Base oil price, which is the key raw material for Castrol India costs nearly 50 percent of the revenue but the global fall in crude prices, has helped the company reduce costs.
Speaking to CNBC-TV18, Ravi Kirpalani, MD, Castrol India says the base oil price decline has been half that of crude price. The company plans to pass on some of the benefits of reduced base oil prices to consumers.
The benefit of reduction in raw material cost will be seen with a lag of two-three months, adds Kirpalani.
The company expects a personal mobility vehicle volume growth of around 6-7 percent. It is also hopeful of commercial vehicle volumes stabilising in second half of 2015.Below is verbatim transcript of the interview:
Q: Very significant decline in crude prices will benefit the company. In Q1 your margins were about 21.9 percent. Now as the full impact of the crude prices decline kicks in how much could your margins rise from the current 22 percent? Can they hit the 25 percent mark in the next two to three quarters?
A: It is true that crude has come off very sharply and from the June highs we have seen Brent now trading above USD 60-62 per barrel. This is a substantive decrease from the price over the last few months.
Our cost of goods is based on cost of base oil which is a derivative of crude and normally over the longer-term tends to follow the same direction as crude.
However, in short-terms it does not exactly lead to a one-to-one correlation and what we have seen is that the dropped that has been announced in base oil prices so far have not been anywhere sharp as we have seen in the price of crude.
Our expectation though is that if the crude remains at these levels and if the rupee remains stable then we should see a similar drop in base oil prices over next two to three quarter reflect on the price of base oil as well.Q: As things stand right now, what has been the decline in base oil prices?
A: This is a changing situation and is happening on a day-to-day basis. However, if the price from the highs of USD 50 a barrel in June have come off by 40 percent then currently the decline base oil is being about half of that.
Q: If and when you do see the benefit of lower prices of base oil would you like to pass any of it on to your consumers?
A: If you go back and take a look at historical trends, when crude comes off sharply you see a mix of both. Some of this will get passed on to consumers because we want to remain competitive in the market and therefore, it is a function of our competitive position in the market.
Our margins have come off. In the last couple of years we have seen a completely unexpected increase in the price of raw materials and that resulted in a lower set of margins. So, we will be seeing to utilise this drop in prices both to restore our margins to normal levels and also to pass on some of it to our consumers.
Q: What will be the normal levels of margins for your company?
A: Historically, we have shaved off 2-3 percent points in operating margins simply because if I can give you a size and the scale over the last three years and if you benchmark it back to 2010 just the increase in cost of goods has been over Rs 700 crore of this company. Clearly, we have not been able to pass on that massive increase in cost of goods as a result our operating margins have come off by couple of percentage points. So we will be seeking to see how we can restore our margins as well.
Q: Up to September-end quarter you were dealing with higher prices of base oil, there was also the unfavorable forex impact that you were seeing on your earnings. Going forward now with the likelihood that the base prices could come off how are you going to be impacted by the recent depreciation that we have seen in the rupee?
A: In the first nine months the adverse impact just in year of the first nine months was foreign exchange and base oil situation has impacted the financials of Castrol India adversely.
The other is the exchange rate. We have seen recently that the rupee continues to remain volatile and in the last few days we have seen it trading at a rate lower than it was. So, we are watching this very carefully but clearly the net benefit to us will be an impact not just what happens to the dollar price of base oil but it is landed cost in India.
Q: How will the company or the industry cut the prices to pass on the benefits of declining raw material prices?
A: We have been watching competitive reaction closely and to the best of my knowledge I haven’t seen any reduction by any competition on their prices.
Q: The bulk of your revenue comes from automotive segment and within that you primarily focus on the commercial vehicle space (CV). What kind of improvement are you seeing in the CV space? What are you hoping for in the next one year?
A: The market is changing quite rapidly and it is true that historically a large part of our volumes and profits comes form CV space which is the oils we sell to trucks, tractors and to off road automotive machinery.
The personal mobility space which is the oil we sell to cars and bike is growing much faster over the last five or six years and today we are in the situation while in volume terms we sell more commercial vehicle oil in gross margin of profit terms today we will be making in this year 2014 for the first time an equal profit of gross margin from personal mobility.
Going forward, we expect that the bulk of our new growth is actually going to come from personal mobility and so, we are doing a lot of work to focus on the cars and bikes oil that we sell.
We have done many innovative things so we have launched new product we have found new customer segment so we are really focusing on personal mobility as a key segment for us.
Q: What can be the expected volume growth in the automotive segment as well as in the industrial segment in second half of this fiscal year as well as in FY16?
A: Going forward, the function of two things; firstly, we have seen a consistent volume growth in our personal mobility business. We are reasonably confident being able to grow this by 6-7 percent. The big question with overall volume growth is what happens to the commercial vehicle oil and what we have seen is that industry still looks under stress.
In recent months we have seen some improvements in the sale of medium and heavy commercial vehicles. However, it will take few quarters for this market to fully restore. Our conversation with heads of business, with big Original equipment manufacturer (OEMs) they share a similar view that is going to take a bit a while. So the real volume growth that you will see in Castrol business will come through once the commercial vehicle business stabilises.
We expect that to happen in the second half of the calendar year 2015. Once that happens and through the second half of the calendar year 2015 we should expect to see a 2-3 percent volume growth for Castrol India come through.
Q: If you are expecting stability in the CV space by the second half of calendar year 2015 by when do you expect it to match pace with the passenger vehicle segment?
A: The passenger car and the personal mobility space will continue to move faster than the commercial vehicle space. The sheer number of vehicles that we are going to see, as the gross domestic product (GDP) of our country increases, as our income goes up aspirations to own car and bikes are going to increase.
We expect that even the market for personal mobility over the next five years will grow much faster than commercial vehicle.
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