Castrol India: Volume and margin gains

Economic revival aided volume growth, while lower input costs boosted profitability.

Even after Castrol India reported a 70 per cent rise in net profit to Rs 80.80 crore for the fourth quarter ended December 2009 and announced a bonus of one share for every one held, the Street wasn’t impressed. Castrol’s stock was the biggest loser among Group-A stocks on Thursday. It declined 8.08 per cent to Rs 654 as against the Sensex’s 0.62 per cent fall. The decline can be attributed to its significant outperformance since the start of 2010; it has risen 17 per cent since then while the Sensex has gained just 6 per cent in the period.

For the December quarter, the 13.7 per cent increase in net sales to Rs 609.5 crore was the result of a 17 per cent rise in lubricant volumes. An upturn in economic growth and focus on growing segments, along with the benefit of a low base of 2008, aided robust volume growth.

The non-automotive lubricant business, though a small contributor to revenues, recorded a 6.4 per cent rise in net sales to Rs 81.9 crore. The first nine months saw sales fall 12 per cent to Rs 228 crore. While sales were marginally lower than the Rs 84.2 crore in the September 2009 quarter, the numbers suggest an uptick in industrial activity.

The company, however, posted a sharp increase of 708 basis points in operating profit margins at 20.88 per cent. Operating profits rose 72 per cent to Rs 121 crore, helped by cheaper base oil. Prices of base oil, which peaked around $1,550 a tonne in August 2008 and later slipped to $1,100 a tonne in December 2008, are hovering at $900-925. That apart, steps for innovating new formulations (including finding substitutes for inputs) and cost management helped improve margins.

Operating profit margins would have been better but for the one-time cost of readjusting the company’s BikeZone channel. These are included in other expenditure, which surged 82 per cent to Rs 96 crore during the quarter.

For the year ended December 2009, net sales were higher by 5 per cent at Rs 2,318 crore, while net profit surged 45 per cent to Rs 381 crore (earnings per share of Rs 30.82). With economic activity picking up, analysts expect volume growth for the industry to improve and Castrol to do better. Margins, however, may not improve further, given that base oil prices have been inching up recently. At Rs 654, the stock trades at 21.2 times its 2009 earnings per share.