X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Castrol India: Strong financial health - Outside View by Luke Verghese

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

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.

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.

Equitymaster requests your view! Post a comment on "Castrol India: Strong financial health". Click here!

  

More Views on News

Castrol India: Volume Growth Continues (Quarterly Results Update - Detailed)

Aug 2, 2016

Castrol India Ltd has announced results for the second quarter of the current year ended December 2016. The company has reported a year on year (YoY) growth of 5.2% in the net sales while net profits for the quarter grew 12.1% YoY during the quarter.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

CASTROL INDIA SHARE PRICE


Jul 18, 2018 03:37 PM

TRACK CASTROL INDIA

  • Track your investment in CASTROL INDIA with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

CASTROL INDIA - CONOCOPHILLIPS COMPARISON

COMPARE CASTROL INDIA WITH

MARKET STATS