• AUGUST 11, 2000

Castrol's growth engine sputters

1HFY00 annualised results do not portend a very good story for Castrol. The company is expected to report a de-growth in earnings as compared to the last two years when it reported an earnings growth of 14%. The growth engine seems to have sputtered but can it relubricate its growth engine?

(Rs m)FY99FY00*Change
Sales 11,956 12,782 6.9%
Other Income 231 274 18.7%
Expenditure 9,499 10,964 15.4%
Operating Profit (EBDIT) 2,457 1,818 -26.0%
Operating Profit Margin (%)20.6%14.2% 
Interest 26 72 174.5%
Depreciation 101 112 11.1%
Profit before Tax2,5611,908-25.5%
Tax 517 344 -33.5%
Profit after Tax/(Loss) 2,044 1,564 -23.5%
Net profit margin (%)17.1%12.2% 
No. of Shares (eoy) 124 124  
Diluted Earnings per share16.512.7 

Castrol's major raw material input is base oil and it imports 90% of its requirements. Based on the annualised results Castrol is expected to take a hit on its operating and after tax profits as margins come under pressure. This pressure is largely from two counters.

In FY99, although, crude oil prices started their upward journey, downstream products (base oil) followed suit with a lag effect. Castrol, however, had already entered into forward contracts and locked in its procurements at lower prices. Consequently, it was able to report a healthy performance for FY99.

However, in the current year the situation has changed. The rise in crude prices has percolated into downstream products. Further, the company no more has the comfort of low priced forward contracts as the rise in price is already factored into the contract.

The agony does not end there. Castrol's import bill is in the range of Rs 2 bn and is expected to be even higher for the current year with high base oil prices. As mentioned earlier the company imports 90% of its base oil requirement and its procurement price will be hit by the depreciation in the rupee. Therefore its operating and net profit will take a double whammy. This is probably the reasson for the stock being battered to its 52 week low on the bourses.

Castrol historically has traded at an earnings multiple of 26.7. At the current price of 257 it still trades at a multiple of 20 on 1HFY00 annualised earnings.

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