Castrol Margins Squeezing Due To Increasing Cost Pressure
Sagar Lele / 17 Jul 2012
Castrol India’s announcement of the second quarter results came in post market hours on Monday, July 16, 2012. Over the last few quarters, there has been increasing pressure on the margins of the company. The revenue for Castrol has been consistent in terms of growth over time. The cost of raw materials for the firm is directly affected by the base oil prices and currency fluctuations. Due to the maddening movement of both these, there has been increasing pressure on the firm’s profitability lately.
Over the years, Castrol has had the tendency to maintain topline and bottomline growth by passing the cost of raw materials on to its customers. Despite extreme business conditions in the past, the company has managed to stand still and this can be evident from the 25.25 per cent operating profit margin seen during the 2008 crisis.
Financials For Q2 2012 And Q2 2011
| | Q2 2012 | Q2 2011 | % Change |
|---|---|---|---|
| Net Sales | 851.3 | 790 | 7.76 |
| Profit Before Tax | 179.3 | 211.7 | -15.30 |
| Profit After Tax | 120.9 | 142.5 | -15.16 |
For Q2 2012, Castrol’s revenue increased by 7.76 per cent to Rs 851.3 crore from Rs 790 crore in Q2 2011. The profit before tax for Castrol though has declined by 15 per cent as compared to Q2 2011. There has been a gradual decreasing trend in the profit numbers for Castrol over the last four quarters.
We expect pressure on the margins to remain for the next few quarters on the back of a volatile rupee cutting through the easing of the base oil prices. Nevertheless, Castrol is extremely strong on its fundamentals and has proven its ability to withstand pressure in the past. Moreover, the firm has a debt-free status and has been regularly providing dividends.
Along with the announcement of Q2 results, the company also announced an interim dividend of Rs 7 for the year ending December 31, 2012. There has also been a proposal by the board of directors of issuing 1 bonus share for every 1 equity share held. This will take effect post approval of the shareholders and in consultation with the stock exchange.
Considering these factors, we believe that the stock is strong in fundamentals though the margins are affected for now and the company would perform well on the improvement of cross-currency fluctuations. We recommend investors to buy Castrol on dips.
Castrol’s Performance Over The Last 4 Quarters
| | Q2 2012 | Q1 2012 | Q4 2011 | Q3 2011 | ||||
|---|---|---|---|---|---|---|---|---|
| Rs. Crore | YoY % change | Rs. Crore | YoY % change | Rs. Crore | YoY % change | Rs. Crore | YoY % change | |
| Net Sales | 851.3 | 8 | 781.7 | 4.1 | 769.4 | 10.6 | 671.6 | 9 |
| Profit Before Tax | 179.3 | 15 | 183.6 | -9.6 | 161 | 1.4 | 140.2 | 4 |
| Profit After Tax | 120.9 | -15 | 122.9 | -10 | 106.8 | 0.8 | 95.1 | 3 |
Castrol’s Performance Over The Last 5 Years
| 2006-07 | 2007-08 | 2008-09 | 2009-10 | 2010-11 | |
|---|---|---|---|---|---|
| Sales (cr) | 1,886.62 | 2,273.47 | 2,406.00 | 2,804.76 | 3,093.29 |
| Growth (%) | 4.66 | 20.50 | 5.83 | 16.57 | 10.29 |
| Operating Profit (cr) | 330.63 | 412.5 | 607.72 | 735.72 | 683.77 |
| Growth (%) | 49.63 | 24.76 | 47.33 | 21.06 | -7.06 |
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