Stock Review: Castrol India

 

WHILE the March quarter results for lubricants-maker Castrol India were better than expected, the road ahead is likely to be bumpy due to rising crude oil prices and sluggish volume growth. Analysts estimate that for a $25 per tonne rise in raw material prices, Castrol's earnings per share is expected to fall three per cent. The margin movement here on will largely be determined by the extent to which it is able to pass on these higher prices. Brokerages expect its realisations to rise by six and one per cent for calendar 2011 and calendar 2012, respectively. In addition to price rise, the company is banking on steps such as improving cost efficiencies, launching new products and changing its product mix to combat the impact of rising input prices. For the next five years, the management expects to clock a compounded annual growth of 15-20 per cent in its net profit. At present, the stock is trading at an expensive 22 times its estimated CY11 earnings, higher than its historical P/E band of 14-18 times. Further, modest volume growth (two-three per cent) and lower margins are the key concerns for the stock.

PRICE RISE IMPROVE REALISATIONS

For the March quarter, Castrol India's net sales grew 14 per cent over the last year to 751 crore. Notably, most of this came due to rise in prices, which helped improve realizations by 13 per cent year-on-year (y-o-y). Volumes grew a meagre two per cent. Surging input prices dented operating profits. Raw material costs surged 18 per cent to `416 crore, leading to a320 basis points contraction in operating margins to 24 per cent. Prices of the key raw material, lube oil surged 20 per cent in the March quarter to $1,200 per tonne and are likely to continue their upward trend over the next twothree quarters. Currently, base oil prices are at $1,400 per tonne and are likely to put pressure on the June quarter numbers. While the company has been able to pass on these cost increases, higher raw material prices will continue to weigh on its margins in the near term.

ONE-OFF GAINS BOOST NET PROFIT

Castrol's bottom line, however, grew a robust 16.6 per cent to `136.6 crore. This was largely fuelled by an over three-times jump in other income to `27.8 crore vis-a-vis last year. These included writebacks to the tune of `12 crore recorded as provisions earlier. What dented profitability marginally was a rise in advertisement expenses by 9.5 per cent y-o-y to `51 crore due to its sponsorship of the ICC Cricket World Cup.

STRONG SEGMENT GROWTH

Further, both its segments reported good growth. Automotive sales were up 15 per cent y-o-y and Ebit grew 9.3 per cent y-o-y. While the demand in this segment is buoyant, the commercial vehicle space is witnessing some slowdown due to lower replacements and higher lube prices. The industrial segment sales grew 14 per cent y-o-y and Ebit was up four per cent y-o-y.