BackFlat revenue hits Castrol’s net profit
Castrol’s operating profit margin improved but it did not result in higher net profit as other income dipped sharply
Premium(Castrol’s operating profit margin improved by 155 basis points to 21.9% in the March quarter. )
Castrol India Ltd’s March quarter financial performance was flat against the year-ago period. The lubricant producer’s revenue for the last quarter stood at about ₹ 785 crore and net profit came in at ₹ 124 crore, almost the same as last year’s March quarter. Sure, the operating profit margin improved, but it did not result in higher net profit, as other income dipped sharply.
Operating profit margin improved by 155 basis points to 21.9% in the March quarter. A basis point is 0.01%. Castrol had been battling operating margin pressure on account of higher raw material costs for a long time and had seen consistent decline in margins. The operating margin has improved in the past two quarters reversing that trend. A key reason for the better operating performance is the softening of the prices of base oil, a key raw material.
The company has also cut spending on advertising, sales promotion, carriage, insurance and freight expenses. That offers comfort, but the outlook on this front is clouded from a short-term perspective. Castrol maintains that base oil prices have hardened again due to an increase in crude prices, while a sluggish economy and slow automotive and industrial growth may dampen lubricant demand. These factors may put pressure on the margins.
In the March quarter, the non-automotive (including industrial, and building and construction segments) segment performed miserably. Its revenue declined by around 20%, the most in four quarters. Profitability, too, was weak. Earnings before interest and tax fell at a faster pace of about 31% to ₹ 17 crore. What this means is that Castrol’s automotive segment (the major contributor to overall performance) has compensated for the under-performance of the non-automotive business.
While the company has expressed concern on the outlook for margins, there are concerns on sales volume growth as well. “Sales volume for 1QCY13 stood at 50.10mn litres compared to our estimate of 51.00mn litres, up 3.3% QoQ but down 4.8% YoY. Automotive oils volume stood at 43.80mn litres (~88% of total volume) and non-automotive oils volume at 6.20mn litres. The problem still persists with non-automotive oils volume, which has been declining since the past five quarters," wrote analysts from Nirmal Bang Institutional Equities Research in their results update.
At the current market price of ₹ 328.40, Castrol’s shares trade at 29 times its estimated earnings for the year to March based on Bloomberg estimates. Those valuations appear to be on the higher side considering that outlook for the stock is not too rosy.
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