Castrol India Limited (500870) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our Q3 FY '23 Earnings Conference Call for Castrol India Limited. Please note that all participant lines will be in the listen-only mode. You can ask questions after the opening statements. [Operator Instructions] We have with us Mr. Sandeep Sangwan, Managing Director, Castrol India Limited; and Mr. Deepesh Baxi, CFO and Whole Time Director, Castrol India Limited. I now hand the conference over to Mr. Sangwan for his opening remarks.

Good evening, everyone. I hope you can hear me. First of all, thank you for joining the Castrol India's Third Quarter 2023 Earnings Call. I hope you and your family are doing well. We are pleased to share that Castrol India Limited delivered strong growth in the third quarter of 2023. And here, I'd like to remind you that we follow the Jan-December calendar year for our reporting. Despite challenges from volatility in crude oil prices, inflationary pressures and global uncertainties, we registered good growth, reflecting resilience in innovation in products and services. And to begin, first, I'd invite Deepesh to talk you through and take you through the third quarter numbers and financial performance in detail. He will then also take this opportunity to share with you how the nine months of this year has been. So Deepesh, over to you.

Thank you, Sandeep, and good evening to all of you. We announced our 3Q full year financial year 2023 results. This afternoon, there are some key financial highlights. In 3Q 2023, we reported a strong financial performance. Our revenue from operations was INR 1,183 crores and this was up 6% year-on-year compared to INR 1,121 crores in Q2 2022. Our profit before tax was INR 264 crores. This is a gain of 4% year-on-year compared to INR 254 crores in Q3 2022. This also extended to a strong performance in the 9 months ending on 30th September 2023. During this 9-month period, the company registered a revenue from operations of INR 3,811 crores, achieving a growth of 6% compared to INR 359 crores in 9 month 2022. The PBT for the 9 months stood at INR 857 crores, growing by 10% from INR 845 crores in 9 months 2022. We entered the last quarter with confidence and are optimistic of continued growth into the 2023 last quarter as well. I would now like to hand over to Sandeep.

Yes. Thanks, Deepesh. Apart from the financial performance, I would like to draw your attention to some key business developments in Castrol India. In terms of our recent launches, the Auto Care range is gaining good traction and acceptance by day. The entire range of products is now available in 18,000 outlets and e-commerce platforms across India. As to Magnatec 30 SUV is also doing well catering to high performance demands in SUVs, which accounts for 50% across the mobility 4-wheeler space. Our Badhte Raho Aage campaign endurance team as we go into the next leg, which will be an extensive on-ground activation, specifically tailored to support truckers. This should boost our outreach into rural areas in the country to tap into the demand. For motorcycle enthusiast, Castrol Power1, partnered with Geocinema as an associate streaming partner of BaragGP, India's first motor GP and produced exclusive content that resonated with the performance biking community. In addition to out-of-home, the campaign went live on Geocinema and other digital channels. It is thought to share that our CSR initiative for truck drivers, Sarathi Mitra completed 6 years of supporting truck drivers, health, well-being and livelihoods. The initiative has improved the lives of over 200,000 truck drivers and their families across India, to date. Sustainability and environment consciousness is an integral part of our business and our strategy. After having launched 100% post-consumer recycled or PCR as commonly known, for ultimate last year, we successfully transitioned all our globulin, high-density, olyethylene, ABE, manufacture and distributed across our supply chain network with 30% PCR content. This migration will help us reduce our virgin plastic consumption by 1,800 metric tons in addition to travel emissions reduction by 2,600 metric tons per annum. During this period, we continued to expand our service and maintenance network. We now have 1,200 multibrand passenger car workshops, over 5,500 bike points and 47 cash-on express oil in outlet GB2 sites. It is heartening to say that our products, services and processes are recognized by various industry bodies from time to time. Our Silvassa plant was recently awarded Platinum Award in Quality Excellence category and Gold Award in Occupational Health and Safety category by Apex India Foundation. Our Paharpur plant won Safety Excellence Award from Indian Chamber of Commerce and achieved 100% renewable electricity by sourcing international renewable energy certificates, aligning the plant to reduce 80% of the Scope 1 and Scope 2 carbon emissions. Patalganga plant continued to receive external recognitions winning safety award from National Safety Council of Maharashtra. Our initiative to conduct ABC certified aging regimens trainings to make car and bike mechanical in India, is progressing well. We've gained over 200 mechanics across India by the end of this quarter. Going into the last quarter, our focus continues to be on strategic expansion in aftercare, electric vehicles and investing partnerships for the service and maintenance of our automobiles. These developments and initiatives should help us strengthen our market position going forward and give an optimistic outlook for the year. On that note, I would like to thank you for your attention. I would like to open the session for your questions, feedback and views. Thank you.

Thank you very much, Mr. Sangwan and Mr. Baxi. We will now begin the question-and-answer session. [Operator Instructions] Participants are requested to use handsets when asking a question. Also, in view of the time, we must stick to 2 questions per person. If you have further questions, kindly rejoin the queue. Ladies and gentlemen, let us wait for a moment. While the questions come in. The first question is from the line of Keval Kumar, an individual investor. Please go ahead.

Hello. Am I audible?

Yes, we can hear you.

My question is whether the company is thinking about expansion in EV battery business as there will be demand for EV vehicles in the new future. And our products like oil, mobile oil, and Brisket etcetera, lubricants will be at a remissions state? And is there any plan to enter into EV charging or EV battery manufacturing or EV battery selling or EV battery swapping business, is there any such plan of the company?

So thank you, Mr. Keval Kumar for your question. I think as a company, we keep evaluating all growth opportunities related to automotive or around automotive sector. As I said, we launched auto care EV products this year, which we are getting a very good response. As far as EV batteries are concerned, we are already actively working on thermal solutions for EV batteries. And we have 2 that go into electric vehicles. So we already supply our thermal fluids for 2 of the largest EV OEMs in India, and we'll continue exploring any potential opportunities that we have. And I cannot talk about specifically batteries whether we'll get into that or not. But is definitely from a thermal management of problems that EVs have, we have, in fact, if you remember, about 1.5 years ago around that time, BP announced a GBP 50 million investment in our global headquarters around thermal management of batteries and that's an area of interest for us.

Thank you.

Thank you. [Operator Instructions] The next question is from the line of Ashwin Agarwal, an investor.

I have 2 questions. The first one is regarding the EV like the previous person have had. When looking at your distribution network and looking at your third-party service centers, would be direction to see that as a headwind to their revenues? And the second question is regarding the indigenization of your end other products business. So I noticed that there are quite a few -- quite a lot of related party transactions. I'm sure a lot of raw material and even finished products as being important from your global supply chain. Do you see an expansion in domestic production going forward?

So thanks for both questions. Let me kind of answer both the questions. First of all, as far as impact of EV is concerned in India, given low penetration of spec cars in India. Our preciation notes to ensure that so does what we've seen in the public domain from our competitors and various other players in the automotive sector. The Indian Lubricant market will continue to be strong for the next -- going well into late 30s and 2040. So the category lubricant category will continue to grow. While emerging electives will be there -- and as I said in my response to earlier question, we are also working on these for electric vehicles, okay? So that's our view of as far as we consume the market will stay robust and strong going into the 2030s and 2030. As you spoke about [ initialization, ] I think we have 3 plants in India, which cater to almost all our kind of needs, and we manufacture all our lubricants except for a minimum quantity that we import, which are very high-quality products, some in the investing sectors in the automotive sector. And so as raw materials is a concern, whatever we can procure locally, our intent is always to procure locally, use local ingredients -- but having said that, base oil, which is a key component which goes into manufacture lubricants and India, we are a base oil deficit company. So everybody imports part of their requirements globally.

All right, thank you for...

You are not audible at the moment?

Sorry, can you hear me now?

Yes, this is...

Yes, sorry. I was just going to follow up on my first question. So my question was more about your third-party network was, as I understand it, a lot of your customers are actually licensed dealers and stuff, right? So do you see any kind of headwinds to their performance?

No, we haven't seen any kind of competition as we're reporting, we see good top line growth in our business, and we expect that likely to continue. So that's why we're also kind of expanding our rate.

The next question is from the line of [ Prashant Gala from ISG Securities. ]

I have 2 questions. My first question is, as you touched on in the interest into the Auto Care segment. Could you share further on whether other subsidiaries within the cash flow international into similar venture? And if so, how the performance of their operations in the auto care? And my second question is, what is the volume of lubricants sold in the current quarter?

Okay. So maybe -- I'd hand over the question to you.

Yes. So the lubricant volume sold is -- this quarter is about 51 million liter.

Yes. Yes. And then let me respond to the autocare question. I think there's certain other markets within the Castrol globally, which are selling autocare products, okay, there's Turkey, there's China looking at these products. And I think we've seen good momentum and month-on-month growth as we build this category and as we build this product line. [ Prashant, ] does that answer your question?

I could not hear the volume of lubricants. Sorry.

51 million liters.

The next question is from the line of Aejas Lakhani from Unifi Capital.

Thanks for the chance. Mr. Sangwan I'm trying to sort of really deconstruct your growth engines. And I'm alluding to something you mentioned, I think, 2 or 3 quarters back. But if I were to just sort of just keep aside the lubricant business and take up my question on 3 halves. You had spoken about the network expansion, the auto services, the bike points. Could you, point number one, expand on what is the strategy there? How do you make sort of headwind, what's the addressable opportunity? Where have you reached in that journey? Point number two, I'm at least not sure of how the key mobility solutions digital business model proposition, what is it exactly? What are the investments we have made, how do we sort of look to monetize on the investment there? What's the business model there? And third, you've spoken about the adjustment fees like the pilot Autocare range. So could you suggest how we can as analysts track that particular space?

Yes. So I think let me, I can answer all 3 of your questions. So first of all, as far as network is concerned, we continue going from strength to strength. We cover almost about to 30,000 workshops today as part of our distribution network and although was creating a branded concept. So when I spoke about 1.5 years ago or 2 years ago, you remember, we started with something called cash flow auto service network. And today, I'm very happy to say that we have more than 400 plus cash flow auto work across 100 cities in India and we continue expanding on that. We have 5,500 bike points. And as I said, 40 Express oil chain centers where customers can buy oil on Jio-BP sites and change their oil. We also have about 40 Express oil centers, 40 plus Express oil centers in rural areas now which are gaining good traction. So that expansion will continue to be a focus area for us as we move ahead because 2 things happen. How does it add on into our business. First of all, I think we get a larger share of the total oil in that outlet. And the second is we are able to sell a much better product in those outlets because the workshops are trained by us in selling better products to their customers. So that's kind of on the network. As far as mobility solution is concerned, I think we finished the transaction in the first quarter of this year. We invested INR 87 crores and that to pick up a 7% stake in that organization. And key mobility is expanding. They're seeing good growth, both in network, both in terms of the top line revenue. I can't talk specific numbers so that I guess we'll have to go to good to -- but their efforts in digitizing the whole workshop space around availability of stay pat doing quality customer experience from a service experience, they have company-owned company operated out as they have franchise workshops. And there are 2 synergies. So we sell our militants in their network, okay? And they send their spare parts in our network. Those are the kind of sources of value. And by joining 2 trusted brands, which is MBS and Castrol, I think we can deliver better consumer experience and customer experience to a new automotive aftermarket. On the third question, I think, on Auto Care, early days, we're seeing good traction. And I think I cannot say in the next quarter, we'll be able to kind of share more granular detail. But I think as we've built this business, we are really positive on this business with a response that we've got from consumers and customers because there is a genuine lack of good quality solutions available to consumers in this category that they can trust. And we will be adding more products in the portfolio in the coming quarters. So I hope those answer that answers your three questions.

Yes. Could I ask you a follow-up?

Sorry to interrupt, sir. We request you to please rejoin the question queue for follow-up questions. The next question is from the line of [ Mohit Mara ] from Guardian Capital.

So this quarter-on-quarter dip in volume, is that due to a monsoon or is there some other factor at play as well?

Mohit, the line is not very clear. I request you to please use the handset while you're speaking.

Is it better now?

This is much better. Please go ahead.

So the quarter-on-quarter dip in volumes, is that just due to monsoon or is there some other factor at play as well?

So I think essentially, there is a seasonality impact. Typically, our quarter 2 seems to be a track record the highest quarter against the quarter and compared to quarter 3, monsoonal an impact, the impact of agri. And therefore, some of our segments like CV have a high sales in quarter 2 compared to quarter 3.

Could you provide volume breakdown segments for this quarter?

Yes. So look, our portfolio as such is about 40% of the volume breakup would be in personal mobility. About 35% would be in serial commercial vehicle and about 15% of the industrial.

Got it. On financing, so you're invested almost INR 500-odd crores in this mobility...

Ladies and gentlemen, the current participant seems to have dropped from the call. [Operator Instructions] The next question is from the line of Varun Arora from B&K Securities India Private Limited.

Sir, on this quarter-on-quarter, so the revenue actually did you by end -- so could you care to answer on that? I know that you're saying seasonality but...

Sorry, I didn't get the last part of your question.

I was saying that if you can elaborate a bit on quarter-on-quarter performance since it went down by 11%.

Yes. So I think -- let me talk to that. You're right, the sequential quarter is lower, but that's traditionally been the case with us, even if I go back 10, 15 years. The third quarter tends to be the lowest for us, okay? And then things pick up as the agent picks up in September, October period, quarter 4 picks up a gain for us. So -- and if I compare it to same quarter last year, we grew 8%. So at least we don't see that as an area of concern. It's the normal part -- in fact, if I can say anything on the volume front, this is possibly the second highest we've ever -- quarter we've ever delivered. So...

The next question is from the line of [ Gian Mathai ] from Cactus.

So my question is with the current Israel/Palestine war, how good are we say? Because our union oil minister Hardeep Singh Puri, has said that we'll be closely monitoring the conflict. And if it's spread to the other mines part, is it going to affect the business in any way? And how well are we posed to having such a situation?

So maybe we can answer the question in 2 parts. So one, what will be the impact of Israel and Palestine/Hamas conflict. I think it's not for us to speculate on those matters. These are matters of international concern. And I think that unfold. But I think as far as we are handling uncertainty is concerned, cash flow is very well poised, okay? So if I go back even to the Covid in 2020 and nobody knew what was happening in the world, we still delivered profit. We still serve our customers. And I think Notebaseoil and input even the import, but they come from Singapore site or Asia Pacific countries. So I think on that, we are pretty well poised and we have the capacity and the capability to handle any kind of uncertainties. The only thing I would say is the inflationary pressure is good increase, okay? We see crude oil going up. We see base oil costs going up. And that is the volatility or uncertainty we'll have to under whether manage that.

The next question is from the line of [ Mira ] from Arihant Capital.

My question is regarding the raw material price. So what is the value for the soil in the quarter gone by and current value? And if you could also highlight on the additives that that had cured recently over the past 2 years, what are the current prices for that?

So I think on an average, I would say that -- between sequential quarter, the oil price has been flattish until there has been a big change. As Sandeep said, we do expect the prices to go up in the next 3 to 6 months. And it is actually has behaved quite differently compared to the. And compared to last year, I would say, at least there has been an increase to the extent of 15% to 20%.

Understood, right. And the synthetic oil, sir, for this quarter, how much would it have been of total revenues?

Synthetics are in the range of about 10% to 12% contribution. And I think we've seen good growth in synthetic oils as the market pushes to better performing vehicles.

The next question is from the line of Ahu Sagawa, an individual investor.

I have 2 questions. Both are relating to a coming calendar year, like 2024 onwards. So the first question is regarding the recycled plastic content, which has increased substantially over the past few years. So now that it has reached 30%, what kind of percentage targets are we expecting going forward? And the second question is regarding the growth of the dealer network. What in the expansion are we expecting there in the year going forward in percentage terms?

So I think I cannot give you any specific numbers. First of all, I think on the recycled plastic, our intent is to keep increasing the content and we keep looking at solutions available, which can withstand out the quality requirements. And I think, first of all, I'd like to say that we will be compliant with the government policy, whether it's the one policy in the arithmetics and extended to us a responsibility. The second is we'll keep looking at solutions which help us reduce our plastic content and increase here. Now specific target is difficult to get to 24, but that's an area of focus. The second question you had was expansion. I think expansion is always on our mind. We have been possibly -- as for the retail market is concerned with the largest distributed listing player in the country. And now we are looking at going up into India or deeper into areas where the demand is coming. And same year on an all the next label expansion that we are looking at.

So the of this cost concern, does that actually increase the cost of the packaging materials that we're using?

So far, we've been able to manage costs but at some point in time will become a demand supply situation but we are really conscious of that, but I think we are committed to sustainability. And I think we will find ways to be sustainable in a cost-efficient manner. That's what I'd like to say.

The next question is from the line of Prashant Rafale from ISJ Securities.

I have a question, sir. My first question is what is the revenue compression on EV transmission float and autocaresevices in total gain in the current quarter? And now my second question is how much money has the company invested in the outer segment so far? And what is the future investment plan? Additionally, could you share the business strategies for growing this segment?

Yes. So let me answer the questions. So on the first question -- 2 questions. First question is the aftermarket Auto Care and -- and then I -- sorry, I remember. As always in autocare contribution, it's very marginal. I think it's still a very small, very low single digits, okay? And -- but this will grow in the future. The second is from an investment perspective, I think that we haven't put our own manufacturing facility for AutoCare. It's a third-party supply arrangement, okay? And that's how we upgrade. What is the strategy? I think the strategy is simply to serve consumers and customers because I think Indian consumers lack availability of good after AutoCare products. And as the penetration of vehicles increase, we believe this category will grow. We have good branded competitors coming into this category. This will also help another whole category of the AutoCare segment, and that's why we kind of market this.

The next question is from the line of [ Sumanta, ] an Individual Investor.

I have this one question, like Castrol part of your product line 2-wheeler convey important product line. And with the terminating challenge of -- on the 20% of scooters are now EV. So how do you foresee how will you combat it is a very premium and a very well-accepted product from Tesla brand to the consumer.

Yes. So thanks for asking that question, very good question. And I think, first of all, I would say electrification is good for the country, it's good for the environment, it's good for consumers. So we fully support electrification in terms of bringing solutions around electric vehicles to OEMs, to our consumers. And I'm sure you're assuming you've also launched a range of EV fluids under the brand of cash flow on, okay, which is transmission flows, greases, coolants for electric vehicles. The second thing is you're right. I think as the electrification grows, it will have an impact improving the segment. But at the same time, I think the growth that we see in cars, because the penetration of a is so low in India, the growth we see in cars will more or less, in fact, compensate this in case that possibly we'll see in the 2-wheeler segment. And the commercial vehicle segment and anisegment will also continue to stay robust. So I think everything will balance out. And on a total basis, we see the market still growing at about 3% to 5% gain over the next 10 to 15 years.

The next question is from the line of [ Gaurav ] from Pavia.

I would like to know the EPS of this quarter and comparison of EPS with the last quarter and last 9 months in terms of percentage.

I will just share the numbers with you. So your question was how much was the EPS for quarter the current order rate?

Yes. My EPS the current quarter and EPS comparisons of last quarter to current quarter and last 9 months to current 9 months.

Okay. So it's -- as we said in the press release, the non-annualized number is 1.97% for this quarter compared to last quarter, sequential quarter, it was 2.28%. And for the 9 months this year, it's been 6.29%, gain, nonannualized.

Okay. And what about the last quarter -- sorry, last 9 months, yes.

6.29%. As you saw our profit was almost on the similar lines. So EPS is also similar.

The next question is from the line of Mohit from Guardian Capital.

So I was asking you for and I got cut off -- we'll spend almost INR 500 crores for this partnership mobility partnerships. Is it possible to share the volume that we're getting out of the volume, profitability or some number.

So I think Mohit I said, first of all, we invested in this company from a strategic investment perspective because I think eMobility is trying to digitize the automotive aftermarket. And it will be paying as devices -- so the second thing is we're selling new base to then that at this stage, we're not in a position to share the exact numbers on what we make from there or how much lubricants we sell. But we're committed to this partner so we commit to this investment because I think in the long run, it's going to be a good thing for the Indian automotive market.

[Operator Instructions] The next question is from the line of Ashwin Agarwal an Individual Investor.

So I just have a follow-up on the recycle plastic discussion that we just had. So you mentioned that you have -- you intend to follow the extended producer responsibility guidelines that PBC has set for you. Are you able to disclose the targets that the government has set?

No, the government wants us by next year. I think that's, if I remember correctly, by next year, we have to collect 100% of plastic that we've put back in the market. And in fact, we are already doing that this year. So...

All right. And going forward, I guess it will stay at 20% or are we expecting further for the year?

I think that's more than 100% is for the government to decide. But I can't comment on government policy. All we are saying is we will be compliant with the governing policy.

Right. Because usually, when the government sets targets to the targets for multiple years together. So that is why I wanted to ask.

I don't have an answer right now. But if the government already issued targets for multiple years, I think that should be available in public in any way. So...

The next question is from the line of Mira from Arihant Capital.

Just wanted to understand our revenue model, how do we charge -- is it based on any escalation in input prices? Or how does the revenue model function and the profitability over the asset?

Yes. Yes. So I think what we have is a pricing pain growth, okay, a strategic pricing framework that we operate against. And end of the day, the price we charge for our products is based on the value we deliver to our consumers and customers and now they're willing to pay for good quality products. And is there any kind of fluctuations in input costs like any other manufacturer, we take our decisions based on the environment.

Okay. So would we be passing it on based on a lag, the increase and decrease. And what would be our safe set margins, the margin that you would require to need there minimum?

I would go to a forward facing statement and what pricing actions will take. We monitor the environment on a consistent basis. And whenever we need to intervene we do. And historically, we've been able to protect our margins, and we know the gross profit that we operate is available in our financial statements. And the intent is, and we said that publicly, to continue operating on an EBITDA level of about 22%, 23% or 25%.

This brings us to the end of the call. On behalf of Castrol India Limited, I thank you for joining this call. You may now disconnect your lines. Wish you a good day ahead.