GST Throttles Castrol India Profit

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Castrol India Ltd. said Indias transition to the Goods and Services Tax system was a major reason for its 33 percent drop in profit during its second quarter. Lingering effects of demonetization were another culprit for lower sales.

The Mumbai-based blender posted a Rs 138 crore (approximately Rs 1.3 billion, or U.S. $20.5 million) net profit during the April through June 2017 period, down from Rs 207 crore in the same period last year, according to a regulatory filing published last week. Net sales declined 10 percent to Rs 1,007 crore.

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The external environment during the first half of the year has been extremely challenging, with the lingering effects of demonetization particularly impacting commercial vehicle oil volumes, Managing Director Omer Dormen said in a press statement. Transition to the GST era, and a sudden, unexpected increase in base oil prices due to a major supply and demand imbalance in the Asia region also impacted the companys performance, especially during the second quarter of the year.

The bottom line also reflects financial support given to trade partners for GST transition costs, he noted. The companys other income fell 10 percent to Rs 15.5 crore, while costs of raw materials consumed increased nearly 11 percent to approximately Rs 389 crore. Total expenses were down marginally to Rs 810 crore.

For the January to June 2017 period, the companys net profit fell nearly 17 percent on year to Rs 317 crore, while net sales declined about 4 percent to just shy of Rs 2,020 crore.

On a conference call with analysts and investors on Aug. 24, Dormen said June sales were hurt hardest by the GST transition. Buyers expected prices to drop upon the official, July 1 implementation of GST, and were therefore reluctant to continue stocking supplies in the month leading up to the switchover, he explained. Total volumes declined 10 percent to around 45,000 metric tons during the quarter.

Pressure on the commercial segment continued in the second quarter due to impact of demonetization and GST-related destocking, Dormen continued. The commercial segment was most impacted [in June] because retail trade was slow, and there was a lot of stock in the market, he added. Segment volumes declined by almost double digits.

However, the company grew volumes in the personal mobility, power brands and industrial segments and retained its overall market shares despite the strong headwinds, he continued. During the first half of the year, Castrols personal mobility segment saw marginal growth in volume, and its industrial segment recorded single-digit growth, he added. Castrols power brands include Edge, Magnatec, GTX, Activ and Vecton.

Castrol said it stayed focused on increasing distribution reach with significant success in customer acquisition and expansion during the first half of the year. The company made significant inroads in the industrial lubricants segment with its new Castrol Hysol XBB cutting fluid, Dormen said. We acquired over 1,000 business-to-business customers.

In regards to increases in input costs, Dormen said higher crude oil prices and unexpected refinery shutdowns in Asia drove base oil prices higher, impacting the companys overall performance. He said that base oil prices in the second quarter jerked up suddenly by around 25 percent to 30 percent, depending on the grade. Stability is expected going forward, as some of the paused refineries are coming back in operation, he noted.

The company hiked its finished lube prices by about 3 percent in May in response to the raw material cost increase, but noted that it likely wouldnt have to increase them more this year. We believe that the rest of the year probably wont see further [base oil price] increases, unless there is a major increase in crude [prices] or further shutdowns, Dormen said.

Dormen said the number of GST registrations by the companys customers has increased, and the lubricant market will likely see stability after September. We have already seen some volume recovery in July and August, but I think post-September, we will see further stability and the market will be getting back to normal, Dormen said. The company expects volume growth over the previous year, but it will depend on the commercial segment recovery, he noted.

The company is also banking some of its projected volume growth on its recently renewed distribution agreement with Essar Oils. Under the deal, Castrol lubricants will be sold through Essars retail network for another three years. We see that now Essar is [very] aggressive in its expansion, Dormen said. About 3,000 sites are coming on stream, and that gives us an opportunity to grow our volumes. He said Castrol is quite optimistic about using Essar as another platform to expand its distribution.

GST will provide benefits in the long-term, Castrol Chief Financial Officer Rashmi Joshi said during the conference call. GST has caused short-term headwinds, but we do believe it will open opportunities for us in terms of efficiency in operations going forward, and better economic activity in the country will certainly help us perform better in the future.

The company is also setting up a new laboratory at its Silvassa facility to test products and provide support to its customers. The laboratory is currently in the commissioning phase and will be fully operational in the third quarter.

Photo: Pashminu Mansukhani / Digital Studio (www.digitalstudio.in)

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