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Castrol: Growth engines need lubrication

Nov 15, 2000

The current financial year is not one that Castrol would like to remember. The increased volatility in crude oil prices and rupee-dollar exchange rates has adversely affected the company's performance.

1QFY01 2QFY01 3QFY01
Sales 2,807 3,312 2,901
Other Income 117 20 24
Expenditure 2,335 2,875 2,537
Operating Profit (EBDIT) 472 437 364
Operating Profit Margin (%) 16.8% 13.2% 12.5%
Interest 11 25 15
Depreciation 27 29 29
Profit before Tax 551 403 344
Tax 109 63 62
Profit after Tax/(Loss) 442 340 281
Net profit margin (%) 15.7% 10.3% 9.7%
No. of Shares (eoy) 124 124 124
FDEPS 3.6 2.8 2.3
Annualised EPS 10.8
P/E ratio 18.9

Historically, Castrol's topline has been growing by more than twice that of the industry average. However, there is now some skepticism as to whether the company can sustain such a performance. The industry as a whole grows by an unimpressive 3%-4%.

As the company is barred from marketing its products from petrol pumps, Castrol adopted a novel approach of retailing its lubes through auto part shops or the 'bazaar segment'. However, post 1996 the PSUs were permitted to enter the lucrative bazaar segment.

This resulted in the oil public sector units (PSUs) making inroads into Castrol's forte. With the winds of liberalisation intensifying the PSUs became savvier in marketing their products. Consequently, they have been able to encroach into what was once Castrol's hunting ground.

Besides competition the external environment has turned against Castrol. Crude oil prices have been surging since the beginning of FY99 to touch ten-year highs of $35/ barrel (Brent). Consequently, base oil (primary feedstock) prices have firmed up. This has increased the company's raw material.

Further, Castrol imports 94% of its base oil requirements. The total imports of the company constitute 20% of its turnover. With the rupee depreciating (8% YTD) the company's raw material procurement costs have spiraled.

The crude oil price rise and rupee depreciation have been a double whammy for Castrol. Both these factors have resulted in the company's bottomline being significantly hit. We have estimated that Castrol will report a 28% drop in post tax profits for the current fiscal FY01.

At Rs 203 the company trades on a multiple of 18.9 on the cumulative 3 quarters annualised earnings.

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