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Castrol: Raw material blues

Jul 29, 2003

Castrol India announced its second quarter results today. The company reported a 4% growth in the topline while its bottomline has taken a hit of 6%. On a half yearly basis the topline was up marginally whereas the bottomline improved by about 4%. We take a detailed look at the results.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Net sales 2,984 3,106 4.1% 5,507 5,552 0.8%
Other Income 22 49 118.8% 65 107 64.3%
Expenditure 2,306 2,516 9.1% 4,353 4,415 1.4%
Operating Profit (EBDIT) 677 590 -12.9% 1,153 1,137 -1.4%
Operating Profit Margin (%)22.7%19.0%20.9%20.5%
Interest 25 6 -76.1% 47 17 -64.0%
Depreciation 33 35 7.3% 66 70 5.7%
Profit before Tax642597-6.9%1,1051,1564.7%
Extraordinary items (7) - (7)
Tax 199 189 -5.2% 361 390 8.1%
Profit after Tax/(Loss) 436 409 -6.2% 737 767 4.0%
Net profit margin (%)14.6%13.2%13.4%13.8%
No. of Shares 123.6 123.6 123.6 123.6
Diluted Earnings per share*14.113.211.912.4
P/E Ratio 15 16
* annualised

With the increase in industrial sales and also on account of higher sales in the automotive segment, the company saw a 4% growth in the topline. It should be noted that the company is heavily dependent on the automobile industry and any increase in volume sales in the auto sector helps the company to improve its topline. In the first quarter the company had reported a decline in topline of about 5% while it increased in the second quarter by about 4%. This seems to be due to the fact that the auto sector may have reported healthy volume growth.

For the June quarter the company's expenses increased at a rate higher than that of the topline. Castrol imports its key raw material (base oil) on a forward contract for about 6-8 months. It should be noted that the crude oil prices were heading north during the same period. Thus this increased the expenses of the company. Raw material as a percentage of net sales increased from 49% to 54% during the June quarter. This resulted in a decline of operating profit margin by about 370 basis points.

% of net sales
2QFY032QFY041HFY031HFY04
Stock0.3%2.4%-0.5%-5.7%
Raw material49.3%54.0%51.7%59.9%
Staff costs6.1%5.8%5.8%6.1%
Advertising6.5%4.8%6.0%4.2%
CIF3.7%3.6%4.1%3.7%
Other exp11.4%10.4%11.9%11.3%

The company was able to reduce its interest outgo significantly and this provided some respite to the otherwise declining bottomline. However the net profit was down 6% during the June quarter.

At Rs 201, the stock is trading at a P/E multiple of 16x its annualised 1HFY04 earnings. With the demand in both automobile and industrial segment picking up the company is likely to benefit on the sales front. However the impact of increased base oil prices will continue to impact its operating profit margins during the remaining part of the year. Also the company is facing competition from the oil PSUs that are becoming more vibrant towards this sector. In the long term, however, we expect that the company will benefit as a result of support from its parent for its raw material sourcing needs and increase in demand as a results of buoyancy in the auto sector. The appreciation of rupee is also likely to benefit the company since it imports most of its raw materials.

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