Castrol India Ltd’s shares haven’t recovered from the decline which came immediately after the lubricant maker announced March-quarter results last week. Worse, the stock has only fallen a bit further by Wednesday.

At a time when cost pressures are mounting, the company increased prices to counter the impact of rising costs. One upshot of higher prices has been that sales volume hasn’t been particularly striking. Analysts were informed in a post-results conference call that sales volume increased about 2.6% year-on-year. Adjusting for a large order in the March 2017 quarter, volume growth stands at 5%. Volume grew in single digits in commercial vehicle oil and personal mobility segments (in line with industry growth), and declined in the industrials segment due to a slowdown in the wind industry, point out analysts from Edelweiss Securities Ltd in a report on 4 May.

Castrol India’s overall net revenue came in at Rs927 crore, up 5% over the same period last year, hardly anything to cheer about. Price hikes weren’t enough to compensate for rising costs. Ebitda rose at a slightly slower pace than revenue at 4% to Rs274 crore, missing some analysts’ expectations. Ebitda was 11% and 8% lower, respectively, than estimates of Edelweiss and Antique Stock Broking Ltd. Ebitda is earnings before interest, tax, depreciation and amortization.

Net profit performance was more dismal. Higher tax outgo meant net profit growth of just 1.6% to Rs182 crore.

The problem is the road gets more slippery hereon. Crude oil prices are on a firm footing and are expected to remain strong in the next few months. Castrol India’s raw materials include base oil and additives, which are derivatives of crude oil. Naturally then, increasing crude oil prices translate to rising costs for the company. Further, rupee depreciation too adds to the volatility in cost of goods.

Sure, Ebitda margin for the March quarter at 29.6% is higher than 28.8% clocked in calendar year 2018 (CY18). However, investors should take into account the looming threat to profit margins going ahead. Edelweiss has pruned CY18/CY19 estimated earnings per share by 3%/4%, citing rising crude oil prices that are likely to impact margins amid Castrol India’s focus on volume growth.

The company follows a January-December fiscal year.

So far in 2018, Castrol India shares have lagged the BSE 200 index. Currently, the stock trades at 24 times estimated earnings for this year, based on the average of four brokerage firms. In the current environment, its valuations look rather steep. Better volumes, if they happen, should help sentiments.

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