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Castrol: Branding helps margin growth - Views on News from Equitymaster
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Castrol: Branding helps margin growth
Jul 31, 2008

Performance summary
  • Topline increases by 15% YoY during 2QCY08.
  • EBITDA margins expand to 20.4%, from 18.6% in 2QCY07.
  • Other income registers a growth of 17% YoY during the quarter.
  • Bottomline registers a growth of 26% YoY owing to operating margin expansion, higher other income and lower interest expenses.
  • For 1HCY08, topline clocks a 14% YoY growth, while bottomline increases by 45%


Standalone financial snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 5,401 6,214 15.1% 9,822 11,143 13.5%
Expenditure 4,395 4,949 12.6% 8,175 8,744 7.0%
Operating profit (EBDITA) 1,006 1,265 25.8% 1,647 2,399 45.7%
EBDITA margin (%) 18.6% 20.4%   16.8% 21.5%  
Other income 79 92 17.0% 152 211 39.3%
Interest 21 7 -66.8% 30 20 -32.4%
Depreciation 50 68 36.8% 98 130 33.3%
Profit before tax 1,014 1,282 26.5% 1,671 2,460 47.2%
Tax 354 454 28.1% 597 904 51.6%
Profit after tax/(loss) 659 828 25.6% 1,075 1,556 44.8%
Net profit margin (%) 12.2% 13.3%   10.9% 14.0%  
No. of shares (m)         123.6  
Diluted earnings per share (Rs)*         21.56  
Price to earnings ratio (x)*         13.3  
*On trailing twelve months earnings

What has driven the performance in 2QCY08?
  • Higher prices have led the 15% YoY growth in topline. The core lubricant business is driven more by value than volume as the company’s focus has centered on advanced formulations required for modern automobiles and machines. While these machines use lower quantum of lubes, they require higher specification lubricants that are premium in nature.

  • Raw materials costs declined by 2.6 % in 2QCY08, as percentage of sales. This reduction was achieved primarily through an effective procurement strategy. It more than offset the increase in both staff and advertising costs.

    Cost break up
    (Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
    Raw materials 3,158 3,476 10.1% 5,945 6,106 2.7%
    % sales 58.5% 55.9%   60.5% 54.8%  
    Staff cost 214 282 31.7% 405 501 23.6%
    % sales 4.0% 4.5%   4.1% 4.5%  
    Advertising cost 280 353 26.3% 446 552 23.7%
    % sales 5.2% 5.7%   4.5% 5.0%  
    Carriage, Insurance & Freight 203 201 -1.0% 366 384 5.0%
    % sales 3.8% 3.2%   3.7% 3.4%  
    Other expenditure 540 637 18.1% 1,013 1,201 18.5%
    % sales 10.0% 10.3%   10.3% 10.8%  
    Total cost 4,395 4,949 12.6% 8,175 8,744 7.0%
    % sales 81.4% 79.6%   83.2% 78.5%  

  • Castrol continues to support its brands aggressively through innovative advertising and sales promotion initiatives as seen in the 26% YoY increase in advertising cost in 2QFY08.

What to expect?
Castrol has improved operating margins again this quarter, signaling its ability to maintain bottomline buoyancy. The company 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. Castrol BikeZone – a franchised motorcycle servicing concept – is also set for fast expansion.

However, the environment is expected to be extremely challenging, with raw material cost expected to escalate sharply. Crude prices have moved up rapidly over the last two quarters and all the lubricant input prices have been reacting to this trend.

At the current price of Rs 286, the stock trades at a price to earnings multiple of 13 times its trailing twelve months earnings. We shall soon update our view on the stock.

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