Castrol India: En route to a good year

Robust demand and a low base point to strong earnings growth for the lubricants company.

Castrol India reported first quarter CY2010 (ending March 31st 2010) results with a 53.6 per cent year-on-year jump in net profit to Rs 117 crore. In a clear parallel to the booming auto sales in India, the lubricant manufacturing and marketing company saw sales rise 26.9 per cent year-on-year to Rs 750.7 crore in the quarter, with auto and industrial lubricant sales increasing 29 per cent year-on-year.

Sale volumes were distinctly higher at 54.6 million litres sold this quarter compared with 45.2 million litres in the first quarter of CY2009. Although not directly comparable, given seasonality of demand, volumes have grown 6.35 per cent sequentially as well, which is significant given that Q2 and Q4 are the best quarters as per calendar year, according to Kotak Institutional Equities. It adds that a price rise in January 2010 has improved realisations this quarter, which averaged at Rs 120.10 per litre compared with Rs 112.5 per litre in 1QCY09.

The price of base oil, a key input, had declined during the first half of last year, leading to strong operating profit margins of 32 per cent in June 2009 quarter. But, as its price rose, it impacted Castrol’s margins that fell in subsequent quarters of September 2009 (26.7 per cent) and December (21.5 per cent).

The hike in product prices, favourable trend in costs of raw materials and better revenue mix (premium products) have led to a sharp improvement in operating profit margins in the March 2010 quarter. These were up by 413 bps year-on-year and 725 basis points sequentially to 28.76 per cent. A 21.7 per cent year-on-year decrease in employee expenses after a restructuring exercise, where employee headcount was cut by 10 per cent in 2008, has also helped boost margins as also a mark-to-market provisioning of retirement funds, analysts say.

Going ahead, a stronger rupee outlook will also boost margins, which will otherwise feel the impact of higher crude oil prices on raw material costs. The company also hasn’t passed through the import duty hikes of 10.3 per cent on base oils outlined in the Budget as price hikes, which could pinch margins. However, alongside a healthy demand scenario, the low base should continue to boost sales volume growth rates till the end of the year.

The stock, which has outperformed the Sensex by about 22 per cent in the last three months, closed 2.5 per cent higher at Rs 389 on Friday. At current levels, it trades at a fairly expensive valuation of 19 times consensus analyst CY2012 EPS estimates of Rs 20.33.