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Castrol: Same old story

Oct 24, 2003

Lubricants major, Castrol, has reported a nearly 4% topline growth during the September quarter. However, at the net profit level, the company continues to be hit and has reported a disappointing 27% decline during the quarter.

(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Net sales 2,706 2,812 3.9% 8,213 8,364 1.8%
Other Income 56 48 -15.0% 121 154 27.6%
Expenditure 2,129 2,402 12.8% 6,482 6,817 5.2%
Operating Profit (EBDIT) 577 411 -28.8% 1,730 1,547 -10.6%
Operating Profit Margin (%) 21.3% 14.6%   21.1% 18.5%  
Interest 15 4 -73.3% 62 21 -66.2%
Depreciation 33 36 9.4% 99 106 6.9%
Profit before Tax 585 418 -28.5% 1,690 1,575 -6.8%
Extraordinary items - -   (7) -  
Tax 193 133 -31.3% 554 522 -5.7%
Profit after Tax/(Loss) 392 286 -27.1% 1,129 1,052 -6.8%
Net profit margin (%) 14.5% 10.2%   13.7% 12.6%  
No. of Shares 123.6 123.6   123.6 123.6  
Diluted Earnings per share* 12.7 9.2   12.2 11.3  
P/E Ratio   20.9     17.0  
* annualised            

The decline in profits is largely a result of strengthening of the raw material costs, as compared to last year. The crude prices have strengthened in the past few months. Consequently, the company's raw material costs were up a significant 49% during the quarter. Material costs as a percentage of sales stood at over 66% (as compared to over 46% in the corresponding period last year).

Consequently, operating profits were down nearly 29% and operating margins fell sharply to below 15% levels. The fact that the company's revenues have not picked up enough steam despite the buoyancy in the auto sector, points to the competitive environment prevailing in the segment. Castrol has always been perceived as a premium brand commanding brand loyalty. But lately, PSUs have started pushing their own lubricant brands aggressively.

Cost break-up
as % of net sales 3QFY03 3QFY04 9mFY03 9mFY04
Stock 4.3% -7.1% 1.1% -6.2%
Raw material 46.5% 66.5% 50.0% 62.1%
Staff costs 5.9% 5.6% 5.8% 5.9%
Advertising 3.9% 5.1% 5.3% 4.5%
CIF 4.0% 3.9% 4.1% 3.8%
Other exp 14.1% 11.4% 12.6% 11.3%

Also, the company is mainly present in the bazaar segment and is not available at the petrol pumps and other retail outlets. This seems to have hampered the company's prospects.

The stock is largely lacklustre and is trading at Rs 193 levels, a P/E of 17x annualised 9mFY04 earnings. The increasing competition in the lube segment and Castrol's inability to enhance its distribution network are likely to continually cast a shadow on its prospects.

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