Castrol India Limited (500870) Earnings Call Transcript & Summary

Hello, everyone. We have Mr. Sandeep Sangwan, Managing Director, India Castrol; along with Ms. Rashmi Joshi, the CFO and Whole-time Director of Castrol India, who will take you through the 4Q and full year results. We will also be presenting the highlights. We will have a Q&A session towards the end of the opening remarks, and we will take you through the procedure of the same. I now welcome Mr. Sangwan. The floor is yours.

Good morning, everyone. Thank you for taking time and attending the fourth quarter and full year 2019 investor and analyst call. I'm joined in the room by Rashmi Joshi, our CFO and Whole-time Director for Castrol India. To give you a snapshot of the results, which we announced on Friday, we've delivered an overall resilient performance for full year 2019 despite a tough external environment and muted demand, thanks to the Castrol India team and all our partners and suppliers who worked very hard to make this possible. Personal mobility, which is a strategic driver, showed steady growth. Our lead and India's #1 selling brand in 2-wheeler category, Castrol Activ, registered record performance, selling over INR 5 crore [ parts ] in full year 2019. Just to give you this idea of scale, it's nearly 1/3 of the total 2-wheelers in India. We delivered strong profitability and cash through robust cost and efficiency management program. Profit delivery from operations grew 7% quarter-on-quarter, and similarly 7% year-on-year at INR 323 crores and INR 1,083 crore, respectively. Cash generated from operations increased by 25% to INR 1,188 crore driven by robust working capital management. Our continued investment in distribution expansion, brands, customer acquisition and advocacy have given us results. We moved into adjacencies of vehicle care products through strategic partnership with 3M, OEM partnerships with Ford India, Jawa Motorcycles, Honda 2wheelers India and Renault were established. We made good progress on strategic digital enablers to provide premium customer experience. And I now hand over to Rashmi for her additional comments before we get into Q&A.

Thank you, Sandeep, and thanks, everyone, for joining the call. Sandeep has covered the most important points that you need to know about our results. Just to add, we opted for the lower tax rate offered by the government for corporates. And as a result, there's a benefit that you see in our profit after tax numbers for the year. So I thought I'll just mention that to all of you. We can now open for questions and answers.

[Operator Instructions] We take the first question from the line of Tarun L. from Kotak Securities.

My first one is to Sandeep. Could you talk about some of the strategic priorities for the next few years? What are the key areas that you intend to focus on, which can perhaps accelerate the growth trajectory for the company?

Thanks, Tarun, for the question. First of all, what I'd like to say is we continue to believe in our growth story for India. We see India as a long-term growth prospect market. And Castrol will continue investing behind the business, as I said, behind our brands, our people and supply chain and capabilities. I think personal mobility will continue to be a growth area for us, and this is an area which has shown steady growth. So that's a priority area for us going forward, and we will continue on growth trajectory in personal mobility growth. I think volume growth is an area which we continuously kind of keep looking at what are the additional opportunities we have from a volume growth perspective. And we continue working on our margin improvement through product mix and other efficiency initiatives. And the last thing I would say is this year, we moved into adjacencies with the launch of our vehicle care product range in partnership with 3M. So I would say that's kind of the focus areas.

See, actually, the way -- I mean we are thinking about that in the -- if I look at, say, last several years, right, Castrol's volumes or, in general, lubricant industries volumes has been growing at a lower pace. Of course, in the last few years, things seem to have improved for you. But do you see there opportunities in certain pockets in the market where probably there are things or changes that you can bring about, which can lead to a better trajectory in, say, next 3 years' time? Or are there any distribution realignment which can be brought about, which again can probably help you grow ahead of the industry?

So a few things, Tarun. I think as far as 2019 is concerned, the overall economic environment has been muted. But if you look at the previous 3 years, our volumes have grown at 3% plus on a CAGR basis. And I think I would like to kind of see 2019 as an outlier from a volume perspective, and we'll get our growth back. Personal mobility, our growth has been around 6% revenue growth in 2019, so that will continue to be an area of focus. And I think in the commercial sector where we've seen a bit of muted demand and more competitive pressure, we've already taken actions in quarter 4 in terms of new product launches and our portfolio realignment that will help us deliver growth in the coming years.

Sure. Second is to Rashmi. Your receivable fees have increased to like 45 days of sales from, say, 30 days a few years ago. And even CapEx in this year is higher at about INR 100 crore. Last year also, it had increased to like INR 78 crores. It used to be a lot lower earlier. So any particular reason for these changes happening in the last year and so?

Sure. So as we said, Tarun, we want to invest in growth, and that's what we are trying to do in different ways. So one is you talked about debtors. So I don't know what 45 days you're talking about. I think our total days sales outstanding is 27 days at the end of 2019. It was [ same ] in 2018. So we started investing more in the channel from 2018 considering the liquidity issues that the market was facing. However, to release cash to the business -- or to the investors, I would say, we worked very hard on getting the benefits from inventory reduction this year. So if you see our cash flow, you can clearly see that the operating working capital has reduced largely driven by inventory reduction. And we redeployed that money in the market to support our channel partners to drive growth. So that's one piece. Sorry, can you repeat the other questions?

CapEx.

CapEx, yes. So I think CapEx, as I said -- so we are again investing in retail channel and other channels to make sure that there is adequate visibility to the brand. So retail transformation, signages are the places we are investing in. We are also investing in a lot of digital initiatives. And you must have probably heard about Fast Scan, which is our initiative for mechanics to redeem their coupons in an instant way, which goes into their bank account. That is just one example, but we are otherwise also digitizing our customer experiences and back-office processes, which in the long term, we believe will get us better business and will lead to more efficiencies in terms of cost and the way we operate and including working capital.

Pretty much this is the run rate that we should continue to assume in the foreseeable future?

Yes. You should, yes.

[Operator Instructions] We take the next question from the line of Sabri Hazarika from Emkay Global.

Just wanted to know -- I have 2 questions actually. Firstly, this Q4, how has been the industry growth during this time? And can you give us some idea on how your personal mobility versus CVO versus industrial volume growth has been?

Okay. So our personal mobility volumes have grown during the year versus CVO, which is low single-digit growth in terms of volume, but the revenue growth has been 6% year-on-year, which I think is very encouraging considering the way the economy was. In CVO, we found pressure on volume and so in industrial because, as you know, the [ IAP ] contracted in the last few months. And especially automotive companies have not been doing well, and that meant that a lot of -- there are a lot of shutdowns in factories, including some auto ancillary companies, and that impacted our industrial volumes. Having said that, we are looking at more customer acquisitions and alternative industries to drive volume growth in industrial. In CVO, the economic activity has been muted, and any improvement in that will certainly lead to an improvement in commercial vehicle volume.

So in 2019, have you gained market share on a like-to-like basis in the industry?

In industrial?

No. The industry as a whole, both automotive and industrial, yes.

Yes. Thanks, Sabri. Let me answer that question. I think our market shares, especially in the 2-wheelers category and -- have been kind of more or less flat or growing in some segments, flattish in some segments. We've lost a bit of share in the commercial vehicle segments, but that's driven by the fact that the whole competitive situation in these commercial vehicles has changed significantly with the whole category kind of portfolio coming down in terms of pricing tables, et cetera. Now we've made interventions in quarter 4, as I said earlier, in terms of our portfolio, in terms of our competitive position. So hopefully, that should get us back to our track on shares.

Right. So -- and the second question is you have -- the long-term volume guidance of the company was -- has been around 5%. And there's also -- so do you stick by this guidance now? And what is the outlook for CY '20?

So we'll talk about the longer term here. And so we continue to hold this view that we will try to grow our volumes by 5% to 6%. So that's still our strategic objective.

Okay. And this year has been quite robust in terms of margin expansion.

Yes.

So is that -- I mean it's -- of course, it's -- part of it is from the mix also. But do you have any particular strategy or any particular guidance on how we should see the margin? Because the margin has been able to compensate whatever the volume decline has been to a large extent. So...

So we'll continue to focus on 2 things. One is personal mobility because that helps us improve the mix and retain margins better in a volatile environment. Second is efficiencies in costs. And I think a lot of margin improvement that you see in 2019 is a result of a lot of work done on supply chain and procurement efficiencies, which, in my mind, are sustainable. So we'll continue to work on that. That will help us keep the margins at these levels or we might reinvest part of that in the market because, as Sandeep said, on the CVO side, we might need to invest more. So we might reinvest part of that. But broadly, our attempt will be to have good margins going forward as well, and that has been our strategy earlier.

Right. And just one last question. In Q4, your cost of goods sold -- unit COGS has reduced. So was it largely in line? Or was there any specific benefits that you got?

As I said, we did a lot of work on procurement and supply chain efficiencies, and the full benefit of that materialized in Q4. There were some one-off benefits that have come in Q4, which were not repeat in -- later. But most of those benefits have been sustainable.

[Operator Instructions] We take the next question from the line of [ Raul Shah ], individual investor.

Sir, can you give more details about your -- this tie-up with 3M and how it works? What is the revenue potential?

So I think that at this stage, as I said, we're just stepping into adjacencies, and 3M is one of the partnerships we're working on. And the project is, right now, in a testing in the pilot stage. So it's very difficult to kind of give you any numbers -- specific numbers as far as top line or margin is concerned. And based on the current feedback we're getting from the market, it's working pretty well. There's some things which we need to fine-tune, but a whole scale-up would potentially come in near future, and we'll continue working on that. But specifically on numbers, very difficult to predict right now, but it's all looking very positive. And like Castrol, 3M is a quality brand. And based on our testing with consumers and customers, they see huge synergies in the 2 brands coming together.

Okay. And sir, what was the volume for 2019? And what was the same figure for 2018, entire year?

Are you talking about total cash flow volumes or...

Yes. Total cash flow volume.

Okay. Just...

So it was 204 million liters, I think, full year. And last, 214 million.

[Operator Instructions] We take the next question from the line of Mohammed Ahmad from FGP Limited.

Just there was some call issues -- call quality issues. I could maybe miss this. But the Q1 -- Q volume growth in Q4 obviously was extremely strong. Now part of it was Q3 was a bit weak. Just wondering, anything specific or one-offs in volume terms in Q4 that allowed you to have such a great number? And any segmented color on it?

No. So I think what has happened is, Mohammed, the Q4 volumes have been partly helped by the interventions we made in towards the end of quarter 3 on our commercial vehicles portfolio. So that's kind of beginning to pay dividends. Personal mobility continues to show steady growth. So there were no kind of very specific things, but is the overall interventions that we've made in the business that are helping us get to where we are.

Okay. So was the market, I guess, not as much then. Your recovery was largely [indiscernible] just from a weak market share performance in Q3?

Yes. Yes.

Okay. And the other question I have very quickly is on tax rate where I think the guidance was 26%. It came in at around 20% just based on the numbers I see the income statement. Should we expect it to be a 20% from a full year perspective in 2020? Or is it going to be 26% as was the original guidance?

Yes. So I think there are some one-off refund of tax this quarter that has changed the tax rate. But overall, it should be around 25% going forward.

[Operator Instructions] Next question is from the line of Omkar Hadkar from Mirabilis.

This is Srinivas. The first question is on the BS VI transition. So a couple of things here. Firstly, I wanted to understand what happens to the legacy BS IV product portfolio for both the PV and the CV part. Do you continue with those products? Or does the entire kind of a product portfolio for lubricant industry get transitioned to BS VI products?

So Srinivas, first of all, I think what I'd like to reiterate is Castrol was the first company to have a BS VI-compliant portfolio. And we were ready with our portfolio in 2019, much before the onset of BS VI going live in April. And the second is the portfolio that we have is backward-compatible, so which means that the older vehicles can also use the BS VI products along with the BS IV products, which are available in the market. So there's going to be a transition of the market, but BS VI products are backward-compatible. So that's the good news.

Okay. No, Sandeep, my question was specifically, will BS IV products still be put out in the bazaar after the deadline? Or there will be only BS VI products?

No. So as I said, it's a transition. And the products will continue to coexist, and there'll be a slow phase-out process, which is a normal way of doing business.

Okay. Okay. Fair enough, fair enough, yes. And then the second question related to that is that what kind of impact can it have on the mix with respect to both, say, price realizations and profitability once the transition kind of sets in after a year or 2?

So actually, it's good news as far as we are concerned because what happens is the product specifications and the products that are in BS VI portfolio are newer technology and newer generation products, which help us kind of get better premiums in the market and in the long run, it'll definitely help improve our margins.

Okay. Okay. Got it. The -- yes, the second question was your comments on the commercial vehicle. So I just wanted to understand what you're doing is more specific to certain pricing intervention? Or are there any kind of new products or categories that you're catering to, which will help you say, regain some lost market share? I mean if you could speak about specific initiatives there.

Yes. So I think it's always a comprehensive look. We look at any segment or category, and it's not one intervention. It's a number of programs that we will look at. So we've launched new products towards August of last year. We launched a product called RX Essential, which is giving us good traction, which is at the lower end of the market. We're making interventions in our support programs, support programs for mechanics in the market across mid-tier products and premium products, and also the activation, which is more centered around advocacy and building our advocacy with mechanics. So it's a combination of various programs where we are making interventions to make sure that we get our rightful share of that.

Okay. Okay. And the last question for Rashmi is could you help with the advertising and promotion number and the royalty number for the last year?

I think advertising was around INR 114 crores, which is almost 3% of turnover.

INR 114 crores, is it?

Yes. INR 113.9 crore, yes.

Okay. And the royalty, please?

Royalty was around similar numbers.

We take the next question from the line of Dharmendra Dave from Prabhudas Lilladher.

This is Ajay Bodke from Prabhudas Lilladher PMS. What is the status of the CapEx project at Silvassa? When do we expect that to get commissioned?

So [indiscernible] said that by 2021, it will be operational. So that time line still stays. So we have looked at the phasing again, and we will be continuing to invest.

And how much has been spent till now?

Last year, not a significant chunk. This year, second half, we start actually spending some significant amount.

We take the next question from the line of Dhiral Shah from PhillipCapital.

Sir, my question is, what is the revenue mix between, let's say, OEM, industrial and bazaar segment?

Sorry, say again?

What is the revenue mix between bazaar segment, OEM and industrial?

Industrial is around 12% of the total volumes. Bazaar is almost the rest. I mean 75% comes from bazaar, and the balance is B2B other than industrial.

Okay. And in terms of product mix, how much would be, let's say, a personal mobility, how much would be CVO and how much would be industrial?

Personal mobility, we said, will be between 45% to 50%. And industrial, I talked about, and the balance is CVO and heavy duty.

And how is the mix in 2018? Let's say, what was the change in mix?

I think there improved personal mobility volumes because, overall, we sold more personal mobility in the year.

By how much? Let's say, a ballpark figure?

We usually don't share too much of detail on this in terms of breakup. But broadly, I can say that it would have grown a percentage or 2.

Okay. And lastly, what is the capacity utilization?

Sorry?

Capacity utilization?

I think it's around 80%.

We take the next question from the line of Deepak Gupta from Reliance Nippon Life Insurance.

I just wanted to confirm, what was the volume for the quarter?

54.

54 million tonne.

Million liters.

Sorry. Yes, sorry. And ma'am, if you can give us a breakup of personal mobility into 2-wheelers and 4-wheelers?

No. We don't usually share that breakup.

We take the next question from the line of Mohammed Ahmad from FGP Limited.

Just one quick follow-up on the COGS. You did mention earlier on the call that there was a few one-offs. Can you give us a sense of how material that was given that your -- sorry?

Yes. Material. Okay. It may not be material on an overall yearly basis.

Okay. So your cost -- sorry, your gross profit per liter was well above your historical number, clearly helped by the mix, but also, I guess, on cost deflation.

Yes.

Could we expect that at least to be flattish for next year? Or could that retrench as you gain back here and see...

You mean the cost of goods?

No. Just the gross -- yes, for cost of goods. The...

Yes. So that'll...

Not cost of goods, sorry.

Okay. That will depend on 2 factors. One is how the cost of goods is moving, and if the crude remains benign and the ForEx doesn't really depreciate in March. I mean it's already depreciated versus last year, okay? So if it depreciates further, then we will have to see how we can protect the margins. But as I said, we could invest a part of the margin growth in getting the volumes back. So where we have -- where market share -- where we want to gain market share. So considering that, you may not see same level of margin, but it will still be quite a decent number because even if you see our 2018 margin, it was quite high.

So would it be fair to say -- I know you give volume, got long-term volume guidance, but if we took a look at your long-term progress, would it be fair to say it's more a mix of gross profit per liter and volumes that you're targeting? And could we say it's something like a high single-digit number there or no?

So we are looking at growing the gross margin pool with the combination of mix improvement, cost efficiencies and volume.

Yes. That is how I understand it. I'm just wondering, do you have, say, a long-term growth target in mind for that gross profit pool growth?

We have, but we don't share those numbers. So we've talked about volume growth of 5% to 6%, and that's what we will steal it.

We take the next question from the line of [ Pankaj Bajaj ], independent investor.

So can you please throw some light on how is partnership with 3M India is progressing and the expected contribution in the top line or the bottom line? And the second question is, are there any investments also that we have to make apart from leveraging our distribution network with the 3M India?

So thanks, Pankaj. Let me take that question. I think as far as the collaboration and partnership with 3M is concerned, as I think I tried to say earlier, it's in early stages. It's a pilot that we kind of -- we started in the second half of last year. And we still kind of in the learn-and-refine mode as far as that partnership is concerned. But the initial feedback has been very positive because consumers see Castrol and 3M as 2 quality brands who will deliver trustworthy, quality products to them. So early days but very positive signs. So therefore, I cannot share any specific numbers around that, how much it will data to our top line or margin. I think in terms of capital investment, no, we're not planning any capital investment as far as this partnership is concerned.

We take the next question from the line of Rahul Jagwani from Insync Capital.

You were talking about long-term volume of 5% to 6%. But from a long term, will there be any impact of BS VI on this in our guidance? I mean, is there any negative impact from BS VI? Is that possible?

So I think what happens is as technology improves, the drain intervals do get impacted that we've seen in our categories. But at the same time, India is a growth country. It's a growing economy. So more commercial activity also leads to more kilometers being drawn -- driven. And therefore, I think it's very difficult to kind of pinpoint any specific things. The other thing that happens is because BS VI products are better products and they command better premium -- where we can command better premium based on new technology and better products, that also leads to turnover growth. So I think we don't see any huge impact as far as the BS VI products are concerned.

But any realization figure on what the difference can be from a long-term perspective as in from BS IV to VI?

So I think we have a strategic pricing framework that we adopt. And I think our focus is always on what is the level of pricing that'll deliver customer value. I think that's what -- where our focus is.

Yes. And it's an evolving thing, right, because it will just start the full BS VI transition. So we will see how things evolve, and we'll make decisions based on that.

Okay. And my second question is on the dividend payout. So now that the dividend implications on the investors, so from next year, will you be raising a dividend payout? Or in that case, we also have cash right now. Is any special dividend which we might pay before March?

So we just declared a slightly higher dividend than last year. If you have seen dividend [ cash ] history of Castrol, every year, we improve the dividend. And there is good cash flow. So that supports the dividend declaration. We have a dividend policy in place, and we usually review it in light of that policy as well as in the light of the year's performance, okay? So the final dividend is already declared, so there's obviously nothing that's going to happen until March. But we do have one interim and one final dividend as a policy. And the directors will take appropriate call based on how the trading of the year has been after midyear, yes.

[Operator Instructions] We take the next question from the line of Manikantha from Axis Capital.

Sir, I wanted to understand, given your experience of working in Europe and African markets, are there any ideas that are being implemented there that are not being used in India so far? And you think that can be implemented here, which can help you in your strategic direction with respect to volume growth?

So thanks for asking that question. I think Castrol is a global organization, and there's a lot of sharing of best practices anyway without maybe having worked in Europe and come back here. And I think we always engage with each of our geographies. Definitely, they're good practices in India, they're good practices in Europe, and we always kind of make sure that we're taking the best of practices across the globe. So that's how I see things rather than being very specific on what is the best practice that can be brought in. And I think the other thing I have observed is India is a huge hub of talent. I'm really energized by what I see in India from a talent and innovation perspective, whether it is kind of -- as Rashmi was saying, we're already kind of into launching a lot of digital initiatives that are going to help our customers get a more premium customer experience.

Next question is from the line of [ Nirav Mehta ] from Edelweiss.

This is Shradha from Edelweiss. Sir, just wanted to understand the impact of this BS VI portfolio. As you said, it is backward-compatible with our older vehicles. So what could be the impact over the next few years on both volume as well as value?

So I think we see the BS VI as a positive development because it will help us give better products to our consumers. It will help in the overall environment towards having a -- better for the people and our customers. From a Castrol India perspective, it's an opportunity for us to kind of give better technology products, and that also helps improve our realizations and turnover as we go forward.

So what is our assessment, how meaningful this will be over the next 3 to 5 years in our overall product portfolio?

So I think it's a transition. It's very difficult to say about what will be the new vehicle sales on BS VI. We'll have to see how the new vehicle sales are coming, and that will mean a slow transition of the portfolio from all BS IV products to BS VI products, but it's not going to be an overnight change thing.

Sir, that is a significant vehicle park, which is non-BS VI that has to be serviced, and that will continue for some year or so. As Sandeep said, it will be a gradual transition. So very difficult right now to make an estimate of number as to how much will transition and how will that impact our business.

[Operator Instructions] Ladies and gentlemen, that seems to be the last question for today. I would now like to hand the conference over to Mr. [ Raunak Narayanan ] for his closing comments -- sir, we just have a participant in queue. Can we that up?

Yes. You may go ahead.

Next question is from [ Nilesh ] from HDFC Securities.

Sir, as you mentioned that you changed the BS VI product portfolio. So what kind of change you have to incorporate so that your lubricants become compatible with the BS VI [ norm ]? And second question, and what is the CapEx amount for that, that you incurred?

So I think as far as the product readiness for our BS VI portfolio is concerned, we leverage our global technology center because Europe went through the same process a number of years ago. And as far as CapEx is concerned, it's a normal part of our innovation budgets. We come -- every year, we invest a certain amount behind our technology development. So it's nothing out of ordinary.

Okay. Any specific ingredient that you have to put into the body so that it become compatible with the BS VI?

So I think it's -- you have to change certain additives in the formulations. But to give you a specific thing, it's very difficult.

Sir, that was the last question. I hand the floor back to you, sir, for your closing remarks.

So thank you very much for your time and questions, and we look forward to your continued support. And see you at the end of the first quarter in 2020. Thank you very much.

Thank you.

Have a good day.

Thank you.