Stock Review: CASTROL INDIA

CASTROL India, the leader in the lubricants business, has reported a healthy 22.3% growth in its September 2010 quarter's net profits, which stood at 16.9 crore, as its revenue growth was aided by improved operating margins, reduced depreciation charge and a lower effective tax rate. This, however, failed to meet the market expectations; the scrip fell by 0.6% on Wednesday, in an otherwise buoyant market when Sensex jumped 2.4%.

   Castrol's September quarter numbers saw sales growing 13.5% to 643 crore with a 100 basis points improvement in operating profit margin to 26.4%. The margin improvement came despite rising raw material costs, as the company aggressively reined in its other expenditures such as staff cost and selling & admin costs. The company's raw material cost to net sales ratio jumped to 52.4% this quarter, from 47.5% in last September. In fact, it was the highest in the last six quarters. The company achieved an absolute reduction of 11% in its expenditure on staff, selling & administration and manufacturing in spite of the rising turnover.

   An 11% fall in its depreciation provisions and reduced effective tax rate at 31.2%, further helped the bottomline in achieving a higher growth rate.

   For the company, brand-building and consumer-connect initiatives remain the key to its success besides developing novel products. In this regard, the company launched extensive marketing campaign with the punchline "instant protection from the moment you turn on the key". It also launched Castrol Safe2GO programme to promote importance of vehicle safety. Sanjeevani, a rural-outreach programme for tractor owners, achieved a milestone by reaching two million tractor owners within a year of its launch.

   In the last couple of quarters, the company has seen an upward trend in raw material costs, denting its margins. Its efforts to maintain and even grow its profit margins so far have proved effective. However, it could become difficult going forward, if the trend in raw material costs continues. Its future volumes growth will also depend on the performance of the automobile industry.

   The company has outperformed the markets over the last one year, nearly doubling in value, while Sensex gained a little over 21%. It continues to remain a stable cash-generating company with little debt and healthy dividends.