Cheaper base oil,better product mix helped margins:Castrol India

Castrol India's operating margins has been improving steadily, thanks to cheaper raw material prices--primarily base oil--and a good product mix, Rashmi Joshi, Director, Finance, Castrol India.But she expects base oil prices to rise in the coming quarters, and says the company will need to buy crude "smartly" to maintain its margins.The company gets most of its revenues from the retail segment in which it has a 20 percent share. Castrol's volume growth has been higher compared to industry average. The personal mobility segment, Joshi says, witnessed a double digit growth in volumes.Below is the transcript of Rashmi Joshi’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.Sonia: It has been a steady performance especially on your margin front: 33 percent on your operating profit margin this time around. I wanted to understand what led to so much operating leverage and what do you think could be the trajectory in margins going forward?A: You are right, Castrol India has really delivered consistently in the second quarter very strong performance and I am glad that it is driven largely by the volume growth which we anticipated. And it is in line with our strategy of focusing on personal mobility and personal mobility volumes have grown double digit. But we have seen this time, a growth across segments whether it is personal mobility, commercial vehicles (CV) or industrial for that matter, so good volume growth in industrial sectors as well. The product mix improvement has helped us with margins. At the same time, favourable cost of goods environment has also helped. I would also like to mention, apart from factors that have helped, it is also the effort of Castrol India employees who have focused really with a lot of rigour in getting these kind of volumes and margins delivered.Latha: What would be the advantage you are getting from cheaper raw material? Will you be able to hold on to this 32.5 percent operating margins?A: Main component of our raw material, as you know, is base oil and fortunately, in the last quarter, we saw the base oil was favourable. We also had some more benefits in the cost of goods. However, we do see that the base oil prices could strengthen in the second half and whatever we can do to buy smartly, we will do. At the same time, the markets are volatile and it is very difficult to predict which way it will go, but internally, we believe that the longer term trend is that crude will be higher than what it was in the first half. So, that will reflect in cost of goods. However, on the volume side and driving the personal mobility volume and improving mix, we will continue to have that momentum and effort and I hope that will help us to keep good margins going forward as well.Anuj: What is the current market share for your company and do you have any targets for either improving it or keeping it constant at current levels?A: We believe that considering this year’s volume growth which we believe is higher than market growth, we should have added to the market share. Our market share has been above 20 in the retail segment which is the largest segment for us. And we believe we are growing market share certainly in personal mobility and some parts of commercial vehicle oils. Industrial, we play in certain segments, especially in metal working fluids and high performance lubricants and in that also, we believe we would have grown higher than the market. So, we expect the market share would have grown. We do not get data on industrial market share very easily because we play in certain segments only. But, we believe we would have improved our market share in the categories of strategic importance.Sonia: Can you tell me what was the exact volume growth that you saw in Q2? Your volume growth in Q1 was 9 percent and in Q2, how much did you do?A: We grew volumes 6 percent.Sonia: And what would the forecast be for the second half of the year?A: While I cannot particularly give you a forecast for the second half, all I can say is that we will continue to have the focus and effort that we have been putting in growing our volumes and that is very much in line with our strategy. There are various inputs being given in terms of growing volumes and that will continue. So, that is all I can say at the moment. But because of the way the economy is going and monsoon is good, we are very optimistic that we will be able to continue to momentum.Anuj: Is there a risk that it has become too dependent, especially your margin picture has become too dependent on crude and crude prices go up. The kind of market share that you have, you may not have enough pricing power to maintain the kind of margins that you have delivered.A: Glues business is always dependent on crude prices and foreign exchange movement. That is a significant part of our cost of goods. It impacts us and everyone who is in this business equally. So, it all comes back to what kind of product mix you have, whether your products are differentiated and whether you are able to maintain your margins on those products because of the differentiation, not so much because of the crude pricing. So, it is all about what value you deliver to your consumers rather than what your cost of goods are.