The primary disappointment stems from lacklustre revenue growth
The primary disappointment stems from lacklustre revenue growth

Castrol India tries to remain steady on a slippery slope amid muted demand

  • It isn’t surprising that the company’s March quarter financial results are not great either
  • Earnings before interest, tax, depreciation and amortization (Ebitda) rose a mere 3% year-on-year

Castrol India Ltd hasn’t had it easy in the past year. Macroeconomic conditions are not particularly great, resulting in muted demand. Plus, higher crude oil prices are hurting profitability, as the lubricant maker’s key input is a crude-based derivative.

Against this backdrop, it isn’t surprising that the company’s March quarter financial results are not great either.

Earnings before interest, tax, depreciation and amortization (Ebitda) rose a mere 3% year-on-year, with the profit margin declining by 60 basis points to 28.9%. One basis point is one-hundredth of a percentage point.

The primary disappointment stems from lacklustre revenue growth, which stood at 5.3% compared to the same period last year, taking revenue to 976 crore.

“Volume growth on the commercial and B2B (business-to-business) side was adversely affected during the March quarter, whereas the personal mobility segment, power brands and new premium products have performed well," said Omer Dormen, managing director, Castrol India. Overall volume declined by 2% year-on-year. Prices were increased to compensate and simultaneously adjust for rise in input costs. Average selling prices per unit increased by 8% compared to the same period last year, said Dormen. Revenue growth, thus, was influenced by a combination of product mix and price increases.

“Castrol India has to drive home a fine balance of volume growth and margins, which is, to say the least, challenging given the market dynamics," said Nitin Tiwari, an analyst with Antique Stock Broking Ltd.

For the March quarter, given the weak demand environment, while overall volume declined sequentially and on a year-on-year basis, Castrol India managed a 3% growth in operating profits thanks to a better product portfolio, said Tiwari.

The company expects things to improve in the next few quarters.

“The synthetics space is likely to see better demand as the Bharat Stage VI emissions standards roll out in the Indian auto market," said Dormen. Synthetics account for 12% of gross profit of the company.

Investors will wait to see how much growth rates improve. Revenue and net profit growth in calendar year 2018 was 9% and 2.4%, year-on-year, respectively. The company’s financial year is from January to December.

With oil prices showing support at high levels, there seems to be no comfort in sight for Castrol India on the costs front either.

Small wonder then, that investors have applied the brakes on their enthusiasm.

Castrol India’s shares have declined by about 20% in the past one year, underperforming the Nifty 100 index.

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