Private sector lubricants major, Castrol has announced results for the third quarter of FY05, reporting 8% and 9% YoY growth in topline and bottomline respectively. Operating margins have witnessed an improvement of 60 basis points.
India’s largest private sector lubricants player
Castrol India is the largest private sector lubricants player with a strong hold in the bazaar segment. The company has over 20% of the market share in the lubricating oil business. A major chunk of its revenues (nearly 86%) come from the automotive segment, which enable the company generate higher margins. The balance is concentrated towards the industrial segment, giving the company strong volumes although at wafer-thin margins.
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What has driven performance in 1QFY05?
Automotive segment leads topline growth: Growth in 3QFY05 topline could be attributed to a strong growth in the automotive segment which witnessed a YoY growth of nearly 20% in the quarter as compared to the corresponding period last fiscal. Sales could be driven largely by the fact that tractor sales have outperformed the industry and Castrol has benefited from the same, being a major player in the tractor fuels business. Having said that, the company has also benefited from the strong industrial activity witnessed during the quarter. Also, the company has increased its focus on premium branded fuels, which have resulted in an improvement in realizations. To put things in perspective, Castrol had recently hiked product prices by nearly 5%.
Inventory gains aid margin expansion: Operating margins have improved by 60 basis points on account of a 14% dip in raw material costs as a result of inventory gains. Further, the company has also been able to control staff and advertisement expenditure. Also, higher realizations boosted income as a result of the price hiked during the quarter. Other expenditure has, however, increased marginally by nearly 80 basis points.
Other income aids net profits: The bottomline growth of 8.8% is due to better realizations and control over expenditure. Further, the company also witnessed a 29% growth in other income, which further boosted the bottomline. Also, while depreciation declined by nearly 6% while a rise in interest expenditure affected the bottomline to a certain extent.
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What to expect?
At Rs 166, the stock is trading at a P/E multiple of 16.5 times annualised 3QFY05 earnings. We believe that Castrol is likely to witness good times ahead as a result of continuing buoyancy in the auto sector. The company is highly vulnerable to base oil prices, which account for nearly 55% of the raw material costs. Given the competitive advantage that the domestic players have in terms of reach and visibility, we believe Castrol is likely to witness intensifying competition going forward. However, strong dividend yields, shall keep long-term investors interested.
Castrol India Ltd has announced results for the second quarter of the current year ended December 2016. The company has reported a year on year (YoY) growth of 5.2% in the net sales while net profits for the quarter grew 12.1% YoY during the quarter.
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