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Castrol: High input costs drag margins
Nov 1, 2011

Castrol India Ltd. has announced its results for the third quarter of financial year 2011 (3QCY11 results). The company has reported a 4.8% year on year (YoY) increase in the topline and 18.6% decline in the bottomline for the quarter. Here is our analysis of the results.

Performance summary
  • Topline growth slows down to 4.8% YoY from 6.4% YoY in the previous quarter (2QCY11)
  • Operating profits declined by 21.7% YoY during the quarter. The operating margins also contracted to 19.7% from 26.4% (YoY).
  • Bottomline registered a decline of 18.6% YoY during the quarter, with net profit margins at 14.1%, contracting by 4.1% (YoY).

Financial Performance Snapshot
(Rs m) 3QCY10 3QCY11 Change 9mCY10 9mCY11 Change
Net sales 6,430 6,741 4.8% 20,448 22,205 8.6%
Expenditure 4,733 5,413 14.4% 14,686 17,070 16.2%
Operating profit (EBDITA) 1,697 1,328 -21.7% 5,762 5,135 -10.9%
EBDITA margin (%) 26.4% 19.7%   28.2% 23.1%  
Other income 72 145 101.4% 226 617 173.0%
Interest 6 9 50.0% 17 15 -11.8%
Depreciation 63 62 -1.6% 181 188 3.9%
Profit before tax 1,700 1,402 -17.5% 5,790 5,549 -4.2%
Profit before tax margin (%) 26.4% 20.8%   28.3% 25.0%  
Tax 531 451 -15.1% 1946 1807 -7.1%
Profit after tax/(loss) 1,169 951 -18.6% 3,844 3,742 -2.7%
Net profit margin (%) 18.2% 14.1%   18.8% 16.9%  
No. of shares (m)         247  
Diluted earnings per share (Rs)*         19.4  
Price to earnings ratio (x)*         25.4  
*on the basis of trailing twelve months earnings

What has driven performance in 3QCY11?
  • The growth in the topline slowed down to 4.8% YoY from 6.4% in the previous quarter (2QCY11). The company has increased selling prices by 15% during the quarter to partially offset the increase in cost of raw material. For Automotive segment, the growth in sales came at 3.1% YoY versus 3.4% YoY in the previous quarter. The sales growth for non automotive segment also slowed down to 15.0% YoY from 25.5% YoY in the previous quarter and its share in the sales increased to 15% during the quarter from 14% in 3QCY10. For the 9 months ending September 2011(9mCY11), overall sales increased by 8.6% YoY, with growth from automotive and non automotive segment contributing to 7% YoY and 18% YoY respectively.
  • Segmental performance
    (Rs m) 3QCY10 3QCY11 Change 9mCY10 9mCY11 Change
    Automotive
    Net Sales 5,484 5,652 3.1% 17,655 18,888 7.0%
    Operating Profit 1,402 1,042 -25.7% 4,333 4,845 11.8%
    Operating Profit Margins (%) 25.6% 18.4%   24.5% 25.7%  
    Non Automotive
    Net Sales 925 1,064 15.0% 2,734 3,235 18.3%
    Operating Profit 246 257 4.5% 815 788 -3.3%
    Operating Profit Margins (%) 26.6% 24.2%   29.8% 24.4%  

  • The decline in the operating profits during the quarter worsened to 21.7% YoY from 12.2% YoY for the previous quarter. The margins came at 19.7%, down 6.7% (YoY) as total expenses increased by 6.7 % YoY (as a % of sales). This was mainly on account of increase in the cost of base oil, which is the key raw material for lubricants. The raw material expenses increased to 58.6% from 52.4% (both as a % of sales) during the quarter. Staff costs were up 18.2% and more than offset the 4% decline in advertising costs. The 'other expenses' increased by 0.5% (as a % of sales) during the quarter. For 9mCY11, operating profits declined by 10.9% YoY on account of high base oil prices with margins coming at 23.1% from 28.2% last year. The raw material prices during the 9 months increased by 20.4% YoY .During the quarter, the auto and non automotive segment registered operating margins of 18.4% (25.6% last year) and 24.2% (26.6% last year). For the 9 months, the margins for auto and non automotive segment came at 25.7% (24.5% last year) and 24.4% (29.8% last year) respectively.
  • Cost break-up
    (Rs m) 3QCY10 3QCY11 Change 9mCY10 9mCY11 Change
    Raw materials 3,367 3,948 17.3% 10,212 12,291 20.4%
    % sales 52.4% 58.6%   49.9% 55.4%  
    Staff cost 269 318 18.2% 729 874 19.9%
    % sales 4.2% 4.7%   3.6% 3.9%  
    Advertising cost 451 433 -4.0% 1636 1685 3.0%
    % sales 7.0% 6.4%   8.0% 7.6%  
    Carriage, Insurance & Freight 184 193 4.9% 631 629 -0.3%
    % sales 2.9% 2.9%   3.1% 2.8%  
    Other expenditure 462 521 12.8% 1478 1591 7.6%
    % sales 7.2% 7.7%   7.2% 7.2%  
    Total cost 4,733 5,413 14.4% 14,686 17,070 16.2%
    % sales 73.6% 80.3%   71.8% 76.9%  

  • The bottomline for the company registered a decline of 18.6% YoY and the margins declined by 4.1% YoY. The decline in the net profits was slightly lower as compared to the operating profits decline on account of increase in other income (up 101% YoY). For the 9 months, the bottomline was down 2.7% YoY while net profit margins came at 16.9% (versus 18.8% last year).

What to expect?
The high costs of base oil and additives continued to be a concern for the company during the quarter. The company is focusing on cost efficiencies and price increases to protect the margins, however, the margins are still suffering.

As per the management, the price hike by 15% to partially offset the 30% increase in unit cost of goods (by almost 30%) over the previous year put pressure on the retail value chain. Besides, lower liquidity, higher finance charges and the high inflation were a cause of concern. However, the institutional business continues to grow despite a moderation in Index of Industrial Production (IIP). The management expects that pricing equilibrium to be better in 4QCY11. On costs front, the company may face challenge as rupee continues to weaken against the dollar. Also, the demand for lubricants may slow down on account of tough global economic situation. At a price of Rs 493, the stock is trading at a PE of 25.4 (on a trailing 12 months basis). We will revise our projections post results discussion scheduled this week and update our subscribers with the fresh recommendations.

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