Castrol India Ltd’s share closed 6% higher on Thursday, in reaction to a better-than-expected March quarter performance. Still, the stock is 13% lower than where it was a year ago. One of the reasons for the stock’s underperformance is the fact that sales volume has been far from impressive. But the March quarter has brought good news on that front.
The lubricant maker says volume growth last quarter was 9% year-on-year. Harshad Borawake, analyst at Motilal Oswal Securities Ltd, points out that this is the best performance since fiscal year 2010. According to Castrol, “Whilst the personal mobility segment continues its growth momentum, this quarter has seen volumes increasing in the commercial vehicle and industrial segments as well.” New products launched over the last 18 months also helped volume growth.
Castrol’s industrial business, which accounts for a much smaller share of revenue, achieved double-digit volume growth, owing mainly to new customer acquisitions and increased business share with key customers.
However, realizations were largely flat, albeit on expected lines. “Assuming 9% volume growth, average realizations have declined 1.8% to Rs.170 a litre,” says Borawake, adding that’s a 0.6% decline compared with the December quarter.
Apart from better volume, lower crude oil prices also helped Castrol’s profitability. That’s because its key inputs are crude oil derivatives. In fact, total raw material costs as a percentage of revenue fell 450 basis points (bps) compared with the year-ago quarter and 130 bps compared with the December quarter. A basis point is 0.01%.
Additionally, advertising and sales promotion expenses declined by a fifth and employee costs increased at a slower pace. The upshot: Ebitda increased 34% to Rs.255 crore. Kotak Institutional Equities was expecting an Ebitda of Rs.220 crore. Ebitda is earnings before interest, taxes, depreciation and amortization.
Clearly, what better way for Castrol to start the year, considering it recorded an Ebitda margin of nearly 30% last quarter? The company’s fiscal year is from January to December. The stock trades at about 30 times estimated earnings for this year. What requires monitoring, of course, is whether the March quarter performance will be sustainable. A pickup in economic activity, as and when it happens, will boost volume. On the flip side, crude oil prices have risen lately. If they continue to remain firm, the moot question will be whether the 30% Ebitda margin will be repeated. The outlook for the stock will depend on the answer to that question.
The writer does not own shares in the above-mentioned companies.