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Castrol - Brand or bust?

Dec 8, 2000

Castrol's stock price has received a new lease of life with the news of the open offer. The parent company, BP Amoco, is planning to acquire an additional 20% shareholding in Castrol (India). BP Amoco had acquired Burmah Castrol, the erstwhile parent of Castrol (India). Consequently, the Indian regulator has stipulated that BP Amoco make an open offer to the shareholders of the Indian subsidiary due to a change in management in the parent company.

Castrol, a December ending company, has reported disappointing figures in all three quarters of the current fiscal, which is in contrast to its performance in earlier years. With the Government opening up the lubes business to private competition - in the non-fuel pump segment - Castrol exhibited strong growth rates as it continuously captured market share year after year. While the industry was growing at a sleepy 3% - 4%, Castrol was zooming along at double-digit rates. Consequently, the markets gave this counter a premium valuation on account of its high growth, distribution strength and strong brand equity. Eventually, classifying it as a FMCG play.

The party, however, seems to be over for Castrol. The company is expected to post a negative top and bottomline growth in the current fiscal. The stagnating retail lubricant market has made individual company growth ever more challenging. Further, the once sleepy PSU oil behemoths are becoming increasingly market savvy to grab a piece of the lucrative retail lubes pie. Entering at lower price points, these companies are successively eating into Castrol's market share.

Murphy, it seems, has cursed Castrol. As if this was not enough, the external environment has become more challenging with crude oil prices soaring to new ten-year highs. The rise in crude prices has resulted in base oil - Castrol primary feedstock - prices spiraling. The rupee depreciation has added to the pressure on the company's bottomline, as Castrol imports almost 50% of its raw material requirement. In FY00, the company imported feedstock worth Rs 2.4 bn; rupee depreciation of 7% escalates costs by Rs 167 m. This swell in costs directly erodes the company's bottomline by 8.2%.

Although the rise in crude oil prices is a temporary phenomenon, the industry growth rates and increasing competition is here to stay. Castrol (India) may need to re-think their strategy to return to their illustrious ways, failing which, the company may need to be viewed as a commodity play.

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