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Castrol India: Strong financial health - Outside View by Luke Verghese

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Castrol India: Strong financial health
Jun 14, 2013

The lubricants that it sells is lubricating the wheels of its fortunes in an inimitable manner

This MNC is unique in certain aspects of its functioning as compared to the functioning of the main body of its MNC peers. (The principal shareholders, Castrol UK and BP Mauritius Ltd collectively hold 71% of the outstanding paid up equity of Rs 4.94 bn-while the FIIs hold another 8.1%.). For example, it believes in issuing free shares at the drop of a hat -sometimes without even thinking of the impending consequences- it would appear. Besides, the company has furnished the brief summary of its working results for the past seven years. This again is another oddity as the general norm is to publish the summary results of the past decade. The well perceived reason here is that a decade represents a very specific business lifecycle of an enterprise. In the case of an Indian enterprise it also showcases the vicissitudes of functioning in the ‘vice grip’ of two terms in power of the government at the Centre. But let that be - because the company seems to know better.

Castrol India has issued free shares of 1:1 each twice in the past seven years which had the effect of raising the paid up capital from Rs 1.2 bn to Rs 2.47 bn initially and then to Rs 4.94 bn in 2012. (The principal shareholders obviously have a well thought out plan on the issue of bonus shares, though it is difficult to envision what it is all about). The reserves currently stand at Rs 1.55 bn-which is only a fraction of the paid up capital. But the point to note here is that free shares are issued primarily when the company anticipates better results in the year to end. In this instance the company reported lower profits on the one hand and the pruning of dividend on the other, in line with the fall in profit. That is to say the net post tax profit fell to Rs 4.47 bn from Rs 4.81 bn previously, and the dividend payout including the tax thereon fell to Rs 4 bn from Rs 4.3 bn previously. In effect the very purpose of issuing free shares in the first instance was lost. It would appear that the management was not very clued in on to the forthcoming results when the proposal to issue free shares was first mooted. This is rather strange and does not speak very well of the management. The point to also note is that the management is very liberal when mulling the dividend payment. Almost the entire book profits for the year are paid out as dividend. What is the bigger game plan here please? The other unique feature is that the company does not have a CEO. It makes do with a non executive chairman in Susim Datta-the former top gun at Hindustan Unilever -- and the day to day affairs are handled by the chief operating officer.

A big player

The company has been operating in India as a legal entity since 1979. The initial name plate was Indrol Lubricants & Specialities Ltd given the stifling conditions imposed by FERA (The Foreign Exchange Regulation Act, 1973) which ruled riot over foreign companies and limited the foreign stake holding to 40% in their domestic operations which were deemed to be present in non-priority areas. In 1990 the name was changed to the present nameplate following a dilution in the FERA norms. We are duly informed that the company operates in the core business area of lubricating oils-supplying to three major market sectors--- automotive, industrial, and marine & energy segments. The company has three manufacturing plants and employs 839 people. The four major players -Castrol, IOC, BPCL and HPCL-- contribute approximately 55% of the total market in volume terms. Castrol’s market share is estimated at 25%. Another 20% is accounted for by MNCs such as TotalFinaElf, Shell, Gulf Oil, and Tidewater Oil. The balance 25% is largely local in nature. The latter factor could also imply that the technology involved is not of a very high standard, inspite of the many foreign brands which are strutting their stuff on the domestic turf.

Financial highlights

The financial highlights of the seven years make for pleasant reading. The net revenues from operations have grown consistently each year over that of the base year 2006. In figurative terms the revenues from operations rose from Rs 17.6 bn to Rs 31.2 bn. (The Company also indulges in traded sales, but the share of traded revenues in this total for each individual year is not known for purposes of comparison). So has the profit before tax, barring the minor hiccup in 2011 and 2012. The post tax profits did a similar jig. For accounting purposes the company breaks the revenues into heads of account-automotive and non automotive. The former accounted for 87% of net revenues, and the latter accounting for the balance. The former generated a margin of 20.5% while the latter generated a margin of 17.1%. The dividend payout amounted to close to 77% of the post tax profit. The high payout could partly be due to the fact that the company does not require a high fixed asset base to sell its produce on the one hand, and the point that the company sells almost cash down with low inventory levels to boot, and no long term or short term investments to take care of. Hence the cash support needed for working capital finance too is limited. As is the wont the biggest expense item on revenue account is advertising and sales promotion at Rs 1.13 bn and sale promotion expenses of Rs 1.1 bn. Cumulatively, the expenditure amounts to Rs 2.23 bn. The gross fixed asset base, inclusive of intangible assets of Rs 3.28 bn, generated gross revenues excluding other income of Rs 36 bn. For the matter of record, the accumulated depreciation accounted for 58% of the gross block.

The cash flow statement definitely reveals a company in full flow. The company generated net cash of Rs 4.6 bn (Rs 3.5 bn previously) from operations. The sum splurged on gross block was only a pitiful Rs. 437 m, and with no revenue or capex outflows on account of borrowings as the company is debt free; the company had all the monies in the world to splurge the surplus funds on hand on dividend handouts. It is as simple as that. And with the parent being the biggest beneficiary in the bargain what is the harm anyways?

Superb cash flow management

As stated earlier the company is not only debt free but had a cash lode at year end. The total cash hoard amounted to Rs 5.74 bn. As luck would have it, the company does not have any sidekicks of any hue to support as revealed by the loans and advances schedule. The balance sheet is about as picture perfect as it can get. The trade receivables at Rs 2.2 bn are only a small farthing of the gross sales for the year and the trade payables of Rs 4.36 bn at year end is almost double the trade receivables - detailing its clout in the market. Inventories too at Rs 3.1 bn are only a small slice of the revenues for the year. It is about as rosy as it can get.

Mercifully the Indian sibling is as yet able to keep a lid on the royalty payments to the principals. The total royalty paid in 2012 was limited to Rs 662 m against a higher figure of Rs 733 m previously. It is not known how the royalty payment went southward in a year when the revenues went northwards. Probably there is a hidden sequence here. The inter-se group transactions are also kept at a minimum. The company purchased materials and finished goods worth Rs 612 m from group companies during the year. (The company has furnished the names of 33 group companies where transactions exist with it. The list includes two Indian companies ---BP India Services Pvt. Ltd, and Tata BP Solar India Ltd. The latter exited the group orbit in the middle of 2012 for whatever reason. The activities of the former are not known). It must be added here that the company purchased finished goods/traded goods (what is the difference between the two denominations please?) worth Rs 1.46 bn during the year. Hence it would appear that quite some by value of the finished goods purchased were domestically sourced. However from the evidence available the company does not appear to be making much of a margin on the sale of traded goods. It is not known how the parent will deal with this situation in the future.

Given the rapid pace of industrialisation and hence the growing demand for lubricants - which are used to oil the moving parts of vehicles and of machinery -and given the high brand recall of the name, the company should continue to grow at quite some speed in the immediate years to come.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . 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.


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