Castrol India, manufacturer of lubricants, sees a volatile second quarter (July-September) as base oil prices and additives, which are used for manufacturing lubricants, are on a rising trend due to rising crude oil prices and a depreciating rupee.
Castrol India, manufacturer of lubricants, sees a volatile second quarter (July-September) as base oil prices and additives, which are used for manufacturing lubricants, are on a rising trend due to rising crude oil prices and a depreciating rupee. Castrol India MD Omer Dormen told FE’s Vikas Srivastava that the company took a second price hike on products in July, and doesn’t rule out future price hikes but will ensure that volumes are not impacted. Excerpts:
What is your outlook for the second quarter in terms of pricing and the impact of rupee depreciation?
The base oil prices increased by $100 per tonne in Q1 (April-June). Going ahead, global pressures are likely to keep the crude oil prices high, which will impact the base oil prices as well. We expect the second quarter to be volatile in terms of pricing of base oil and other additives. Besides, headwinds from rupee depreciation will also be felt in the second quarter (July-September). The rupee has depreciated by Rs 4-5 against the dollar, which will impact the base oil imports. The packaging and logistics costs will also add to the overall costs. Although we took the second price hike in July, we will look at maximising the gross profit pool rather than increasing the gross unit margin going ahead. So, while we will go for the price increase, we will see that volumes are not impacted.
What is your capacity expansion plan and how much you plan to invest?
We have three manufacturing plants. One in Patalganga in Navi Mumbai, one is in Silvasa and another in Kolkata, apart from third-party tie-ups to fill some of the products we do not manufacture. All put together, we have around 280 million litres of capacity across different segments. We continue to look at the mix of products that we are selling and how to make relevant capacity additions, which are in line with our future demands. We normally expand the capacity by 15%-20% year on year. We are getting more and more into personal mobility with higher blending cycles and more value-added packs. However, the focus on the commercial segment will continue. We invest around Rs 100 crore to Rs 150 crore every year not just on plant capacities but other capital expenditure as well.
What is your plant utilisation level?
Our utilisation level is around 80% and is based on certain seasonalities. It is not an average demand that we fulfill every month of the year. We keep a utilisation buffer to meet certain demands that may crop up during the agriculture season or during winters. So we have to under-utilise the capacity at times to meet higher demand in certain seasons. Also, the products are blended in-house and given outside to control the quality.
What has been the competitive pressure in terms of pricing of products?
We look at pricing and follow what is happening in the market. But we maintain a premium of 5%-20% on our products based on product carrier, investments that go in them and the product life cycle. They are backed by top-class quality and service. We do not compromise on the quality. Products are manufactured using specific formulations and additives, which cannot be bought in the spot market and have to be sourced from specific refineries based on set standards. So it is not just the products but our services that deserve a premium. Then there is reliability that goes with it.
What are strategic changes required to mitigate the impact of the shift towards electric vehicles?
As per our global estimates, there has been significant shift towards electric vehicles and is likely to grow over the next 10-15 years, however it is also estimated that internal combustion engine vehicles will double over the next 10 years in absolute terms. As far as India is concerned, we see a similar trend. However, there is no clear policy on how its going to be driven. It is not just about the manufacturers, it is about the whole grid and the network. There are new cars being introduced every year, but I am not sure if they are getting sold. Two-wheelers and three-wheelers can be an easier switch or a fast way forward in current circumstances. Meanwhile, one important thing that is going to happen before EVs is the autonomous driven car and the aggregators, so we are looking at who is going to own the cars, who is the decision maker and who will service it. This is happening even faster, and we are looking at it with keen interest. However, there is not going to be any major shift on the EV side, since we see growth happening in conventional vehicles for the next 10 years.
How do you manage big PSUs when it comes to distribution networks?
Our distribution is a based on pull mechanism that is a replenishment model, which brings a lot of operating discipline in the sales team and the way we do the business. It is reflected in the way our balance sheet is managed and the cash we generate (`800 crore per annum). Our average days outstanding is just 20 days, which is far better than the industry average. It really helps us to manage cash flows, which helps us to distribute higher dividends to shareholders on constant basis. If you have a share worth `100, around 90% of that is through bonus shares.