Castrol India Limited (500870) Earnings Call Transcript & Summary

Thank you, Ronit. Good afternoon, everyone. I hope you and your families are staying safe and healthy during these difficult times. Thank you for joining us on the second quarter and the first half 2020 results call. We all know that the country and several communities continue to witness unprecedented and very difficult times caused by several factors. The continued economic slowdown, lower GDP, vehicle sales decline, uncertainty around BS VI, liquidity crunch and the continued COVID-19 pandemic has been causing severe demand and supply disruptions for the lubricants industry. Despite this challenging environment, Castrol India has shown continued resilience and determination during the second quarter of 2020 while being focused towards 3 priorities: one, protecting our people; second, supporting communities; and third, protecting the financial health of our business in these difficult times. I would like to thank all our teams for their hard work and commitment during these difficult times, both our plant teams who have continued operations in a safe manner to fulfill customer demand and all our teams working virtually from home. We have committed to INR 11.7 crore of our annual CSR spend towards supporting communities impacted by COVID, including hospitals and critical medical equipment, truckers and mechanics, refuse collectors, migrant laborers, daily wage workers, police personnel and essential service workers. Customers are at the center of what we do, and we have continued to fulfill most of their demand, even during this difficult time, due to our strong supply chain and distribution network. We acquired close to 1,000 new customers or retail outlets during this period. As part of our strategic delivery, we have continued to progress on our priority areas. We are very excited with the strategic alliance we have entered into the Jio-bp retail sites, which will greatly enhance the reach and visibility of Castrol lubricants across 1,400 Jio-bp sites, which will expand to 5,500 retail sites over the next 5 years. We have leveraged digital, built strong virtual customer connects and deeper relationships while continuing to acquire new customers, renew contracts and strengthen our advocacy efforts with key stakeholders. We started several online trainings and offers, including for mechanics and our B2B customers and prospects in order to help them safely resume work when they restart business. Financially, we have delivered 45% versus last year of our turnover and more than 35% of PAT. Protecting cash was our key focus area, and cash delivery was very healthy at 85% of 2019 first half. We have supported our customers through extended credit terms and SKUs to revive trade. This, along with judicious cost management and efficiency programs, have helped us maintain our current strong liquidity and financial position to be able to meet any near-term challenges. Lastly, I would say that we continue to monitor the ongoing crisis very closely and are constantly working towards protecting the long-term health and sustainability of our business. We have a new TVC on air for our largest selling 2-wheeler brand, Castrol Activ, which went live a week back, just as things are picking up, especially in the personal mobility sector. This is an example of our agility and the responsiveness we have continued to display in this volatile situation, which is also a reflection of the strong fundamentals of the business. Our strategy remains unchanged. And we are confident of long-term, profitable business growth as economic activities return to normalcy. And now with this, I'll close my opening remarks and welcome the Q&A session. And I have Rashmi, our CFO, with us. And between the 2 of us, we will answer any questions that you may have. Thank you very much.

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

A couple of them. First one, could you share how were the volumes in this quarter?

Sure. Rashmi, would you like to respond to that?

Sorry, I was on mute. Yes. This quarter, we did 29 million liters.

Okay. 29 million liters. Okay. And how -- are we now in the -- like we are already like pretty much at the end of July. So are we back to normal, let's say, 80%, 90% normal? So if you can comment anything on that?

Well, I will not state the percentage, but all I can say is that the momentum looks stable post June. However, this whole changes in the lockdown in various states from time to time, make it very difficult to really estimate what is going to happen, but I would say that it's looking quite stable.

Okay. And the second question that I have is that there is a reasonable amount of cash, which is being accumulated on the balance sheet. I know that you prefer dividend as a payout mechanism and you continue to pay out higher dividends. But is there any thinking of -- given where the stock is, is there any thinking of considering a buyback at some point of time, which may be also routed to enhance your whatever returns and value for the shareholder in some way?

So Tarun, thank you for that suggestion. I think we've been getting it. So we will consider that in our conversation. Thank you, sir.

We take the next question from the line of Puneet Gulati from HSBC.

Can you comment a bit more on how your -- how the BP's relationship with Jio will likely impact your growth perspective. You talked a bit about 1,400 outlets going to 5,500. Is there anything more that you can comment? And if you can give some sense of the time line for this.

Sandeep, you want to take that?

Yes, yes, let me take that. I think, first of all, what I'd like to say is it's a very exciting growth opportunity for us because as I said in my opening remarks, there are 1,400 Reliance retail sites now, which have been transferred or will transfer into the JV, which is Reliance BP Mobility Limited. And the exciting opportunity for us in Castrol is we are the sole lubricant supplier on all these sites or the lubricant supplier to the JV, which means that it gives us a good opportunity for sales at these outlets. And also from a brand visibility perspective because millions of consumers visit these retail sites for [indiscernible]. The other exciting opportunity with -- also with the Jio digital platform. And the JV, it also gives us potential to participate any -- in any future mobility services that we can offer on these sites and being part of that journey. As far as time lines are concerned, we've already started supply to some of these outlets because the JV has gone live. And these are very early days, but supplies are on. And I think let's see how demand picks up, but we're looking forward to this as a growth opportunity.

So will it be fair to say that 1,400 outlets to start with will be incremental to your growth, but nothing you were supplying through those channels before?

I think -- will it be 100% incremental? Difficult to say. But our presence in this channel was kind of not there earlier, and that's why we're seeing it as a growth opportunity.

Okay. Okay. And then you also mentioned about future mobility. So does that mean Castrol intends to enter beyond the lubricant space as well?

I think we always keep looking at potential opportunities. It will be -- it's very difficult to say anything specific right now. But for example, you've seen that we partnered with 3M on automotive care range of products. So we constantly keep evaluating what is the possibility for the future. And if any good ideas or opportunities come in future mobility space, we'll be open to look at that.

[Operator Instructions] We take the next question from the line of Shweta Jain from ANS Wealth.

Sir, I have a couple of questions. One was if you could give some sense to how is the sensitivity of our gross margin with respect to crude oil prices. One was that. And the second question was if you could let us know what is the quarterly cash burn and fixed to variable cost proportion.

So I'll hand over. Rashmi, do you want to take these questions, please?

Yes, Sandeep. Sorry. Can you please repeat the first question?

Okay. So ma'am, I just wanted to understand the sensitivity to our gross margins with respect to the crude oil prices. So if you could give some sense how does these 2 correlate and what impact it has on the gross margin.

Okay. So I think the base oil prices have been probably the lowest in last quarter that has gone by. Going forward, we might see some stand-alone base oil prices based on the demand that is coming through usually. What will happen is each time there is a change in base oil price -- base oil is a crude oil derivative. So I'm addressing base oil and not crude. There is a time lag between the changes of price of crude and changes of price of base oil, depending on the stock holdings and the choices that [ refiners make of basin demand supply, whether they want to do base oil or not, something else or the liquidity that we have ], okay? So base oil impact, it's a significant portion of our products. So it impacts significantly. We do not expect big changes to happen going forward in the base oil prices in the near future. In terms of sensitivity to gross margin, the way I would put it is there are 2 factors. One is the cost of risk, which just impacted immediately after the base oil prices change between a month or 2. However, there is the sales price realization and the base oil changes also could impact those through competitive actions. Because we do have to look at what pricing premiums are holding in the market as the base oil prices are low for a long time so that we're able to retain our volume share in the market [ within ] competition. And hence, the changes to gross margin will depend on that also, okay? So it's difficult to say that whether a particular amount of base oil change will [ result in the base changing gross margin truly ] and so it's a next step. Now the other question was on cash burn, right? So I think we spent about INR 90 crores, yes.

Per quarter, right?

Per quarter, yes. And about 1/3 of that is fixed.

Okay. Okay. So just a follow-up. So basically, the first question, what I understand is, and correct me if I'm wrong, ma'am, the gross margin is dependent on basically the cost of goods sold, which is a directly -- it will impact directly, right? I mean immediately, you can see the impact of it?

1- or 2-months lag because of stock, yes.

Okay. Okay. And the sale price realization also impacts the gross margin, which depends on -- like how do you decide the sales price realization? Like how does it move?

So we hold certain pricing premium, and there are different pricing premiums versus competition on different brands depending on the strategy for the brand and depend on which geographical geography we are in, yes. So the team keeps looking at this pricing premium, considering the impact of those premiums on volumes, yes. And basically we took pricing intervention. And then the gross margin, a function of both prices as well as cost.

Right. Okay. So price intervention may or may not happen? But cost of goods can -- definitely will be there, right?

Yes.

We take the next question from Vaibhav Badjatya from HNI Investment.

So if you look at the long-term evolution of your business, if I look at the -- some of the volume numbers in, say, 1997, 1998 and volume numbers today, when I'm not talking about the corona period, even before corona, say, in FY 2019, they're broadly same. So they are like -- it's like 20 years, our volumes have not changed, while have no concern on the profitability. But what is it in the strategy that is leading to such kind of flat volume for 2 decades? Has the -- I just wanted to understand that -- what is there that we are fine with 2 decades of low volume growth?

Sandeep, you want me to take that?

Yes, yes, you can take that. And then if I have anything to add, I'll add. So...

Yes. So if you look at our stated strategy, it is driving profitable volume growth, yes? The lubricant market in India is about 2.5 billion liters, and of which approximately half is what the -- is relevant to us. The last portion of our portfolio is aftermarket. And the -- of the 1.2 billion, I think, about 50% is industrial and commercial vehicles and the balance is personal mobility. The personal mobility market is growing, and it will grow faster than the rest, and that is what is the basis of our strategy. And that's the volume that is going to give profit, okay? So our strategy was very clear from last, at least, 5 to 10 years, is that we will be profitable volume growth. In lubricants, the technology is changing fast. And the usage of lubricant is declining each year because people want to use lesser of -- less oils. There's this green agenda, which now most oil majors have adopted, okay, as the next objective for themselves, right? So the lesser oil we use, the better it is for environment. And of course, there's a cost of ownership issues that the OEMs drive and because of which they reduce the oil consumption that will happen in [ their millings ]. As a result of this, you will always see that the volumes will decline over the longer period, at least in India because we are a developing country, increasing 1% or 2% each year in each share market so there's -- either the volumes are flat or they decline. So in certain industry focusing only on volume for growth in value will not help us in creating overall shareholder value. Hence, the strategy to focus on personal mobility, which also means that you do make volume value choices in the other segments. That is what we've been doing. So if you see -- if you can just recall whatever 19 -- which number? '98, '78, whatever, what was the per liter gross profit and now what it is, okay? And then you will see that the value has been created for shareholders through this strategy. And that's why we are still following that strategy because going forward, also, we see huge potential for growth in personal mobility and probably not so much in the other commercial vehicles.

Right. So exactly, I have no concern on profitability because your gross margin per tonne has expanded dramatically over 20 years, which is what has driven our returns, but then...

Yes, we could have followed the volume path of just growing volumes and probably not deliver so much of profit, yes, because we have to give really deep discounts to be able to get those volumes. And even after giving it, you're not sure you can get the volume because somebody else is giving more discount than you. So we are not that kind of company. We are a premium lubricant company.

But is there a limit to this margin per tonne expansion because it has reached really, really high level over last, say, 5, 6 years? I mean there has to be a point where the consumers still think that it's just too much of a difference. And they might shift to other brands, which is probably the reason, in terms of market share, other players are growing faster in spite of the overall industry headwinds.

So can I comment on...

Sure. I will just speak for a minute.

Yes, yes. Please continue. Yes.

Yes. So if you see last 3 or 4 years, our unit margin has not grown substantially. And so we have consciously ensured that the improvement in margin was largely led by mix improvement and not by prices, okay? So we have taken care that we are not unnecessarily putting higher prices in the market. As I said, we look at pricing premiums on every competition, and we do take pricing action. Some example is last year, fourth quarter, we did take pricing action in commercial vehicles portfolio, okay? Which led to some margin dilution, but we are okay with that. We are looking at those aspects also, but it's a balancing thing. There is not always one way that you can go. Sorry, Sandeep, you wanted to add.

Yes. I think the only thing I want to add is there are a few other things which you need to consider that are happening in the market. So first of all, I think as the technology evolves, that gives us upgrading opportunities in the market, okay? Because as engines become more efficient, they use more technologically advanced products, which obviously give us an opportunity to market more premium products. And as you see the evolution, the oils are becoming thinner from 20W, there's a movement to 10W. And then most of the cars today use -- will be using 5Ws. And the world -- and if I look at developed countries like Europe and all, they're all being moved to 0Ws, okay? So that's another phenomenon that helps keeping the portfolio robust and keeping a margin level that -- where we want them to be. Second, as Rashmi was saying, we have a pricing strategy. It's not that we completely want to outprice ourselves from the market. So we follow a certain pricing strategy, and we keep looking at our premiums versus competition. But at the same time, we've also introduced new products to participate in the larger categories. For example, we introduced RX ESSENTIAL in the commercial vehicle segment, which is at the lower end of the market. We have Activ ESSENTIAL, which is placed in 2-wheeler segment at the -- at a lower price point. So it's not kind of one game in town. It's a combination of various factors.

We take the next question from the line of S., Ramesh from Nirmal Bang.

So if you look at the Y-o-Y decline in the revenue for the quarter, can you give us the breakup between the impact from volumes and impact from prices for the second quarter?

Yes. Rashmi, do you want to...

Sorry, say again.

Yes. So your Y-o-Y, the revenue has come down 53% compared to the second quarter last year. So can you give us the impact of volumes compared to the same period last year?

Volumes compared to the same period last year. So volumes are about -- lower by 55%, right, compared to last year. Yes. So last year was a [indiscernible]. Yes.

Okay. So -- and the -- if you look at the sequential movement in the margins, it looks like you have possibly seen some acceleration in the volume, say, between May and June. So is there any volumes you're pushing to the channel, was possibly holding higher stock? And is there a push in terms of higher-value products this quarter compared to the fourth quarter?

So we are not pushing volumes. That's number one. We are just servicing the demand that is arising. The plants are closed, so we will have stock to push, okay? So we had enough stock at our CMS locations, so we could service the demand. And there were times where we service the demand through -- from plant directly because of lockdown issues or from some other stock locations than the usual, yes? So the distributor stock pipeline is pretty light, I would say, or managed well. We are not pushing stocks in the system. There was sufficient demand that we saw in [ the year ] and the personal mobility demand also went up to -- in June some time, especially the crude oil demand.

Yes. Rashmi, I think one thing I like to comment on is, as you rightly said, we're not pushing stocks into trade because stocks sitting in trade doesn't help if you don't collect cash for that trade. And I think that's one area where the strength of Castrol has played very well in the second quarter in May, June period because we were able to supply to demand. And at the same time, we were able to collect our cash from the trade, which has been a pretty strong performance on cash delivery.

Okay. So if I may look at the big picture longer term because of the concern about the shift from the internal combustion engine to electric vehicles, and there was a mention about your company looking at solutions for electric vehicles in terms of liquids or products for the electric vehicle engine. So is there anything you can share in terms of how you see this market growing? What are the kind of new products you may like to introduce maybe over the next 2 years? Any thoughts on that?

So let me try and answer that. First of all, I think the demand for engine oils based on internal combustion engine is going to continue over the next 20, 30 years, if I look at India. So it's not if things are going to go electric in the short-term because if you look at -- our penetration of vehicle ownership is pretty low in India, especially if we look at cars. So our engine oil business or lubricants business based on internal combustion engines is going to stay pretty healthy over the next few decades. At the same time, we leverage a lot of our global technologies, R&D as far as EV fluids are concerned. So we have a portfolio of EV fluids approved by OEMs, and I'm very happy to kind of say that we are supplying EV fluids to Tata -- for Tata electric vehicles and MG electric vehicles in India. So we're already starting on that journey. But is it going to be a huge part of the business in the coming decades? Possibly not. Our business will pretty much be focused on servicing demand from ICEs.

Next question is from the line of Nitin Tiwari from Antique Stockbroking.

So I just wanted to like -- I wanted you to elaborate a little bit on your sales mix in this quarter. And how do you see that evolving in the next 6 months of this financial year?

Rashmi, do you want to take that?

Yes, yes. So in terms of sales mix, as I said, the personal mobility volumes was better towards June. There was demand on -- in commercial because of agri. The agri demand was good. Agricultural was good. So overall, I think the mix was better.

I was coming more from the standpoint of the breakup between automotive and nonautomotive, if you can help me with that.

So automotive was about -- automotive was -- I can talk of the first half year, not for the second quarter, so close to 90%. [ And then most of invested numbers. ]

All right. So automotive was 90%. And secondly, like you mentioned overall volume number at about 29 million liters, right, for this quarter?

Yes, yes.

Great. And your second question would be around like what are your like thoughts about addition to your retail distribution channel in this year. And I believe you have over 1 lakh retail distributor partners, so where would that be headed in this year? And also, if you can talk a little bit about your ad spend for this quarter and for the next 6 months.

Well, the retail distribution, the 100,000 number you have is the retail outlets, which are furnished by our distributors. So they are not our direct customers.

Of course.

Yes. And so during the quarter, we added about 500 retail outlets and 500 new customers [ to work through engagements ] with our various customers, okay? What's the plan for expansion? There are a lot of things being done on the distribution side in terms of improvement. Considering the COVID situation, right now, it's very difficult to say any numbers. But we are very seeming to improve and do better whatever we are doing on the distribution side. [ And I'm sure there will be -- at a time this quarantine will be or we will be able to come back with something more concrete. ]

That's helpful. And also on your ad spend, if you can elaborate a little bit how was it in this quarter as the...

So this quarter, ad spend was very low because the demand was very low. And there is no point in spending money on advertising if -- or nobody can buy the product, right? So we have taken down our ad spend quite a bit, but we started spending, again, in our advertisement from TV in July. We will come back to normal levels going forward.

You're about 6% to 7% of your top line for the rest of 6 months? Is that's the right number to look at?

I don't know whether 6% or 7%. Again, it will all depend on how things are there in the market, whether the demand really picks up. But as I said, we have started spending for new product launches as we lined up and we will spend as required.

Next question is from the line of [ Shradha Sherman ], individual investor.

Ma'am, would you be able to spell out for where we will be progressing on the CapEx? And how many million liters will the CapEx add to -- and so today, you're at 200 million liters, what would your future capacity be? And would you have the split between OEM and secondary sales in the automotive side?

Sorry, OEM and?

Secondaries, like servicing and service centers and all those things. Would you track that if possible?

Yes. So OEM and that secondary, as you call it, it's about 10% of our volume usually, okay?

So 90% [ in business ]?

Yes. What was your first question? Sorry, I missed that.

The CapEx, ma'am. The Silvassa CapEx of 40 million liters. I mean what would that take -- where are we progressing on that [ if Feb also go... ]

Yes. So considering -- so we started work on that. However, considering the demand drop that has happened because of COVID on the uncertainty of the situation around us, so if you see the -- across the world, the demand has dropped. And generally, the business sentiment is not very positive at the moment. Considering that, we have -- we're going slow on this CapEx this year. However, it's still in the pipeline, and [ it more than added capacity going forward. It is a ] personal mobility product capacity, which still remains a relevant CapEx to spend on. So we will see that coming through next year. And is -- now that's good news.

[Operator Instructions] Next question is from Kiran Naik from Mody Fincap.

Sir, I have a question on the -- your deal with the Reliance industries. You told -- you said that they have 1,400 outlets, and our products will be sold on that -- on their outlets. So with our Castrol product, other companies' products also will be sold or exclusively Castrol?

No, it's going to be exclusively Castrol.

Okay. And for those 5,000 also, which are going to come further?

Yes, over the next 5 years.

Okay. And is there -- in this deal, we -- have we taken any stake in Reliance or Reliance has taken any stake in our company, anything like that? Or it's just a simple joint venture?

No. It's a joint venture between Reliance and BP. So Reliance has 51% and BP has 49%. But as far as Castrol India Limited is concerned, we are a supplier to the JV.

Next question is from the line of Shradha Sheth from Edelweiss.

Just a question on the volume this quarter, if you could just give color, how was it spread across different segments within the automobile? So how was the hit in the CV and the other segments?

So Rashmi, do you want to respond or...

Yes, yes. So it was about 45% personal mobility and the balance is CV and industrial, Shradha.

And as we are seeing the comments across OE suppliers, that around July, things have picked up, it could be possibly pent-up demand or things picking up. So if you could just give some color in terms of how -- for our industry, we are seeing the demand trend?

So we actually answered this question before, Shradha. So we are seeing stable demand, as I said, however, considering the fact that the lockdowns are being imposed again in various states, it is difficult to, at the moment, say how it's going to land, but we did see stable demand during July.

When you say "stable," meaning things are picking up from May?

Yes, I will say that.

Yes, yes. And Shradha, let me also kind of add on. You're seeing demand pick up, and I think we're seeing good demand pickup in 2-wheelers to begin with. And as Rashmi stated earlier, in May and June -- second half of May and June, we had a good demand on -- from agri that -- which was more related to the harvest season. But in July, we're seeing stable demand. Recovery seems to be faster in 2-wheelers as compared to the other segments, whether it's commercial vehicles or passenger cars.

Okay. That's helpful. And just on the pricing action, I think gross profit per liter has come down to roughly about INR 90. So -- I mean how are we evaluating going forward in light of volumes, in light of base oil coming up a bit? And in terms of demand pickup, are we considering any further pricing actions?

So I think we -- go ahead, Rashmi. No, no, no. Go ahead. Go ahead.

So in the last quarter, we had to make an intervention in terms of billing schemes, so within scheme of 1, 3 and 10. It was more designed to help getting the movement going in the market, which is suffering because of lockdown. And that actually helped because our distributors were able to move the goods and sell and collect money. I think our focus in Q2 was collection of cash because there are a lot of fear in the market in general in terms of liquidity and ability to pay back the debt. So considering that, we had the local scheme. That scheme got over in June. So we expect the realization to look better going forward.

Next question is from the line of Sabri Hazarika from Emkay Global.

I have 2 questions. So first one is your -- so we understood about this decline in net relation that you pointed to the scheme that was there in Q2. But against that, your cost of goods sold, I mean, the unit base oil price also seems to have gone up. So anything specific on that? Because otherwise, that was like a quarter with the lowest oil prices.

No. See, base oil price has not gone up.

I mean if I divide your, I think, raw material cost with the...

Yes. That is because of Forex, not because of base oil.

Okay. So that is part of -- okay. So overall, base oil has remained flat. So there's nothing exceptional on that or nothing as such, right?

No. It's just the Forex that is impacted.

Okay, ma'am. And second question is on this -- you have earlier also maintained the guidance of around 5% medium- to long-term volume CAGR. So you continue to maintain that? And when do you think that you should be like back to that kind of trajectory? Any guidance on that?

We would like to maintain that as a strategy, as a stated strategy. And we will have to review all of what we do in the light of COVID situation in the short term, okay? And once we do that review, we -- and if there is a change, we will talk about it. But at the moment, that's the longer-term number that you're still holding on. And 2020 is going to be a year of aberration, obviously. And we'll have to see how 2021 pans out post this whole pandemic in 2020 and the impact of that on global economy as [indiscernible].

And your OpEx run rate will be this? Or it can again go up with the -- with higher volumes?

Okay. I mean variable cost can go up.

Variable part will go up. So...

And the freight, et cetera, obviously, it will go up. So other expenses drop that you're seeing today is not going to remain at that level. However, we, as a company, have always been very conscious of cost and we've been taking actions almost every year, every 2 years in terms of driving efficiencies and you will see that the way our employed benefit costs are shown. And the -- that we've -- our costs have grown almost half of general inflation rate each year, if you take a CAGR of 5 years. So we will continue to do things that are necessary to keep costs in control.

All right. And the expense will also behave accordingly depending on how the market opens up?

Yes.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Sandeep for closing comments.

Yes. So thank you very much, and thanks for all your questions, and hope we've answered the questions to best of our ability. And I think if we look forward, I think I'd like to thank all the team of Castrol India for showing resilience in quarter 2. I think given the circumstances, April and May were pretty much locked down, we focused, we've been able to deliver very good cash performance. We've been able to deliver profit, although lower than last -- as compared to last year, but still, I would say, a robust performance. And if we look at the second half, there are signs of cautious optimism in the way we see stability in demand coming through. But again, it's very difficult to say given the current state of lockdowns and things opening up and closing down again. But we have pretty exciting opportunities, whether it is the Jio-bp, a retail joint venture or we have strong plans in terms of new product introductions. For example, we launched Activ CRUISE last month, which is getting good traction. We launched the GTX SUV product for passenger cars, which is also getting good traction. So cautious optimism for second half. And thank you very much and stay safe, and all the best to you and your families. Thank you.