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LUBRICANTS SUPPLIES GHANA LTD > News/Events > Castrol rides on lower crude prices

Castrol rides on lower crude prices

Castrol is expected to reap the benefits of lower raw material prices on falling crude oil prices fully in the next quarter

Even as falling crude oil price brings cheer, it?s still not clear if volume growth will pick up meaningfully. If the economy improves and sales in the automotive segment picks up, the stock could continue its dream run.

 

With the sharp fall in crude oil prices, Castrol India Ltd?s shares have understandably been in great demand. The shares have risen by 50% in the past six months, much higher than the 9.6% rise in the CNX 500 index of the National Stock Exchange.

Falling crude oil prices will result in lower raw material costs, although the company is expected to reap those benefits fully in the next quarter, as the impact will reflect in the financials with a lag.

In the nine months ended September, the price of base oil, Castrol India?s main raw material, was slightly higher compared with last year. Also, unfavourable forex movement played a spoilsport. A combination of both hit the company?s profit to the tune of Rs.150 crore.

?Our cost of goods has been significantly higher this year,? said Ravi Kirpalani, managing director of Castrol India. Input costs as a percentage of revenue increased by 215 basis points this year to 57.7%. A basis point is 0.01%.

 

As a result, margins fell and operating profit for the nine months ended September increased by a just 1% year-on-year despite around 7% growth in revenue.

This year, 87% of Castrol India?s revenue came from the automotive business, which includes the personal mobility segment (passenger cars and two-wheelers) and the commercial vehicles segment. Of the two, growth in the personal mobility segment has been stronger than the commercial vehicles segment.

?The personal mobility business has seen a sustained growth of 6-7%, while the commercial side of the business, accounting for three-fifth of our automotive business volumes currently, has been extremely challenging. It?s difficult to say whether markets have bottomed out as far as the commercial vehicle segment is concerned,? said Kirpalani.

The company expects 2-3% volume growth in the automotive segment in 2015, and sees an equal share of volumes from personal mobility and commercial vehicles by 2019. Castrol India?s remaining revenue comes from the non-automotive segment, which has seen 13% revenue growth this year.

Even as falling crude oil price brings cheer, it?s still not clear if volume growth will pick up meaningfully. If the economy improves and sales in the automotive segment pick up, the Castrol India stock could continue its dream run.

The writer does not own any shares in the above company.