Sunday, August 3, 2008

Castrol India

It's More Than Just Oil. It's Liquid Engineering

Strong brands, technologically advanced products and customised offerings among others have helped Castrol’s sales and net profits grow at a CAGR of 13.4 per cent and 19.3 per cent in the last three years, even as volume growth has remained muted.

The muted volume growth is mainly due to a shift in consumer preference towards high-tech products, especially in the auto lubricants where Castrol enjoys a market share of 21 per cent.

For instance, companies like Tata Motors have changed oil drain specifications for their commercial vehicles (CVs) for engine oils (doubled to 36,000 kms) and lubricants (increased to 72,000 kms), thus reducing the frequency of changing these consumables.

While this means lower consumption, it also means increased use of technologically superior products that support longer running of vehicles and hence higher realisations for lubricant manufacturers.

Technological advances in passenger cars have also meant increased demand for high-tech products. This is positive for Castrol, which has access to its UK parent’s R&D.

The company has already entered into tie-ups with players like Volvo, Ford and Audi (cars) and Tata Motors (CVs), besides being the exclusive ‘first fill’ lubricant for Tata Motors’ Nano.

Going forward, with India adding a million cars and UVs and over six million two-wheelers every year, demand for automotive lubricants will remain healthy. Increasing spends towards infrastructure and industrial capex also point to robust demand for industrial lubricants.

While concern over the surge in base oil prices exists, Castrol has raised prices in the past to offset the increase. The cut in import duty by half to 5.13 per cent on base oil in June 2008 also provides respite.

Overall, Castrol’s revenues and profits are seen growing at 10-15 per cent annually over the next two years. At Rs 258.70, the stock trades at 12 times its CY09 (December ending) estimated earnings and can deliver 18-20 per cent in a year.

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