points).

The primary factor contributing towards the company's reduced costs are raw material expenses, which stand reduced by 15.8% YoY. Prices of base oil, the primary feedstock for lubricants, has been a thorny issue over the last 12 months, as feedstock costs increased with the surge in crude oil prices. For 1HFY02, expenses remain high as raw material costs increased by 37.7% in 1QFY02. Over the same quarter of the previous fiscal, this cost head grew by 29.2% with the rally in crude oil gaining steam. We had mentioned the possibility of the company incurring lower feedstock costs in 2QFY02, as crude oil prices softened in the first quarter of calendar year '01 (considering the company enters into forward contracts for procuring base oil and consequently is locked into lower procurement prices for the June '01 quarter). During this period, oil prices declined to $24 - $26 / barrel from above $30 / barrel. However, crude has climbed its way back to $26 - $29 / barrel over the quarter ended, which could push up costs for Castrol in 3QFY02.

Although, staff costs are higher by 16.1% for the quarter, in 1HFY02 they stand reduced by 2.7%. The higher quarter numbers could indicate a revision in staff salaries. Advertising costs in 2QFY02 have been cut by 33.6%, which has reduced total other expenses by 1.1% and stand lower by 16.6% year to date.

The interest costs, which increased for five consecutive quarters, have been brought under reign. In FY01, interest costs of the company rose by 175.2%. The lower costs could be due to better working capital efficiency. Thereby, reducing expensive short-term borrowings. Improved operating profits and lower interest costs have driven PBT growth in 2QFY02. However, year to date PBT is lower by 9% mainly due to lower other income for the period. Removing other income (indicating quality of earnings) the PBT shows a marginal drop of 0.6%, which indicates the company has stemmed the bleeding in better quality earnings. The reduced other income for the period is due to a non-recurring gain in 1QFY01 amounting to Rs 79.8 m from sale of investments.

Extra-ordinary items pertains to voluntary severance package offered by the company to its employees. In 2QFY01, the company stopped operations at the Wadala, Mumbai plant. In the current fiscal (1QFY02), the company terminated operations at the Hosakote, Karnataka plant. All employees at Hosakote are reported to have opted for the VRS. Castrol, however, has not indicated its intentions regarding the future of the Karnataka plant.

Effective tax of the company has increased substantially in 1HFY02. During the period effective tax has increased by 8.5 percentage points to 26%. This is mainly due to the reduced tax benefits from the Silvassa plant. Tax for FY01 has been reworked to account for the actual tax for the fiscal ended '01. Castrol had provided RS 62.7 m as tax in 2QFY01, which has increased to Rs 72.6 m.

At Rs 221 the company is trading on a multiple of 18x and 22x 2QFY02 and 1HFY02 annualised earnings. However, the price finds support due to the proposed buyback from parent BP Amoco and Burmah Castrol U.K. The shrinking industry scenario, continuing poor auto sector performance, volatility in crude prices and depreciating rupee could put further pressure on valuations of the company. A favourable re-rating of the stock will depend on the company's ability to sustain 2QFY02 performance through the adverse external environment.

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