Stock Review: CASTROL

The marks of the ubiquitous inflation were quite visible on the March 2011 quarter results of India's leading lubricant maker Castrol, which could hardly improve upon its profits at the operating level from the year-ago period.
The decent growth at the net profit level owed itself to a jump in other income, which included certain one-off items. With no relief in sight over soaring crude oil prices, the company's woes are unlikely to go away in a short while. Castrol's year-onyear revenue growth at 14.8% during the March 2011 quarter was better than what it had achieved during the second half of 2010. However, operating profit margins saw a 320-bp decline against the year-ago level. The resultant operating profit was just 1.2% higher.

The raw material cost as a proportion to net sales moved to a two-year high of 52.8%. During the quarter, base lube oil prices ruled nearly 20% higher against the year-ago period at $1,200 per tonne level. The cricket World Cup season may have increased the company's advertising and other expenditures for the quarter.
In spite of all this, the company posted a decent 16.6% growth at the net profit level. The source of this growth was a three-fold jump in other income to . 27.8 crore. Higher cash balance and interest rates brought in higher interest income while the company chose to write back . 12 crore of provisions made earlier.

Battling the spiralling raw material prices is, perhaps, the only major challenge and it is doing whatever it can — improving efficiencies to bring down the remaining costs and increasing earnings through price hikes, new products launches and uptrading consumers to superior products. It should be noted that out of the March quarter's revenue growth, just 2% came from volume growth while the remaining 12.8% growth came from abovementioned measures.
The scrip continues to trade at a premium valuation of 23.4 times its earnings for trailing 12 months. The company is expected to see base oil prices maintaining their current level for at least a couple of more quarters, if not move higher. This means the margin pressures are there to stay.