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Castrol India: A well oiled company - Outside View
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Castrol India: A well oiled company
May 12, 2010

Strange indeed are the ways of Indian corporate and their CEOs. A company's way of celebrating the CEO's swan song is to ring in the right notes of the Indian kind.This is precisely what happened when Naveen Kshatriya decided to hang up his boots in 2009 and canter out into the deepening sunset. It literally flogged itself to death in 2009 to rustle up a higher rupee turnover in spite of lower volume sales, generate significantly more cash and, accommodate a record 250 % dividend and payout, while issuing 1:1 bonus shares to boot. Mr Kshatriya will definitely be remembered for long by Castrol's principal shareholders - Castrol and BP of the UK who between them hold close to 71% of the equity---for his yeoman services to his principals. Seriously, Castrol should think of changing its CEO every 3-4 years .

For sure Castrol is no lilliputian in the market-with its strong brand equity, it claims to service close to 20% of the overall volumes market in lubricating oils, greases and brake fluid, and, by catering to both the auto and industrial segment. This market share is in direct competition to the big three-IOC, BPCL and, HPCL - the latter three are also in the big oil biz. Between these four top guns, they control some 70% of the overall volume market share. What is most interesting about Castrol's operations is that it appears to have dealings with some 75 other group subsidiaries!!!!

But indeed the going in 2009 was tough. Inspite of a sharp 25% increase in volume production capacity at 2.36 lakh kilo litres a year during 2009 (based on single shift working) which unfortunately the company could not flog, it actually produced 2% less at 2.03 lakh kilo litres and for good reason at that. Volume sales you see were down 5% at 2.03 lakh kilo litres, though it realized 5% more value from the volumes that it sold.

The management claims that the new high tech and high power automobiles and the commissioning of fresh capacities in the industrial sector are delivering the value in the market place for the lubricant sector-and this trend will grow exponentially in the future.

By resorting to such tricks as drawing down inventories, keeping the squeeze on debtors and getting more mileage from trade creditors too (admirably enough in a year of tougher market conditions), it was able to squeeze out more cash from manufacturing operations. It also appears to have handled its imports well given the fluctuating forex rates -imported raw materials accounted for 47% of all raw material consumption. It imports base oils and additives and it buys them indigenously too!!!!

Thus, the net cash generated from operations grew exponentially to Rs 5.7 bn from Rs 1.6 bn previously. This then appears to be a sign of what the company can do if it wants to, and hopefully will be implemented to the hilt in future.

Future growth will thus be double fisted for Castrol. On the one hand it may have to pump in more investment into manufacturing capacities - unless it decides to shift gears and go for double shift production (which also begets the question of why it would want to go for capacity addition in the first place).

The company is in an advantageous position here. Its present gross fixed asset base is a mere Rs 3 bn, including capex in the making. On the other, it will have to shift production to make more high value added lubes to cater to the increasingly more sophisticated market. It will also have to spend more money on advertising and sales as its competitors get into the act. Already in 2009 such expenditure rose sharply to Rs 1.5 bn from around Rs 1 bn previously.

But given the cash in its kitty, its zero debt gearing and the well established brand value of its product, the company can well look forward to a most rewarding future.

Disclosure: Please note that I am not a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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