Castrol India: higher volume, profit margin ensure a good drive

Higher crude prices are a threat and investors must watch out for signs of that


The stock trades at around 32 times its estimated earnings for 2016.
The stock trades at around 32 times its estimated earnings for 2016.

Mumbai: Investors cheered Castrol India Ltd’s June quarter results, with the stock going up 6% in the past two trading days.

After all, the company delivered its highest ever quarterly profit. The performance benefited from sales volume growth and a favourable cost of goods environment. For the quarter, overall volume increased 6% over the same period last year, said Omer Dormen, managing director, Castrol India, adding that the increase is largely driven by double digit growth in the personal mobility segment and power brands.

New product launches have helped volume growth too. “New products like Castrol CRB Mini-truck, Castrol Activ Scooter, Castrol MAGNATEC Stop-Start and Castrol GTX Ultraclean launched during the last 12 months are all punching above their weight,” pointed out Dormen. Price realisations have remained at a similar level on a year-on-year basis. Accordingly, revenue increased 5% to Rs.971 crore.

The company also benefited from a softer crude price environment, as its key inputs are crude derivatives. Total raw material costs as a percentage of revenue fell 500 basis points to 43%. Advertisement and sales promotion expenses increased by a third compared to last year’s June quarter. But this was compensated to some extent by a 4% decline in employee costs. Overall, operating profit margin increased 278 basis points to 32.7% last quarter. Operating margin was higher than 30% clocked in the March quarter as well. One basis point is one hundredth of a percentage point. Net profit thus grew at a relatively faster pace than revenues at 12% to Rs.207 crore.

As far as the outlook for the second half of 2016 is concerned, Dormen said, the company expects volatility in input costs and exchange rate to continue. The company’s fiscal year is from January to December. At the same time, the lubricant market will continue to recover, driven by increased vehicle sales and freight movement. Within the automotive segment, the personal mobility segment—passenger cars and two-wheelers—are expected to continue to drive growth.

A pickup in economic activity will help and so will a good monsoon this year, which will eventually boost rural demand. However, investors seem to be discounting most of the positives at the current market price. The stock trades at around 32 times its estimated earnings for 2016. Higher crude prices are a threat and investors must watch out for signs of that.

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