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Castrol: Base oil prices drag bottomline
Aug 12, 2011

Castrol India Ltd. has announced its 2QCY11 results. The company has reported a 6.4% year on year (YoY) increase in the topline and 5% decline in the bottomline for the quarter. Here is our analysis of the results.

Performance summary
  • Topline growth slows down to 6.4% YoY from 14.8% YoY in the previous quarter.
  • Operating profits declined by 12.2% YoY during the quarter. The operating margins also contracted to 25.1% from 30.4% (YoY).
  • Bottomline registered a decline of 5.2% YoY during the quarter, with net profit margins contracting 2.2% (YoY).
  • The company has declared an interim dividend of Rs 7 per share for the CY11.

Financial Performance Snapshot
(Rs m) 2QCY10 2QCY11 Change 1HCY10 1HCY11 Change
Net sales 7,458 7,932 6.4% 14,018 15,464 10.3%
Expenditure 5,193 5,944 14.5% 9,953 11,657 17.1%
Operating profit (EBDITA) 2,265 1,988 -12.2% 4,065 3,807 -6.3%
EBDITA margin (%) 30.4% 25.1%   29.0% 24.6%  
Other income 73 194 165.8% 154 472 206.5%
Interest 6 2 -66.7% 11 6 -45.5%
Depreciation 60 63 5.0% 118 126 6.8%
Profit before tax 2,272 2,117 -6.8% 4,090 4,147 1.4%
Profit before tax margin (%) 30.5% 26.7%   29.2% 26.8%  
Tax 769 692 -10.0% 1415 1356 -4.2%
Profit after tax/(loss) 1,503 1,425 -5.2% 2,675 2,791 4.3%
Net profit margin (%) 20.2% 18.0%   19.1% 18.0%  
No. of shares (m)         247  
Diluted earnings per share (Rs)         20.3  
Price to earnings ratio (x)         25.9  
*on the basis of trailing twelve months earnings

What has driven performance in 2QCY11?
  • The growth in the topline slowed down to 6.4% YoY from 14.8% in the previous quarter (1QCY11). For Automotive segment, the growth in sales slowed down to 3.4% YoY versus 14.9% YoY in the previous quarter. However, the sales registered an impressive growth of 25.5% YoY for non automotive segment and its share in the sales increased to 15% during the quarter from 13% in 2QCY10. For the half year ending June 2011(1HCY11), sales increased by 10.3% YoY.
  • Segmental performance
    (Rs m) 2QCY10 2QCY11 Change 1HCY10 1HCY10 Change
    Automotive
    Sales 6,507 6,729 3.4% 12,171 13,236 8.8%
    EBIT 1,937 1,645 -15.1% 3,443 3,291 -4.4%
    Margin (%) 29.8% 24.4%   28.3% 24.9%  
    Non Automotive
    Sales 933 1,171 25.5% 1,809 2,171 20.0%
    EBIT 286 292 2.1% 542 558 3.0%
    Margin (%) 30.7% 24.9%   30.0% 25.7%  

  • The operating profits for the company declined by 12.2% YoY for the quarter versus 1.1% rise in previous quarter. The margins also declined by 5.3% (YoY) as total expenses increased by 9.5% YoY (as a % of sales). This was mainly on account of increase in the cost of base oil, which is the key raw material for lubricants. The raw material expenses were up 6.6% YoY (as a % of sales) during the quarter. The margins were also down on account of increase in staff costs and advertising costs. However, 'other expenses' and 'CIF (Carriage, Insurance and Freight) expenses' declined as a percentage of sales during the quarter. For 1HCY11, operating profits declined by 6.3% YoY on account of high base oil prices. The raw material prices during the half year increased by 5.1% YoY (as a % of sales). The margins for the half year also declined by 4.4%.
  • Cost break-up
    (Rs m) 2QCY10 2QCY11 Change 1HCY10 1HCY11 Change
    Raw materials 3,621 4,378 20.9% 6,845 8,343 21.9%
    % sales 48.6% 55.2%   48.8% 54.0%  
    Staff cost 244 297 21.7% 460 556 20.9%
    % sales 3.3% 3.7%   3.3% 3.6%  
    Advertising cost 361 534 47.9% 825 1,042 26.3%
    % sales 4.8% 6.7%   5.9% 6.7%  
    Carriage, Insurance & Freight 227 213 -6.2% 447 436 -2.5%
    % sales 3.0% 2.7%   3.2% 2.8%  
    Other expenditure 740 522 -29.5% 1,376 1,280 -7.0%
    % sales 9.9% 6.6%   9.8% 8.3%  
    Total cost 5,193 5,944 14.5% 9,953 11,657 17.1%
    % sales 65.5% 74.9%   71.0% 75.4%  

  • The bottomline for the company registered a decline of 5.2% YoY and the margins declined by 2.2% YoY. This compared to a 17% YoY increase in net profits and 0.2% YoY increase in margins in the previous quarter (1QCY11). The decline in the net profits was modest as compared to the operating profits decline on account of reduction in tax expenses (down 10% YoY) and a whopping 166% rise in other income. For the half year, the bottomline was up 4.3% YoY while net profit margins declined 1% YoY.

What to expect?

The high costs of base oil and additives continued to be a concern for the company during the quarter. For the same reason, the company had to shut down its plant in Chennai. Despite a continuous focus on cost efficiencies and price increases to protect the margins, the operating profits were adversely impacted. With investment in brands and marketing activities, we expect the company to maintain its market share in the lubricants segment. In that direction, it has signed a partnership agreement with BMW India to supply automotive lubricants to the BMW dealer network in the country. The company also extended its strategic partnership with Tata Motors for a further period of five years.

Going forward, we expect base prices to relent on account of weakness in crude prices. However, we expect that advantage to be nullified on account of recent developments in the global economy, which will have an adverse impact on the demand for lubricants. At a price of Rs 526, the stock is trading at 25.9x its trailing 12 months earnings. As per our estimates, the current stock prices imply a point to point return of 7% and a compounded average annual returns of 3% with respect to target price at the end of CY13. We have a cautious outlook on the stock.

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