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Castrol: Auto upturn gives breather

Nov 26, 2002

The lubricants industry contracted in the past two fiscals with downturn in the auto industry and better engine technology, road infrastructure & lubricants. Pressure on players intensified with increase in competition. Having said that, Castrol India Ltd. (CIL) has managed to reverse the slide in revenues registered in the past two quarters.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net sales 2,555 2,706 5.9% 8,196 8,212 0.2%
Other Income 17 56 223.3% 76 121 58.9%
Expenditure 2,210 2,129 -3.7% 6,965 6,482 -6.9%
Operating Profit (EBDIT) 346 577 66.8% 1,230 1,730 40.6%
Operating Profit Margin (%) 13.5% 21.3%   15.0% 21.1%  
Interest 16 15 -10.5% 54 62 13.4%
Depreciation 33 33 -0.9% 97 99 2.0%
Profit before Tax 314 585 86.5% 1,155 1,690 46.3%
Extraordinary items - -   (45) (7)  
Tax 101 193 92.0% 326 554 69.8%
Profit after Tax/(Loss) 213 392 83.9% 784 1,129 44.0%
Net profit margin (%) 8.3% 14.5%   9.6% 13.7%  
No. of Shares 123.6 123.6   123.6 123.6  
Diluted Earnings per share* 6.9 12.7   8.5 12.2  
P/E Ratio         16.0  
* annualised            

Continuing upturn in the auto industry in FY03 is likely to have offered much needed respite to the lubricants market both in volumes and pricing power. Commercial vehicles (CV), passenger cars (B segment) and two wheelers (motorcycles) are registering healthy double digit growth. We reckon, diesel engine oil (DEO) sales, driven by CV segment and constituting 70% of automotive lubes, has led industry revival. BPCL reported 19% growth in lubricants business. Amalgamation of Tata BP Lubricants has led to presence in the price-sensitive CV market segment, which could have driven the volumes. Going forward, although concern on volumes remain, introduction of higher technology vehicles across the board is likely to shift consumption to high quality - high value lubes.

Despite expected improvement in volumes, raw material costs, which constitutes the largest share of operating expense, was lower by 6% for the quarter. Lower raw material cost, similar to last quarter, have facilitated expansion in operating margins. International crude oil prices (Brent blend) were down 8.1% YoY at $ 25.1/ barrel in first quarter of FY03. Also, the company has completed implementation of an ERP system, which could have facilitated streamlining of business processes. Further, imports constitute 90% of base oil and 36% of chemicals & additives consumption of the company, which consitutes 29%of gross sales. Appreciating rupee over the last six months could have reduced the normal depreciation burden.

With lower base oil prices and implementation of ERP, we mentioned rise in interest expense in 2QFY03 was surprising. However, interest expense has declined in the current quarter. Depreciation charge has remained flat, which could be due to Castrol having shut operations at Mumbai and Karnataka over the past two years.

At Rs 195 the scrip is trading on a multiple of 16.3x 9mFY03 annualised earnings. Valuations over the past two years have declined from 25x earnings. With upturn in the automobile industry, we estimate volumes to grow by 4.3% in 2003. Considering performance in 2Q & 3Q, the company is likely exceed our per share earnings estimate of Rs 11.5 by 6%.

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