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Castrol India: Margins offset weak demand
Aug 7, 2015

Castrol India Ltd has announced results for the quarter and year ended June 2015. The company has reported a year on year (YoY) growth of 1.1% in the net sales while net profits for the quarter grew by 48.3% YoY.

Performance summary
  • Revenues for the quarter registered a growth of 1.1% on a year on year (YoY) basis.
  • Operating profits for the quarter grew by 48.3% YoY% YoY with margins at 29.6% as compared to 20.2% in 2QCY14.
  • Net profits for the quarter grew by 48.3 % YoY with net profit margins at 20.0% versus 13.7% in 2QCY14.
  • The Board of Directors of the company has declared an interim dividend of Rs 4 per share.

Standalone Financial Performance Snapshot
Rs m 2QCY14 2QCY15 Change (%) 1HCY14 1HCY15 Change (%)
Net sales 9,103 9,202 1.1% 17,254 17,160 -0.5%
Other operating income 34 34 0.0% 53 68 28.3%
Total income from operations 9,137 9,236 1.1% 17,307 17,228 -0.5%
Expenditure 7,263 6,474 -10.9% 13971 12559 -10.1%
Operating profit (EBDITA) 1,840 2,728 48.3% 3,283 4,601 40.1%
EBDITA margin (%) 20.2% 29.6%   19.0% 26.8%  
Other income 102 152 49.0% 258 587 127.5%
Interest 4 2 -50.0% 8 5 -37.5%
Depreciation 84 94 11.9% 168 205 22.0%
Profit before tax  1,888 2,818 49.3% 3,418 5,046 47.6%
PBT margin (%) 20.7% 30.6%   19.8% 29.4%
Tax 644 973 51.1% 1172 1734 48.0%
Profit after tax/(loss)  1,244 1,845 48.3% 2,246 3,312 47.5%
Net profit margin (%) 13.7% 20.0%   13.0% 19.3%
No. of shares (m)       495
Diluted earnings per share (Rs)*       11.7
P/E ratio(x)*       42.1
*On a trailing 12 months basis

What has driven growth in 2QCY15?
  • Revenue grew by a mere 1.1% during the quarter. While the revenues in the auto segment (around 89% of the sales) grew by 2.1%, sales in the industrial sector witnessed a decline of 6.3% YoY. Overall volumes were up just 1% YoY, mainly driven by volumes in the personal mobility segment while volumes in the industrial segment and commercial vehicles segment declined.

  • The operating profit margin for the quarter improved to 29.6% as compared to 20.6% in 2QCY14. The boost in the margins was mainly on account of significant decline in the raw material costs. A decline in advertisement and promotion expenses further aided margin expansion. Higher share of premium products in the automotive segment also helped company to report strong margins. Segmentwise, both automotive and non automotive segment witnessed an expansion in the margins on a YoY and sequential basis.

  • The net profit for the quarter also grew by 48.3% YoY on the back of improvement in the operating margins.

    Segmental Summary
    Rs m 2QCY14 2QCY15 Change (%) 1HCY14 1HCY15 Change (%)
    Automotive Segment
    Revenues 8,047 8,215 2.1% 15244 15313 0.5%
    EBIT 1,628 2,458 51.0% 2882 4418 53.3%
    EBIT % 20.2% 29.9%   18.9% 28.9%  
    Non Automotive Segment
    Revenues 1,090 1,021 -6.3% 2063 1915 -7.2%
    EBIT 186 256 37.6% 331 429 29.6%
    EBIT % 17.1% 25.1%   16.0% 22.4%

    Cost breakup
    (Rs m) 2QCY14 2QCY15 Change (%) 1HCY14 1HCY15 Change (%)
    Raw materials 5,221 4,441 -14.9% 10,103 8,463 -16.2%
    as a % of sales 57.4% 48.3%   58.6% 49.3%
    Advertisement and Sales promotion expenses 714 604 -15.4% 1,335 1,363 2.1%
    as a % of sales 7.8% 6.6%   7.7% 7.9%
    Staff expenses 433 445 2.8% 824 867 5.2%
    as a % of sales 4.8% 4.8%   4.8% 5.1%
    Other expenses 895 984 9.9% 1,709 1,866 9.2%
    as a % of sales 9.8% 10.7%   9.9% 10.9%
    Total expenses 7,263 6,474 -10.9% 13,971 12,559 -10.1%
    as a % of sales 79.8% 70.4%   81.0% 73.2%
What to expect?
The company reported strong margins due to a better product mix (premium products) and weakness in the raw material prices which it seems the company has not passed on completely to customers. However, volumes continue to disappoint. Overtime, because of better technology, the frequency of changing lubricants has come down significantly. This factor, along with the competitive pressure and weak industrial demand is likely to be the key hurdle to raise volumes. Also, the company may have to pass the benefits of lower input costs to customers to boost volumes and this can impact margins to some extent

As per the management, the broad environment still remains challenging, especially for Commercial vehicle oil segment and industrial lubricants. While the company has benefited in a weak crude price scenario, it may experience volatility in input costs due to volatile exchange rate.

Castrol has strong brand, product portfolio and robust financials in its favor. While we believe that it is fundamentally strong business, the rich valuations at which the stock is trading are already taking that factor into account. Castrol at a current price of Rs 495 is trading at a price to earnings (trailing 12 months basis) of around 42 times. We recommend investors to avoid the stock at current prices.

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