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Castrol: Profiting from the brand - Views on News from Equitymaster
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Castrol: Profiting from the brand
Jul 27, 2009

Performance summary
  • Topline increases by 3% YoY during 2QCY09.
  • EBITDA margins increase to 31%, from 20.4% in 2QCY08 on the back of a 12% (as a percentage of sales) decline in raw material costs.
  • Other income declines 28% during the quarter.
  • Bottomline registers a whopping 55% YoY growth during 2QCY09 due to expansion in operating margins.
  • For 1HCY09, topline clocks a 2.7% YoY growth, while bottomline increases by 31.5%.


Standalone financial snapshot
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 6,214 6,402 3.0% 11,191 11,489 2.7%
Expenditure 4,949 4,419 -10.7% 8,743 8,354 -4.4%
Operating profit (EBDITA) 1,265 1,983 56.8% 2,448 3,135 28.1%
EBDITA margin (%) 20.4% 31.0%   21.9% 27.3%  
Other income 92 66 -28.3% 163 161 -1.2%
Interest 7 6 -14.3% 20 15 -25.0%
Depreciation 68 67 -1.5% 130 133 2.3%
Profit before tax 1,282 1,976 54.1% 2,461 3,148 27.9%
Tax 454 692 52.4% 904 1,101 21.8%
Profit after tax/(loss) 828 1,284 55.1% 1,557 2,047 31.5%
Net profit margin (%) 13.3% 20.1%   13.9% 17.8%  
No. of shares (m)         123.6  
Diluted earnings per share (Rs)*         25.2  
Price to earnings ratio (x)*         17.0  
*On trailing12- months earnings

What has driven the performance in 2QCY09?
  • The topline of Castrol grew by 3% YoY in 2QCY09. However, EBITDA margins expanded by 11% due to a 12% (as a percentage of sales) decline in raw material costs. Other costs like staff expenses, advertising cost, carriage insurance & freight and other expenditure have grown more or less in proportion with sales.

  • Castrol’s management has stated that it expects a modest growth of around 10% going forward. 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. The industrial and marine segments are likely to take a backseat.

  • Castrol is not looking at expansion in the distribution sector in CY09. 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 management had earlier stated that it expected market demand to remain sluggish during 1HCY09. This was expected to negatively impact Castrol’s volumes in the short term. However, the benefit of raw material cost reduction is now being reflected in the company’s margins.

At the current price of Rs 429, the stock trades at a price to earnings multiple of 17 times its trailing 12 months earnings. We shall update this analysis on receiving further information from the company.

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