Smooth drive

POUND WISE

Castrol promises a firm performance given the buoyant auto markets.

The automobile industry has grown leaps and bounds in the past few years. Both two- and four-wheeler vehicle sales have witnessed phenomenal growth in volumes.

The implications of this growth have been far-reaching for a number of other industries, including the lubricant oils industry. Volumes have been growing steadily and the market for higher value added products increases as the number of new car and motorcycle models increases.

Castrol India, one of the leading lubricant oil marketing companies has been recording a steady all-round growth in the wake of the automobile market boom. The company reported a strong December 2006 quarter with a 27 per cent increase in turnover and a 20 per cent growth in profit after tax as compared to the same period in 2005.

Slick performance
The company ended the year 2006 recording a 22 per cent top-line growth, and a bottom-line growth of over 5 per cent. The growth in net profit is significantly lower at 5.2 per cent than in the previous year, when it was 15 per cent plus.

The slowdown in growth this year was due to heavy rise in the input costs "� about 37 per cent in 2006 -- which consists of mainly base oils, the lowest value added product in crude distillation, for lubricants. The rise in base oil prices was prompted by the increase in crude oil prices due to falling supply and continuing high demand. Average crude oil prices rose over 17 per cent over the year.

However, to reduce Castrol's woes in a tough year, both automotive and industrial lubricants did well. The non-automotive segment however contributed only about 15 per cent to Castrol's revenues. A wide presence across the country with strong brands helps Castrol clock high volumes in the automotive segment, and a loyal customer base ensures that the margins are maintained.

In addition, the company has maintained its leadership in automotive lubricants, thus gaining leverage on the pricing front. Castrol India increased prices of its products by 22-25 per cent in 2006. The price hikes were proportionately less as compared to the increase in raw material costs.

The burden on the margin is absorbed by other income for the company, which increased significantly for the year, and may not continue in the coming years.

Viscous volumes
Volume growth in lubricants is seen to be slack because of improving engine technology and declining population of old trucks which tend to be large consumers of lubricants.

To combat this, the company re-launched its flagship car lube brand Castrol GTX last year, along with 10 new products across different segments which would ensure high volumes.

The company boasts of exclusive original equipment manufacturer (OEM) partnerships with automobile majors such as Tata Motors' commercial and passenger vehicle divisions, Mahindra and Mahindra's farm equipment division and JCB India, apart from being one of the key suppliers to Maruti Udyog for lubricant oils, transmission oils and brake fluids for initial fill as well as at dealers and authorised service centres.

Castrol also has alliances with other major manufacturers like L&T John Deere, Ford India, and Bajaj Auto.

In the industrial lubricants market, Castrol is now focusing on small and medium enterprises, a fast growing segment. "Volumes (across both segments) are expected to continue to grow at 2-3 per cent a year for Castrol, while its earnings are expected to grow at a rate of about 10 per cent," says Jaspreet Singh of Prabhudas Lilladher.

Further, the company claims to have reviewed its portfolio of customers and exited several unprofitable segments of the market.

In a bid to preserve margins, the company has also introduced an aggressive cost management programme leading to efficiencies in the business. This is evident from the decreased advertising spend over the year, by over 16 per cent.

Innovative outlays
In addition to being the leader in the lubricant retail business, Castrol has also diversified into a high margin-high growth segment of motorcycle servicing with an initiative called Castrol BikeZone, over the past two years.

BikeZone is a franchise-based model which provides services and repairs for all types of motorcycles, and sells genuine two-wheeler spare parts and high quality Castrol lubricants.

The company differentiates this initiative on the grounds of transparency of service, personal attention and an assurance of quality. So far, Castrol has close to 50 BikeZones in around 15 cities. The two-wheeler servicing market is estimated at Rs 6,000 crore, and the company aims to achieve leadership in this market too, as it increases its presence across the country.

"The BikeZone initiative would turn out to be a large contributor to the bottom line, though it may take a few years to realise as large volumes are required," says Prabhudas Lilladher's Singh.

Marginal relief
The pricing of lubricants is not regulated by the government, so lubricant oil manufacturers have some leeway in passing on higher raw material costs. For PSU oil companies, this is one product where a price hike can be effected easily, which benefits private sector players like Castrol.

In 2007, the prices of base oil are expected to remain weak as compared to last year. This is because crude oil refineries around Asia are on increasing their capacities from this year, according to experts.

Thus, margins for lubricant marketing companies are expected to remain strong, considering a steady supply of inputs at stable prices along with no pricing pressure at the retail end.

Castrol India makes significant investments in maintaining its retail leadership by appointing brand ambassadors like the Indian cricket team captain Rahul Dravid and actor John Abraham for its flagship brands. The company plans to continue investing in its brands through sponsorships and promotions. 
 

FLUID FINANCIALS
Rs crore	Castrol India	Tide Water Oil	Savita Chemicals
Revenues	2038.59	39.00	773.30
Operating profit	254.36	16.58	71.51
Net profit	154.49	10.34	45.94
EPS (Rs)	12.50	94.00	31.47
CMP (Rs)	228.60	1950.10	261.85
P/E(x)	18.29	20.75	8.32
Note: Figures for a trailing 12 month period ending December 2006 Savita Chemicals figures include wind power operations

Valuation
Over the past two years, the stock has been steady with a few large movements between Rs 170 and Rs 250, and the revenues and earnings have grown at a compound rate of about 7 per cent and 2 per cent respectively, over the past five years.

The stock has remained firm during declines in markets, while refuting volatility at steep inclines. This makes it an ideal defensive bet in a bear market.

The stock is valued at 12.3 times and 11.4 times its expected CY07 and CY08 earnings respectively, at the current price of Rs 228.60.

The company has aggressive branding and marketing plans as compared to its peers, and is expected to maintain its margins even in adverse input cost conditions. "Castrol is a steady performer along with being a high dividend yield counter," adds Singh.