28th November, 2008

Castrol India is a leader in the lubricant market. Although there is a slump in the automobile segment and the sales are decling but the economic boom of last five years has already put enough cars and commercial vehicles on the road to keep the lubricant market alive and growing.  The company had a robust balance sheet, sound business model and strong brand equity and cash flows. Its a good growth and defensive stock in volatile stock market.

Lubricant Market :

Castrol India is the Indian subsidiary of UK-based Burma Castrol and is engaged in manufacturing and marketing of automotive and industrial lubricants and specialty products. It operates in the automotive (heavy-duty commercial vehicles, cars, motorcycles ) as well as non-automotive (Industrial)  segments.  The company is the market leader in the retail segment with a share of around 21% in the total automotive lubricants market.

Sector Growth:

The company has maintained its growth rate and has increased its market share in the ever growing Lubricant market. The demand in the automative sector (personal and commercial vehicles, industrial and construction machinary) is going to keep this segment growing.

 Castrol maintains revenue and value growth through higher dependence on superior technology products relevant to latest type and technology of vehicles. The company is foucused on building profitability.

Balance Sheet:

The company’s balance sheet size has doubled in the past one-and-a-half decades, while its topline has gone up four times. This shows that the business is not capital-intensive and is earning high returns. The company’s return on capital employed (RoCE) for CY07 stood at 80%. Castrolis a debt-free company and pays regular dividends.

The company’s net sales have witnessed a compound annual growth rate (CAGR) of 10.8% over the fiveyear period ended December ’07 to Rs 1,966 crore. Its net profit has recorded a lower CAGR of 7.4% to Rs 218.4 crore. At an average payout of 85% of its profits, the company’s dividend payout has broadly grown in line with the corresponding growth in profit during the past five years.

Castrol posted a smart recovery in its operating and net profit margins in ’07. This was fuelled by certain factors like price hikes, exit from low-margin segments that have been commoditised, new product launches, and re-launch of old products with new identity, packaging and strong consumer propositions.

Rising crude oil prices have been a concern for the company since the past two years as oil is a critical raw material for lubricants. However, the company is expected to benefit from the recent crash in crude prices.

Risks :

• The new lubricants last longer hence less consump[tion. This affects the volume growth.
• Price undercutting by low-cost competitors in an attempt to gain volume share is another threat for this premium-category lubricant manufacturer.
• A slow down in the Indan economy along with a slump in the automobile segment may hamper future volume growth of the company’s products.
• Curtail in infrastructure spend due to the general economic slowdown is also likely to curb the market for lubricants.
•  With an industrial slowdown, the company’s business in the non-automotive segment may also take a hit.

Price:

At the Current Market Price (CMP) of Rs 302 the stock is trading at a P/E ratio of Rs. 13.7. The Dividend yield comes to