Castrol India awaits volume recovery

A faster rate of decline in total operating expenses meant Castrol was able to clock an operating profit margin of 27%, higher year-on-year but lower sequentially


If it weren’t for lower crude prices, the December quarter performance of Castrol would have been gloomier as lower crude prices translate to lower base oil (a key input for the lubricant maker) prices.
If it weren’t for lower crude prices, the December quarter performance of Castrol would have been gloomier as lower crude prices translate to lower base oil (a key input for the lubricant maker) prices.

The subdued economic conditions have ensured a rough ride for lubricant makers. In particular, commercial vehicle oils and industrial lubricant oils have been sore spots. In that backdrop, “For 2015, our overall volumes saw a drop of 2% in the automotive segment and 7% in the non-automotive segment versus previous year,” says Omer Dormen, managing director, Castrol India Ltd.

The lubricant maker announced its fourth quarter and full year results on Wednesday after market hours. On Thursday, Castrol India stock lost 7.4%. What gives?

True, nobody expected great numbers for the December quarter. Even so, the extent of revenue decline (8% year-on-year) was more than expected. “We saw a volume drop of 4% year-on-year in automotive and 6% in non-automotive segment,” says Dormen. The automotive segment contributed 86% of revenue and saw a 7.6% revenue decline. While the overall automotive market has declined, personal mobility market volumes have increased, points out Motilal Oswal Securities Ltd, adding that poor monsoons have impacted rural demand and within that, specifically the agriculture segment. The non-automotive or industrial segment declined by one-tenth, compared with last year’s quarter. Not only volumes, but overall realizations, too, fell by 3.7%.

Of course, lower crude prices helped. In fact, if it weren’t for lower crude prices, Castrol’s December quarter performance would have been gloomier. Lower crude prices translate to lower base oil (a key input for the lubricant maker) prices. Total raw material costs as a percentage of revenue declined 840 basis points (bps) year-on-year and 160 bps versus the September quarter to 47%. One basis point is one-hundredth of a percentage point.

A faster rate of decline in total operating expenses meant Castrol was able to clock an operating profit margin of 27%, higher year-on-year but lower sequentially. That, along with higher other income and lower depreciation costs, led to a 7% year-on-year net profit growth to Rs.141 crore.

What next? While crude prices are still lower, analysts don’t foresee meaningful improvements in operating margins. According to Dormen, the depreciating rupee could offset some of the benefit of lower crude prices.

Motilal Oswal says in a report that the company could expect a volume uptick in the March quarter on the increased discounts being offered. Castrol India’s personal mobility category has performed well. The category is expected to continue to drive volume and value growth. A meaningful improvement in economic activity will help, but signs of that occurring in the near future are not clear.

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