Last month, when Castrol India announced its results, it carried a clear message. The print ads read: When the going gets tough, the tough get going. It was an indication of what was going on behind the stolid facade of White House, the Rs 885.25 crore Castrol headquarters in Mumbai.
For the first time since the reforms process began six years ago, there was a dip in net profit and the interest burden was at its highest. This has not stalled the 80-year old Castrol Indias ambitious blueprint for growth. Managing director R A Savoor is going full steam ahead with modernisation plans for Castrols six plants, entering new segments with a clutch of futuristic products in consultation with users. In other words, doing everything to keep the companys slick image intact.
But first, a look at how the bottom line skid. For the year ending December 1996, sales revenue grew by 24.37 per cent. It, however, recorded an 8 per cent drop in net profit to Rs 94.53 crore from Rs 103.05 crore in 1995. This has been an outcome of a decline in other income, higher interest burden and higher provision for depreciation. In the same period, other income fell by 54 per cent to Rs 17.32 crore. With a state-of-the-art 200,000 kl capacity lube-blending plant at Silvassa, in Dadra and Nagar Haveli, which went into production last year, provision for depreciation went up to Rs 4.49 crore. This, coupled with Castrols modernisation programme has pushed interest costs up by 49.3 per cent to Rs 16.98 crore.
One reason for the downslide is the growing crowd in the 1.5 million tonne, Rs 5,500 crore lubricant market. In the last five years, the number of players has jumped from seven in 1991 to 28 today. Instead of pressing the panic button, the company focused its energies on the marketplace. To keep pace, it constantly launched new products and fine-tuned marketing skills. The result: Castrol swapped margins for marketshare. So much so that despite a drop in profits, Castrols share has gone up by a percentage point in the last one year.
The company continues to be the third largest and the leading private sector player. Even as Indian Oil Corporation leads the pack with a market share of 42 per cent, Castrol stands at an impressive 17 per cent. This is just two percentage points behind its closest competitor, Hindustan Petroleum. The remaining companies like Elf, Pennzoil, Gulf Oil, Shell and Tidewater Oil Company are together trailing at 11 per cent.
Castrols rollercoaster ride began in October 1992, when the lubricant market was deregulated. Prior to decontrol, the dominant players were the four public sector oil companies Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum and IBP. Together, they controlled about 90 per cent of the market.
The deregulation came mainly in three forms. Base oil imports, which used to be canalised through IOC, were decanalised. The import duty was then slashed from 85 to 30 per cent. Lastly, administered prices of base oils were scrapped in favour of free pricing. This saw foreign lubricant giants like Elf, Shell, Esso, Pennzoil and Caltex set up shop in the country. While some have tied up with public sector companies, others are operating independently. Says K Srivatsa Kumar, an investment analyst with Jardine Fleming, The entry of multinationals has resulted in cut throat competition. This will intesify in the coming years.
All the same, the dismantiling of controls benefitted Castrol the most. It had a mere six per cent share in 1991. Around this time, Castrols UK parent, Castrol plc, increased its stake from 32 per cent to 51 per cent. In 1992, Castrol initiated proceedings with leading PSUs for strategic alliances. But talks broke down when the PSUs wanted Castrol to sell its products under a new brand name. But with the parent company showing more interest, the free flow of technology helped Castrol. Says Raman Pandya, marketing director of Castrol, With the removal of controls, we were free to import the exact quality and quantity of base oil required. It helped us to introduce products in which we were not present.
Castrol has always been ahead of its competitor to cash in on new developments. Savoor has always stated that the constant upgradation of the product mix has given Castrol its competitive edge. To ensure this, Castrol set up an R&D facility at Wadala in Mumbai three years ago. This helped it tailor its products to suit user requirements.
This foresight was evident way back in the mid-eighties. When the Maruti 800 hit the Indian roads, Castrol launched a range of speciality products. These included lubricants like SF grade engine oil, self mixing T level grade of 2 stroke products, GL-5 levels of gear oils, multi-grades SG and SM engine oils.
The new line-up had an effect on volumes which doubled from 62,946 kilolitres (kl) in 1991 to 160,642 kl in 1995. Translated into rupee value, turnover grew from Rs 182.87 crore to Rs 711.61 crore in the same period.
Secondly, it made its presence felt in new segments. Better known for its automotive lubricants, Castrol has made inroads into the industrial, diesel, petrol and marine sectors. In the last couple of years, there were around 20 new products from Castrol. These were mainly for pumps, tractors and two-wheelers. Says Pandya, By plugging all these segments, we were able to enhance our market share.
Armed with a range, the focus is now on developing its retail network. The restrictive clauses which prevented private sector players from selling through petrol pumps saw Castrol consolidate its reach via authorised dealers and retail outlets. Castrol has over 18,000 retail outlets and 5,000 dealers across the country, the largest among the private sector players.
The change is already visible. The new found aggression has seen the private sector companies, headed by Castrol, guzzle up business from the PSU behemoths. From a high of 85 per cent in 1992, the PSU market share is down to less than 65 per cent. Strong branding and sustained marketing efforts have been responsible for the growth. All the same, Castrols selling expense has increased 98 per cent on compounded annual growth rate basis, from Rs 6.17 crore in 1991 to Rs 56.53 crore in 1995.
With most new entrants targetting the automotive lube market, supply is likely to outstrip demand, reveals a lubricant consultant. And with price being the only unique selling proposition, players are undercutting.
The issues are similar in the industrial segment, where quality takes precedence over price. With the automotive market getting crowded, many companies have started eyeing this segment. Elf, which currently has only five products here, will soon have a full-fledged division for industrial sales.
Gulf has also entered the race by bagging an order from the Indian Railways. Bharat Shell, which until now had a low profile in this segment due to capacity constraints, has commissioned a blending unit at Taloja in Maharashtra.
With competitors pulling up their socks, Castrol is banking on the Silvassa plant to maintain its lead. The Rs 61 crore plant which commenced production in July 1996 has accuracy filling machine as well as multi product blending capacity facilities. The commissioning of the plant is likely to result in a saving of around three per cent for Castrol customers on account of absence of sales tax in the union territory.
This unit is the seventh plant in the country and is the second largest plant of the Castrol family. It will manufacture over 150 types of products, mainly for the industrial sector. Says A M Doshi, director (finance), The entire Silvassa project has been financed entirely through internal generation of funds and income from unit will be fully exempted from tax for five years.
Besides this, the company is pumping Rs 20 crore to modernise its existing six plants around the country. There are innovative marketing arrangements as well. Castrol has tied up with Delhi-based Escort JCB and Escorts Tractors for the exclusive supply of lubricants for earth moving equipment. An agreement with Hindustan Power Plus will see Castrol as a sole supplier of initial and service fill lubricants for caterpillar (an earth moving) engines.
The new products are no doubt going to put pressure on margins. And whether Castrol can hold on to the slippery surface remains to be seen.
Company Market share (%)
Indian Oil Company 42.0
Hindustan Petroleum Corp 19.0
Castrol India 17.0
Bharat Petroleum Corp Ltd 7.0
Gulf Oil 3.0
Tidewater Oil Co 3.0
Elf Lubricants 2.0
Shell 2.0
IBP 1.5
Pennzoil 1.0
Others 2.5
