Castrol India Equity Research

Date of Research – 14 January 2016

Price – Rs. 431.25

About the Company

Castrol India Limited (“Castrol” or the “Company“) manufactures a range of automotive and industrial lubricants. The Company markets its automotive lubricants under two brands – Castrol and BP. From a minor oil company, with a market share of about 6 % in 1991, Castrol has grown to become the second largest lubricant company in India with a market share of around 25 %. The Company has leadership positions in most of the segments in which it operates including passenger car engine oils, 4-stroke oils and multigrade diesel engine oils. Castrol has the largest manufacturing and marketing network amongsts all lubricant companies in India.

The Company has three manufacturing plants, including a state-of-the-art plant in Silvassa. Castrol’s distribution network encompasses 270 distributors, servicing over 91,000 retail outlets.

*Financial year – January to December

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Total Income from Operations3,120.903,179.603,392.303,298.00 3,370.40 
Expenses2,498.402,492.002,675.602,403.20  2,365.50  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)622.50687.60716.70894.80  1,004.90  
Depreciation26.6030.5036.1039.00  45.00  
Finance Costs1.801.702.400.80  1.50  
Other income72.2083.6048.1095.90  87.30  
Exceptional items(22.80)– – 
PBT666.30761.80726.30950.90  1,045.70  
Tax218.90253.20251.80335.70  370.80  
PAT (before Minority Interest and share of Associates)447.40508.60474.50615.20  674.90  
Profit/ (loss) attributable to Minority Interest– – 
Share of profit / (loss) of Associates– – 
Consolidated Profit / (Loss) for the year447.30508.60474.50615.20  674.90  

Profitability Analysis

Consolidated(%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Operating Profit Margin Ratio19.9521.6321.1327.13  29.82
Net Profit Margin Ratio14.3316.0013.9918.65  20.02 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital494.56494.56247.28247.28 247.28 
Reserves & Surplus154.67256.86249.50 328.33  348.47 
Net worth (shareholders funds)649.23751.42496.78 575.61  595.75 
Current liabilities818.62850.28981.39 1,071.07 1,277.43 
Other long term liabilities and provisions11.7213.3113.67 14.94  14.09
Trade payables– – 
Total Liabilities1,479.571,615.011,491.84 1,661.62  1,887.27 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets156.03175.09187.74185.25 184.24
Noncurrent Investments– – 
Current assets1,172.291,299.131,157.26 1,333.21  1,541.50 
Long term advances and other noncurrent assets84.8587.5985.03 93.24  94.36 
Intangible Assets1.050.24– – 
Deferred Tax Assets65.0952.9661.81 49.92  67.17 
Other Assets0.26– – 
Total assets1,479.571,615.011,491.841,661.62  1,887.27 

Efficiency Analysis

 (%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE95.8891.51144.27155.45 168.68 
ROE / RONW68.9067.6995.52106.88 113.29 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Total Income from Operations (Rs. Cr.)3,120.903,179.603,392.303,298.00 3,370.40
Growth (%)4.27 %1.88 %6.69 %(2.78 %) 2.20 % 
PAT (Rs. Cr.)447.30508.60474.50615.20  674.90  
Growth (%)(7.01 %)13.68 %(6.70 %)29.65 % 9.70 % 
Earnings Per Share – Basic (Rs. )9.0510.289.5912.44 13.65 
Earning Per Share – Diluted (Rs. )9.0510.289.5912.44 13.65 
Price to Earnings32.9430.1348.2930.13 29.85 

Dividend History

The Company has maintained an average dividend yield of 2.31 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Castrol’s average current ratio over the last 5 financial years has been 1.42 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Castrol’s average long term debt to equity ratio over the last 5 financial years has been 0.00 which indicate that the Company is operating with ZERO level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Castrol’s average interest coverage ratio over the last 5 financial years has been 341.39 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Castrol reported a promoter holding of 51 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 13.83 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.