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Castrol: Input costs spoil the party
Nov 11, 2008

Performance summary
  • Topline increases by 30% YoY during 3QCY08.

  • EBITDA margins decline to 16.4%, from 19.3% in 3QCY07.

  • Other income registers a decline of 19% YoY during the quarter.

  • Bottomline registers a growth of 10% YoY owing to erosion in operating margins and lower other income.

  • For 9mCY08, topline clocks a 18% YoY growth, while bottomline increases by 33%



Standalone financial snapshot
(Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net sales 4,311 5,581 29.5% 14,133 16,724 18.3%
Expenditure 3,481 4,664 34.0% 11,656 13,408 15.0%
Operating profit (EBDITA) 830 917 10.5% 2,477 3,316 33.9%
EBDITA margin (%) 19.3% 16.4%   17.5% 19.8%  
Other income 86 70 -18.5% 237 281 18.4%
Interest 7 7 0.0% 37 27 -26.2%
Depreciation 51 61 18.7% 149 191 28.3%
Profit before tax 858 919 7.2% 2,529 3,379 33.6%
Tax 315 323 2.4% 912 1,227 34.6%
Profit after tax/(loss) 542 596 9.9% 1,617 2,152 33.1%
Net profit margin (%) 12.6% 10.7%   11.4% 12.9%  
No. of shares (m)         123.6  
Diluted earnings per share (Rs)*         22.00  
Price to earnings ratio (x)*         12.7  
*On trailing twelve months earnings

What has driven the performance in 3QCY08?
  • Higher price realisations have led the 30% YoY growth in topline. The core lubricant business is driven more by value than volume as the company’s focus has centered on advanced formulations required for modern automobiles and machines. While these machines use lower quantum of lubes, they require higher specification lubricants that are premium in nature.

  • Raw materials costs shot up by 47 % in 3QCY08 on a YoY basis. As percentage of sales, they increased by 7%. Although the cost of crude oil is dropping, the price of base oil has not yet followed this trend and continues to be at high levels.

  • Castrol continues to support its brands aggressively through innovative advertising and sales promotion initiatives as seen in the 13% YoY increase in advertising cost in 3QCY08.

  • The company continues to focus on its long-term strategy of up trading consumers by offering higher value products like the Castrol CRB. It tries to upgrade its product portfolio and offers superior value through the use of synthetic technology in its key brands like Castrol Magnatec and Castrol Power1.

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. Castrol BikeZone – a franchised motorcycle servicing concept – is also set for fast expansion.

While base oil price will eventually drop, it is expected that some of the benefits will be offset by the sharp devaluation of the Indian Rupee over last 6 months against the US Dollar. Moreover, the volume growth is likely to be impacted in the short term due to the economic slowdown.

At the current price of Rs 280, the stock trades at a price to earnings multiple of 12.7 times our estimated CY10E earnings. As such, the stock seems fairly valued at the current levels.

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