BackCastrol gains from price hikes, better product mix
Castrol gains from price hikes, better product mix
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Base oil prices averaged around $900 per tonne even in the January-March 2010 quarter. Still, the company’s operating margin rose to 27.4% last quarter. This is largely owing to a 6-7% hike in product prices taken in January this year. Besides, as Ravi Kriplani, director-automotive and chief operating officer of the company points out, the sales mix has been gradually improving, with an increased proportion of sales from higher value products such as synthetic lubricants and semi-synthetic lubricants. These products help improve fuel efficiency of automobiles and also result in lower carbon emissions.
Assuming a similar rate of volume growth for the rest of the year, one can expect revenues to grow by 12-13% after factoring in the price hike taken in January. One might wonder why volumes of lubricant manufacturers are growing in single digits when automobile sales are growing at a much faster pace. The reason is that improvements in technology have enabled lubricant changes after much longer intervals. While this has limited volume growth, higher sales realizations have compensated to some extent.
Thanks to the improvement in margins last quarter and owing to the low base effect, Castrol’s pre-tax profit grew by an impressive 55%. Profit growth is likely to be much more subdued in the June quarter because of a high base effect as far as margins are concerned. Base oil prices had slumped to $600 per tonne in the April-June 2009 quarter, resulting in margins of 31%. Prices have now risen to well over $900 per tonne owing to the rise in crude prices and this is likely to result in drop in margins on a year-on-year basis.
For the year as a whole, the company can be expected to report a steady growth in profit, unless of course crude prices rise further. But much of this growth is priced in Castrol’s shares, which trade at over 20 times annualized March quarter profits.
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