Patience play

Manish Joshi & Sachchidanand Shukla

Castrol India (CIL) stock has been slipping of late. However, the downward movement is not due to the company’s financial performance during the third quarter to September 2001. In fact, the sharp fall in crude oil prices to $15 per barrel and the consequent decline in base oil prices in the last two weeks is a positive development for the company. Base oil is the key raw material for manufacturing lubricants.

It seems that the stock market is perturbed by the fact that there could be short term oversupply of the stock once the open offer from BP Amoco is over. There is a valid reason for such a pessimistic feeling. Many investors had bought the stock to make a killing, as they anticipated the open offer at Rs 350 per share, while the market price was much lower.

However, since the open offer was only for 20 per cent, the unsold quantity lying with those investors may flood the market.

However, one also has to look at the other side of the coin. If CIL’s stock price continues to fall rapidly, then it may no longer be a profitable proposition for the same investors.

On the contrary, they may think of holding on to it if crude oil prices remain soft, which could significantly benefit CIL. If one looks at CIL’s third quarter performance, it is evident that the company has posted a topline growth (net of excise) of 1.6 per cent to Rs 241.7 crore, even when the going was tough for the lubricants industry.

Around 85 per cent of the company’s total turnover came from the automotive sector and the rest from the non-automotive (industrial) sector. CIL’s major problem was curtailing total expenditure mainly comprising raw material consumption. Raw material consumption came down to 58 per cent of sales as against 61 per cent. As a result, total expenditure inched up 1.7 per cent to Rs 205 crore.

Despite a marginal pressure on OPM at 15.2 per cent (15.3 per cent), CIL posted a tad better PBT of Rs 34.45 crore (Rs 34.35 crore). With 66 per cent of the total allocable capital employed, the automotive sector’s contribution in PBIT is around 93 per cent and with rest 34 per cent capital employed, the non automotive sector’s (industrial) contribution is around 7 per cent.

Kinetic Motors
Kinetic Motors (KMCL) has a tough task ahead of it, in view of the intensifying competition in the scooter segment, despite being well entrenched to take on the competition with a complete portfolio of products and new launches. So far, the company has bucked the trend of declining scooter segment with its non-geared premium scooters.

KMCL’s performance during the quarter to September 2001 mirrors the signs of a slowdown, as sales of the company grew by a sluggish two per cent to Rs 103 crore. According to SIAM data, KMCL scooter sales were up two per cent to 60,067 scooters as against the industry decline of two per cent. Tight reign over expenditure enabled the company to post operating profit growth of 25 per cent to Rs 13.4 crore. As a result, OPM improved by two percentage points to 12.8 per cent. Net profit grew 13 per cent to Rs 7.4 crore. Moreover, the topline as well as bottomline growth is lower than that of the preceding quarter.

The company is trying to enhance its scooter portfolio by adding two new models - 75cc scooterette ‘Style’, and a 110-cc called ‘Zx Zoom’. Further, a 65cc scooterette targeted at college students and a four stroke scooter is in the offing.

However, Kinetic Group’s foray into the fast growing motorbike segment through Kinetic Engineering holds the key to the Group’s future performance.

There are concerns that the launch of bikes in the economy segment will cannibalise its offerings in the scooter and scooterette segment. Also, since the Group does not have a presence across all price points, it will find it difficult to gain ground from competitors such as Hero Honda and Bajaj. The Group expects a turnover of Rs 300-400 crore from its bikes. However, that may be a tad too optimistic.