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Castrol: Propelled by lower crude prices

Oct 27, 2009

Performance summary
  • Topline increases by 2%YoY during 3QCY09.
  • EBITDA margins jump to 25%, from 16% in 3QCY08 on the back of a 15% (as a percentage of sales) decline in raw material costs, especially base oil.
  • Other income grows by 1% during the quarter.
  • Bottomline registers a whopping 60% YoY growth during 3QCY09 due to expansion in operating margins.
  • For 9mCY09, topline clocks a 2% YoY growth, while bottomline increases by 40%.

Standalone financial snapshot
(Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
Net sales 5,581 5,667 1.5% 16,772 17,156 2.3%
Expenditure 4,664 4,229 -9.3% 13,407 12,583 -6.1%
Operating profit (EBDITA) 917 1,438 56.8% 3,365 4,573 35.9%
EBDITA margin (%) 16.4% 25.4%   20.1% 26.7%  
Other income 70 71 1.4% 233 232 -0.4%
Interest 7 6 -14.3% 27 21 -22.2%
Depreciation 61 71 16.4% 191 204 6.8%
Profit before tax 919 1,432 55.8% 3,380 4,580 35.5%
Tax 323 476 47.4% 1,227 1,577 28.5%
Profit after tax/(loss) 596 956 60.4% 2,153 3,003 39.5%
Net profit margin (%) 10.7% 16.9%   12.8% 17.5%  
No. of shares (m)         123.6  
Diluted earnings per share (Rs)*         28.1  
Price to earnings ratio (x)*         19.3  
*On trailing12- months earnings

What has driven the performance in 3QCY09?
  • The topline of Castrol grew by 2% YoY in 3QCY09. However, EBITDA margins expanded by 9% due to a 15% (as a percentage of sales) decline in raw material costs, especially base oil and a premium product mix. However, staff expenses and advertising costs have grown at a faster pace than sales. The company increased its advertising spend this quarter towards the campaign for its four stroke motorcycle oils, Castrol Activ and diesel engine oil for trucks and tractors, Castrol CRB.

    Cost break-up
    (Rs m) 3QCY08 3QCY09 Change
    Raw materials 3,467 2,694 -22.3%
    % sales 62.1% 47.5%  
    Staff cost 252 300 19.0%
    % sales 4.5% 5.3%  
    Advertising cost 215 400 86.0%
    % sales 3.9% 7.1%  
    Carriage, Insurance & Freight 181 184 1.7%
    % sales 3.2% 3.2%  
    Other expenditure 549 651 18.6%
    % sales 9.8% 11.5%  
    Total cost 4,664 4,229 -9.3%
    % sales 83.6% 74.6%  

  • Castrol’s management has stated that it expects a modest growth of around 10% going forward. 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. The industrial and marine segments are likely to take a backseat.

  • Castrol is not looking at expansion in the distribution sector in CY09. 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 management had earlier stated that it expected market demand to remain sluggish during the fiscal. This was expected to negatively impact Castrol’s volumes in the short term. However, the benefit of raw material cost reduction is now being reflected in the company’s margins.

At the current price of Rs 543, the stock trades at a price to earnings multiple of 22 times our CY11 estimated earnings. We believe Castrol is richly valued at this juncture and advice against taking fresh positions in the stock.

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