Stock Review: CASTROL INDIA

Lubricants maker Castrol India has had another year of robust growth. Its net profit grew 28.7% in 2010, on the back of an 18% growth in sales. Amid rising oil prices, the company managed its costs well to improve the operating margins to a historical high. With strong investment in brand-building, rising oil prices could possibly be the only concern for its future growth.

Castrol's operating profit margin at 26.7% for 2010 was better than the 25% in 2009 and, in fact, the best-ever in its history. This was made possible by a 7.8% reduction in staff cost and 3% dip in other expenses. The company has been trying to shift demand for its high-efficiency synthetic oil-based lubricants, which boosted margins. After years of stagnancy, it registered a 7% growth in volume in 2010 mainly due to an increase in the number of automobiles on the roads.

Nearly a quarter of the company's revenues come from agricultural applications such as tractors. This has resulted in some seasonality in its sales. Its June quarter typically witnesses higher revenues, profits as well as margins. The company has been trying to lower the cost of raw materials. Earlier, the costs were 60% of net sales on an average; they were brought down to below 50% in 2009. In 2010, the costs inched up to 50.5% of net sales due to the rising oil prices.

The expense on brand-building and advertising remains the second-largest cost for the company. In 2010, it spent . 162 crore on advertising, up 8.6% from the previous year. Recently, the company entered into a fiveyear sponsorship deal with the International Cricket Council, tying up as its Official Performance Partner. This is not expected to push up the company's advertising budget significantly. The company ended the year with a cash pile of . 619 crore, 17.8% more than in last December. Its annual capex remains at just around . 25-30 crore, and considering its final dividend of . 8 per share, which will use up another . 225 crore, the company will be left with over . 300 crore of unutilised cash.
The scrip is trading at a priceto-earnings multiple of 20.6.

The company expects decent volume and revenue growth in 2011. It is poised to maintain its steady growth in future, too.