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Castrol: SEBI protects investor interest - Views on News from Equitymaster
 
 
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  • Sep 12, 2001

    Castrol: SEBI protects investor interest

    The Castrol stock has climbed 13% in the last three months whereas the BSE Sensex has declined by 9.9% in the same period. The stock has jumped by 24.6% since August 1, 2001. This is due to the Mumbai High Court ruling in favour of the Securities Appellate Tribunal (SAT). In fact, the SEBI has ordered BPAmoco & Castrol U.K to pay interest for the delay in carrying out the buyback.

    The original open offer by BP Amoco & Castrol U.K was made at Rs 312, which was the 26 month average market price existing on July 7, 2000 the date the global acquisition came into effect. However, SEBI is of the opinion that the parent should take the acquisition announcement date, March 14, 2000, as the benchmark for pricing the open offer. In which case, the open offer should be priced at Rs 351. However, BP Amoco and Castrol UK decided to contest this ruling before the SAT, which ruled in favour of the SEBI. BP Amoco and Burmah Castrol then contested this ruling at the Mumbai High Court, which also upheld the Appellate's decisions. SEBI, however, has ordered the company to pay interest on the buyback price for delaying the proceedings, which was then upheld by the SAT. As per reports, the SEBI has not yet approved the offer document due to ambuiguity regarding the interest payment. BPAmoco & Burmah Castrol have been ordered to pay interest @ 15% p.a. from August 8, '00 to September 7, '01.

    Shareholding pattern
    (no. of shares in m)  
    Shares Outstanding 123.5
    Shares held by Castrol U.K 63.0
    Free Float 60.5
    Maximum open offer (@20%) 24.7
    The company has managed a comeback in the second quarter of calendar year '01. Sales and post tax profits were higher by 4.7% and 11.8% respectively. Operating margins also rose by 160 basis points. The financial performance seemed to be driven by strict vigil over cost and better realisations. But more importantly, the company seems to have reaped the benefits of lower feedstock (base oil) cost with crude oil prices softening in the first quarter of 2001 (considering the company enters into forward contracts for procuring base oil and consequently is locked into lower procurement prices for the June '01 quarter).

    Arbitrage Opportunity?
      SEBI BPAmoco
    % buy back of free float* 40.8% 40.8%
    Open offer price 408.0 351.0
    CMP** 256.0 256.0
    Premium to CMP 59.4% 37.1%
    Realisation from open offer 166.5 143.2
    Break-even price 151.2 190.5
    1HFY02 annualised earnings 9.9 9.9
    P/E Ratio (PER) 15.3 19.2
    * Assuming all non-promoter shareholders tender in their shares
    ** CMP Current market price
    Nevertheless, the health of the lubricants industry continues to remain feeble. The sector witnessed de-growth of an estimated 10% in the last fiscal. Key drivers of consumption are still showing sluggishness with the index of industrial production (IIP) estimated to grow by 3% in 1QFY02 compared to above 6% in the same quarter of the previous year. The auto sector, especially commercial vehicles, is still showing weakness. Further, crude oil prices in 2Q of calendar year '01 climbed back to $26 / barrel. Consequently, higher feedstock prices could apply pressure on operating margins.

    Two scenarios have been analysed. One with a buyback price of Rs 408 as ordered by SEBI (taking interest calculation) and Rs 351 as agreed by BP Amoco. The break-even price is the post buyback price of the Castrol India scrip for the investor to come out quits in the deal. Therefore, to register any gains, the stock price of CIL will have to trade above these levels post buyback.

    There is a definite re-rating impending post buy back, which has held up the counter. The company has stated that the automotive lubes segment is expected to grow by only 2.5% p.a. over the next five years. Oil prices continue to remain high, leading to firm base oil prices (key feedstock). Increased competitive pressure mainly from the PSUs. The automobile industry continues to remain in the doldrums. All this could adversely impact the future earnings ability of the company and consequently, the valuations. Nevertheless, the arbitrage opportunity has turned more favourable compared to the time we initially carried the story.

     

     

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