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Lubricant maker Castrol India Ltd’s volume growth was expected to be subdued last quarter. Unfortunately, total volumes fell by a tenth compared to the same period last year, according to two analysts who attended the investor call on Thursday. Compare that with the March quarter, when volume growth was flat year-on-year.
The company says the impact of the transition to the goods and services tax (GST) and the lingering effect of demonetization affected volumes (commercial vehicle oil). Add to that muted price realization and the upshot was net revenue declined 10.3% year-on-year to Rs870 crore.
There was no respite on the cost front either. Input costs as a percentage of revenue increased year-on-year as well as sequentially. An unanticipated increase in base oil prices owing to a major supply/demand imbalance in the Asia region hurt Castrol India. Employee costs rose at a relatively faster pace too. A combination of all these factors meant a substantial 861 basis point drop in operating profit margin year-on-year to 24%. Operating margin fell compared to the March quarter too. A basis point is one-hundredth of a percentage point. Accordingly, operating profit declined as much as 34% compared to last year’s June quarter, to about Rs210 crore.
The lack of volume growth has weighed on the stock. Castrol India’s shares have underperformed the S&P BSE 200 index so far this fiscal year. Currently, the stock trades at about 28 times estimated earnings for fiscal year 2017, based on data from Bloomberg. The company follows a January-December fiscal year.
To be sure, it still has plenty of support. “Castrol India’s >80% dividend payout policy and RoE/RoCE (return on equity/return on capital employed) of ~100% reflect its superior balance sheet and high-quality cash flows which warrant higher valuation multiples,” said a report by Motilal Oswal Securities Ltd.
A recovery in volumes, however, is a key trigger for the stock and the outlook isn’t rosy on that front. Analysts expect the adverse impact of GST on the numbers to continue for some time. But demand is expected to look up from the December quarter onwards. These factors will keep any sharp appreciation in the share price at bay in the near future. However, considering the stock’s underperformance, most of the bad news seems baked into the price. Trends in base oil (a key input) prices are an important measure to track for the stock.