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Castrol: Product mix offsets cost - Views on News from Equitymaster

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Castrol: Product mix offsets cost

Oct 13, 2010

Castrol has announced its 3QCY10 results. The company has reported a 14% YoY and 22% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline increases by 14%YoY during 3QCY10 on the back of higher realisations.
  • EBITDA margins expand to 26.4%, from 25.4% in 3QCY09 despite a 4.8% (as a percentage of sales) increase in raw material costs.
  • Other income increases by 1.4% during the quarter.
  • Bottomline registers a 22% YoY growth during 3QCY10.
  • For 9mCY10, Castrol registers a 19% YoY topline growth and 28% YoY bottomline growth.

Standalone financial snapshot
(Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net sales 5,667 6,430 13.5% 17,156 20,448 19.2%
Expenditure 4,229 4,733 11.9% 12,583 14,706 16.9%
Operating profit (EBDITA) 1,438 1,697 18.0% 4,573 5,742 25.6%
EBDITA margin (%) 25.4% 26.4%   26.7% 28.1%  
Other income 71 72 1.4% 232 226 -2.6%
Interest 6 6 0.0% 21 17 -19.0%
Depreciation 71 63 -11.3% 204 161 -21.1%
Profit before tax 1,432 1,700 18.7% 4,580 5,790 26.4%
Tax 476 531 11.6% 1,577 1,946 23.4%
Profit after tax/(loss) 956 1,169 22.3% 3,003 3,844 28.0%
Net profit margin (%) 16.9% 18.2%   17.5% 18.8%  
No. of shares (m)         247.3  
Diluted earnings per share (Rs)*         18.8  
Price to earnings ratio (x)*         26.8  
* On a trailing 12 months basis

What has driven the performance in 3QCY10?
  • The topline of Castrol grew by 14% YoY in 3QCY10. The company has seen a sharp increase in its raw materials cost driven by rising base oil and other input costs. Despite this, the company has continued to grow margins through a combination of premium product mix, and strategic pricing actions.
    Cost break-up
    (Rs m) 3QCY09 3QCY10 Change
    Raw materials 2,694 3,367 25.0%
    % sales 47.5% 52.4%  
    Staff cost 300 269 -10.3%
    % sales 5.3% 4.2%  
    Advertising cost 400 290 -27.5%
    % sales 7.1% 4.5%  
    Carriage, Insurance & Freight 184 184 0.0%
    % sales 3.2% 2.9%  
    Other expenditure 651 623 -4.3%
    % sales 11.5% 9.7%  
    Total cost 4,229 4,733 11.9%
    % sales 74.6% 73.6%  

  • Castrol’s management has stated that it expects volume growth going forward although inflation in input costs will affect margins. With crude prices hovering around US$ 80 to US$ 85 per barrel it likely that raw material prices will harden in the future. The company intends to focus on the strategic growth areas like cars, motorbikes and tractors , where it expects to grow in volume and value terms. In fact, the company has recently intensified its activities in rural markets with the Sanjeevani programme aimed at directly contacting farmers in 35,000 villages to explain the benefits of Castrol CRB Plus for tractors. It has reached out to over 2 m tractor owners over the period of one year since its launch. The industrial and marine segments are likely to take a backseat.

  • Castrol is not looking at expansion in the distribution sector in the near term. Instead it plans to focus on improving the productivity of its existing network of 270 distributors, which service its 70,000 outlets.

What to expect?
Castrol 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. It also runs Castrol BikeZone – a franchised motorcycle servicing concept.

The benefits of a growing economy and the company’s marketing push are showing in its topline growth. However, the benefit of raw material cost reduction now reflects in the company’s margins and is likely to shrink with an upward trend in crude oil prices.

At the current price of Rs 504, the stock trades at a price to earnings multiple of 32 times our CY12 estimated earnings. We believe Castrol is richly valued at this juncture and advice against taking fresh positions in the stock.

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