Fundamental Analysis of Castrol India – Detailed Stock Analysis

Fundamental Analysis of Castrol India: The world of Automotive Engineering is filled with numerous mechanical parts. When we fire up a vehicle’s engine, these parts move in tandem at super high speed generating a lot of friction as they rub against each other. This generates a lot of heat, which could eventually lead to wear & tear on your machine.

However, adding a bit of oils & greasy mixtures ensures that your vehicle runs smoothly & lives a very long life. The Company we will talk about today has ensured that its innovations in Automotive lubrication make our bikes & cars last much longer than they used to. 

In this Fundamental Analysis of Castrol India, we take a look at the company when it comes to India, its financials, future plans & more

Fundamental Analysis of Castrol India

We will take a brief look at the history of the Company when it comes to India. We will then look at what they sell in India, before fundamentally analyzing their financials over 5 Years and finally reaching a conclusion on the Company. 

Company Overview

Castrol was founded by Charles “Cheers” Wakefield under the name CC Wakefield & Company in 1899. The man left his job at Vacuum Oil to start selling trains and heavy machinery lubricants. 

He also took a personal interest in the automobile and the airplane segment. His Company started developing lubricants for engines, which could withstand the heat inside an engine & still work smoothly & efficiently. This led them to use vegetable oil, which was made from castor beans. 

The newfound liquid was fluid enough to work from an engine’s cold start and was thick enough to keep working at high temperatures. The Company marketed it under the name “Castor”.  In 1919 John Alcock and Arthur Brown chose Castrol to lubricate their engine on the first trans-Atlantic flight.

In 1966, Castrol was acquired by Bumrah Oil Company, a lubricant manufacturer from Scotland. BOC later merged with British Petroleum (BP). Castrol’s history with India dates back to as far as 1910 when CC Wakefield & Company would export certain oils to the Indian market.

In 1976, Castrol incorporated a Company under the name Indrol Lubricant & Specialities Pvt Ltd. This company was later renamed as Castrol India in 1990. Castrol currently has Automotive Lubricants, Marine Lubricants, and other Industrial Lubricants.

Automotive lubrication consists of lubrication oils for engines, transmission fluids, coolants, brake fluids, and greases. Industrial lubrication includes fluids for general applications such as gears, compressors, and refrigeration purposes, in addition to metalworking and process oils. 

Apart from selling lubrications, Castrol also operates a vehicle services division called Castrol Auto Service (CAS). In CY22, CAS expanded to 230 car workshops across 110 cities. Apart from this, the Company has 5215 Castrol Bike Points and 42 Express Oil Change outlets. 

Industry Overview

India is the third largest finished lubricant market globally accounting for approximately 7% of the global demand. The automotive sector, which indirectly controls a greater chunk of Lubricant’s revenue, contributes approximately 7% to India’s GDP and 49% to India’s manufacturing GDP. 

The demand for automotive lubricants stems from the growing demand for vehicles, which in turn is fuelled by rapid infrastructure development, rising income levels, widening of the middle class and their aspirations, and easy access to finance.

Technological advancement in automotive hardware design is leading to a demand for more efficient and premium lubricants. Demand for industrial lubricants arises from various industries such as Automotive, Wind, Power, and Process Industries like Steel, Cement, and general engineering.

Lubricants are manufactured by blending base oils with additives. This blending involves highly advanced formulations as specified by the Original Equipment Manufacturers (OEMs). India is currently a base oil deficit market.

This leads to large-scale import of base oils and additives, exposing the Company to fluctuations in foreign exchange rates and supply chain disruptions.

When the year started, base oil prices were at normal levels but in February, with the Russia-Ukraine crisis, prices started to move upward. Between Q1-Q2 of CY2022, prices of base oil touched a multi-year high. Headwinds on account of vessel/equipment availability posed additional challenges on imports.

The future of the lubricant industry would be fuelled by the growth in the market for alternative fuels such as CNG, which is finding more demand across both Private and Commercial Vehicles. The Electric Vehicles market is also an up-and-coming segment, which would require specific formulations. Castrol is developing oils to capture both these markets.

Castrol India – Financials

Revenue & Net Profit

Castrol India reported a Revenue growth of 14%, growing from Rs. 4240 Cr in CY21 to Rs. 4851 Cr in CY22. Its revenue growth in the past two years has been quite good, especially compared to a slowdown in revenue from CY19 & CY20. On a long-term basis, the Company showed a very slow growth of 4.96% CAGR in the past 5 years. 

Net Profits dwindled this year as a result of a rise in raw material costs. This led to a slow growth in Net Profits of merely 8%, from Rs. 758 Cr in CY21 to Rs. 815 Cr in FY22. Castrol remains at risk as a result of volatility at prices at constantly eat up its earnings. The Company was able to report a Net Profit growth of a mere 3.57% CAGR in the past 5 years. 

Note: Castrol India follows the January to December Calendar year for its financial reporting. 

Profit Margins

The Company’s Operating Margins decreased by 216 Bps from 25.43% in CY21 to 23.27% in CY22. These margins have mostly been downhill since the Company set a 5-year high of 29.74% in CY19. Raw Material costs are at a 10-year high, costing 52% of the Company’s revenue.

Its Net Profit Margins decreased from 17.86% in CY21 to 16.82% in CY22, a fall of 104 Bps. Net Profit Margins have more or less stayed in line with Operating Margins, which saw expansions up to CY20 & have continued to drop since then.

Return Ratios

Return on Equity dropped by 400 Bps, from 50% in CY21 to 46% in CY22. This was a result of Shareholder’s Equity growing at a rate faster than Net Profits. The company’s reserves grew by 21% from last year. 

Return on Capital Employed saw a massive deterioration of over 461 Bps points falling from 62.55% in CY21 to 57.94% in CY22. This was due to an increase in lease liabilities, from Rs. 7 in CY21 to Rs. 50 Cr in CY22. 

Debt Analysis

Castrol India has continued to remain Debt-free for the past 5 years. The Company has almost always depended on Internal Accruals to fuel its growth & CAPEX requirements. 

Its Interest Coverage Ratio stood at 294x as of CY22, which is quite pointless to measure in a Debt-Free Company.

Fundamental Analysis of Castrol India – Key Metrics

The Key Metrics of Castrol India are given below.

Future Plans Of Castrol India

1. The Company will continue to expand its market in the 2-wheeler & passenger vehicles category, as the market noticed strong & continuing demand for the sector.
2. Castrol’s alliance with Jio-bp gives it access to expand Castrol’s footprint in fuel forecourts across India.
3. The Company would be expanding its Castol Auto Service station, which would be set up in jio-bp petrol pumps
4. Castrol India is also diversifying into the Electric Vehicle (EV) segment. It already supplies EV fluids to many OEMs such as Tata Motors, MG Motor, and BYD. 

Conclusion

We finally reach the end of our article on Fundamental Analysis of Castrol India and as we do so we realize that Castrol India is quite a stable business, with slower-than-market growth. However, the business continues to generate really strong returns to its shareholders with an RoE of 46%.

As per the Boston Consulting Group’s growth-share matrix, we would like to put this Company in the “Cash Cow” category. Castrol is an established name in the vehicle lubricant segment. This is what lets the Company enjoy a reputed brand value bringing in stable earnings.

At the same time, having established such a presence, it will continue to get harder for Castrol to maintain such a high growth rate & cannibalize the market share of its competitors. 

The Board however recognizes this & spends less on any major Capital Expenses. Instead, they choose to return these earnings to their stakeholders, leading to significantly high RoE & RoCE.

So what do you think about this stock? Should it continue to remain a valuable stock and reward its shareholders in a slow & sustainable manner? Or should it take on more debt & go on a Capital Expansion? Do let us know in the comments below.

Written By Nasir Hussain

By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks also get updated with stock market news, and make well-informed investment.