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Castrol: A lackluster quarter - Views on News from Equitymaster

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Castrol: A lackluster quarter
Aug 6, 2014

Castrol India Ltd has announced results for the quarter ending June 2014. The company has reported a net sales growth of 6.0% year on year (YoY) while net profits for the quarter declined by 19.0% YoY.

Performance summary
  • Revenues for the quarter registered a growth of 6.0% on a year on year (YoY) basis. For the half year ending June 2014 (1HCY14), the net sales were up 5.1% YoY.
  • Operating profits for the quarter declined by 3.3% YoY (with margins at 20.5% as compared to 22.5% in 2QCY13). For 1HCY14, the operating profits were down 8.7%, with operating margins at 19.3%, down from 22.2% in 1HCY13.
  • Net profits for the quarter declined by 19.0% YoY with net profit margins at 13.6%, down from 17.8% in 2QCY13. For 1HCY14, the net profits declined by 19.2% YoY, with net profit margins at 13.0%, down from 16.9%
  • The Board of Directors of the company have declared an interim dividend of Rs 3.5 per share for year ending December 2014, same as the interim dividend last year.

Standalone financial summary
Rs m 2QCY13 2QCY14 Change (%) 1HCY13 1HCY14 Change (%)
Net sales 8,620 9,137 6.0% 16,467 17,307 5.1%
Expenditure 6,682 7,263 8.7% 12812 13971 9.0%
Operating profit (EBDITA) 1,938 1,874 -3.3% 3,655 3,336 -8.7%
EBDITA margin (%) 22.5% 20.5%   22.2% 19.3%  
Other income 194 102 -47.4% 406 258 -36.5%
Interest 3 4 33.3% 8 8 0.0%
Depreciation 73 84 15.1% 144 168 16.7%
Profit before tax before exceptional items 2,056 1,888 -8.2% 3,909 3,418 -12.6%
Exceptional items 198 0 nm 198 0 nm
Profit before tax margin (%) 23.9% 20.7%   23.7% 19.7%  
Tax 718 644 -10.3% 1328 1172 -11.7%
Profit after tax/(loss) excluding exceptional items 1,536 1,244 -19.0% 2,779 2,246 -19.2%
Net profit margin (%) 17.8% 13.6%   16.9% 13.0%  
No. of shares (m)         495  
Diluted earnings per share (Rs)*         9.2  
P/E ratio(x)*         36.0  
*On a trailing 12 months basis

What has driven growth in 2QCY14?
  • The revenues for the quarter increased by 6.0% YoY. While the lower demand remained a challenge, the company was able recover the increase in costs of goods through better sales mix and judicious pricing actions. As per the management, the personal mobility business continues to demonstrate strong underlying volume and value growth. While volumes in the auto segment declined on a YoY basis, the Industrial segment delivered a good performance with volume growth of over 7% despite demand shrinkage in all core manufacturing sectors.

  • The revenues in the auto segment grew by 5% YoY during the quarter due to higher realizations. However, the operating margins in the segment declined by 4.7%. For non auto segment, the revenues were up 14% YoY while operating profit margins for the segment declined by around 5.6%.

  • The operating profits for the quarter declined 3.3% YoY with operating profit margin at 20.5%, down from 22.5%. This was mainly due to high cost of raw materials, that went up from 53.8% in 2QCY13 to 57.1% in 2QCY14 (both as a % of sales). However, the rise in raw material cost was offset to some extent by decline in other expenses and moderation in advertisement and sales promotion expenses.

  • The net profits for the quarter declined by 19% YoY. This was mainly on account of around 47% YoY decline in the other income. Also, the company had booked exceptional gains from the sale of non operating assets in the corresponding quarter last year, which was not present this year.

    Cost breakup
    Rs m 2QCY13 2QCY14 Change (%) 1HCY13 1HCY14 Change (%)
    Raw materials 4,638 5,221 12.6% 9,067 10,103 11.4%
    as a % of sales 53.8% 57.1%   55.1% 58.4%  
    Advertisement and Sales promotion expenses 683 714 4.5% 1228 1335 8.7%
    as a % of sales 7.9% 7.8%   7.5% 7.7%  
    Staff expenses 385 433 12.5% 720 824 14.4%
    as a % of sales 4.5% 4.7%   4.4% 4.8%  
    Other expenses 976 895 -8.3% 1797 1709 -4.9%
    as a % of sales 11.3% 9.8%   10.9% 9.9%  
    Total expenses 6,682 7,263 8.7% 12,812 13,971 9.0%
    as a % of sales 77.5% 79.5%   77.8% 80.7%  
What to expect?
As per the management, the macro economic environment currently remains quite challenging for the lubricants business. The company currently is operating in an environment of low demand along with increase in cost of goods. Further, there is stiff competition in the lubricant market. The company has launched two new products in the automotive segment. As per the management, the second half of 2014 is likely to remain tough though it believes that there are signs of recovery on the back of positive sentiments and thrust on infrastructure growth. At current price, the stock is trading at trailing 12 months Price to earnings multiple of 36 times which we believe is expensive. As such, we suggest investors not to buy the stock at current levels.

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