Castrol losing out to competition

Falling volumes and realisations impact revenues which fall 8% yearly to Rs 791 cr

Castrol India’s results for the quarter ended December were weak on many parameters. Falling volumes and realisations hit revenue, which fell eight per cent over a year to Rs 791 crore, much lower than the Bloomberg consensus estimate of Rs 861 crore.

Both its business segments, automotive (86 per cent of revenue) and non-automotive, saw a fall in volumes and realisations, say analysts at Motilal Oswal. The company lost market share in the commercial vehicles segment due to competition and lower prices from peers. However, it managed to protect its market share in the high-margin personal mobility segment.

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Soft input costs aided Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins, which expanded 272 basis points (bps) over a year to 27.8 per cent. This and the doubling of 'other income' to Rs 22 crore pushed up 'profit before tax' by nine per cent to Rs 225 crore. But, as the tax rate rose from 36 per cent to 37.4 per cent, it restricted net profit growth to 6.7 per cent, at Rs 140.8 crore, against the consensus estimate of Rs 163 crore.

Castrol's performance was in contrast to Gulf Oil Lubricants, which reported strong volumes, revenue, and earnings growth. Notably, Gulf Oil has increased promotions and discounts since January to get more market share.

Given the results, the Castrol stock fell 7.4 per cent on Thursday to Rs 377 against a Sensex fall of 0.5 per cent. The stock now trades at 28 times the 2016 estimated earnings, slightly below its historical average one-year forward price-to-earnings ratio of 29.

While the valuations are reasonable, the intensifying competitive environment could have a bearing on Castrol's margins, say analysts. "We see competition increasing, especially in the business-to-business segment, leading to lower-than-expected margins in the coming quarters," says Alok Deshpande of HSBC.

While Castrol is increasingly aligning its pricing with that of competitors, to ensure its premium here remains 35-40 per cent, analysts at IIFL believe its power in this regard has eroded over the years. Earnings growth, pegged at 10 per cent in 2016, could be lower.

Castrol's leadership position and strong brand value are key strengths. It needs to be seen how well this and its stronger distribution network of 105,000 dealers (Gulf Oil's is at 58,000) help the company protect its margins and market share.