CASTROL INDIA

Interpreting Numbers & Trends Castrol is finding it tough to boost earnings in the face of rising input costs & dull demand, despite better operating efficiencies Lagging Volumes a Drag on Earnings 

For shareholders of automotive and industrial lubricant manufacturing firm Castrol India, the 10% profit growth the company posted in the quarter to December 31, 2012, after several quarters of decline in profits, may come as a relief. However, the company still has to overcome a few major challenges, and there is no indication that the year is going to be any better. Its current valuations certainly appear expensive.
Castrol India has been battling a combination of rising oil prices, a weak rupee and an economic slowdown — which led to profits sliding in the past two years. While the rise in oil prices and the weak rupee exerted upward pressure on raw material costs, the slowdown in domestic economy hampered demand from industrial users.
Ravi Kirpalani, automotive director & chief pperating officer, Castrol India, had told ET that the economic environment remained challenging for the company in 2012. The company managed its costs and working capital better. Although its post-tax profit in 2012 was about . 34 crore lower than in 2011, cash generation from operating activities was . 100 crore higher, he said.
The challenges listed above will weigh heavy on the company’s prospects. Data suggest that lubricant sales by volumes contracted marginally in India in 2012. Castrol increased its volumes by 7% in the automotive lubricants segment, and gained some market share as well, but lower volumes in industrial and infrastructure lubricants somewhat cancelled out the gains.
With growth difficult to come by, Castrol plans to expand its distribution network and make its brand stronger. According to Ravi Kirpalani, the company connected with 8,000 new outlets in 2012, against 1,000 to 2,000 in the previous years. This year, it plans to add 10,000 more outlets to its distribution network. It will continue to invest in its brand by increasing advertising spending, with an eye on long-term growth.
Equity analysts appear divided on how the Castrol stock will respond to the prolonged stagnation in earnings. A note from Kotak Institutional Equities reiterated its ‘sell’ recommendation with a target price of Rs 200, citing the difficult operating environment and expensive valuations.
In contrast, a report from brokerage firm Motilal Oswal maintained its ‘neutral’ outlook on the stock, with a price target of . 316, citing its pricing power and healthy demand from the replacement market. But there is a consensus that at 34.9 times its profits for the past 12 months, Castrol India’s current valuations are expensive relative to its prospects. 

KEY POINTS Castrol India has been battling a combination of rising oil prices, a weak rupee and economic slowdown
Castrol increased volumes by 7% in the automotive lubricants segment and gained some market share
But lower volumes in industrial and infrastructure lubricants somewhat cancelled out the gains