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Last Updated : Oct 18, 2013 04:30 PM IST | Source: CNBC-TV18

Forex volatility may lead to margin squeeze: Castrol India

Margins will get squeezed and the biggest risk comes from foreign exchange volatility. But despite all this, the company has no plans to go slow on investments.

Flat cost and other income paid off for Castrol India, which reported a 22 percent increase in net profit to Rs 104.5 crore in the September quarter, against Rs 85.7 crore during the same period in the previous year. However, volumes have seen a decline because of the company's exposure to distressed sectors such as building, construction and industry comprise, says Ravi Kriplani, MD, Castrol India.

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But the personal mobility segment, that is the company's exposure to cars and motorcycles, which is less important in terms of overall weightage, is growing and there the volumes are up by almost 10 percent year-on-year, he says.

Going forward, he feels margins will get squeezed and the biggest risk comes from foreign exchange volatility. But despite all this, the company has no plans to go slow on investments.

Below is the verbatim transcript of Ravi Kriplani's interview on CNBC-TV18

Q: The first question is on volumes because the revenues are flat and we have seen a bit of a decline in volumes that has been a big concern for analysts. Do you think this trend will continue over the next few quarters?

A: The overall results have been strong and we have grown the profit before tax in the quarter that we are reviewing by about 26 percent. You drew our attention to the fact that the volumes are below last year and that is correct. Now to be able to put the volume story in some perspective it is important to explain that our volume currently has made up almost three quarters of what we sell to the commercial sector which is what we sell to trucks, to building and construction, to industry. As you know that part of the economy is under enormous stress and the whole volumes if you look at building, construction, if you look at mining, industrial output. All those indicators are hugely down and our volumes have been severely impacted because our exposure to these segments is almost three quarters of our total volume.

If you look at the personal mobility segment which is what we sell to cars and motorcycles, that is less important in terms of overall weightage but growing and there our volumes are up by almost 10 percent year on year. Now you are not able to see this in the volume trajectory because as I said the commercial part of our business is much higher in terms of weightage and that has declined but we are happy to note that on the personal mobility sector we are seeing some real progress.

Q: I want to concentrate on the margin picture because for this quarter you all have managed to maintain your margins. What is the range that you would possibly expect going forward?

A: If you look at what we have done in this quarter and you look at the way we have managed the business, broadly we have a situation that about Rs 26 crore of gross profit has flowed pretty much into the bottomline. We have had some increase in other income, costs are flat. Now we have done that as we said in our press release through a focus on cost efficiency. However if you look at the next two-three quarters going forward my expectation is that the margins are likely to squeeze a bit. And the reason for that is that actually more recently the rupee has depreciated further, it has stabilized currently, but it remains volatile. And I think the crude market remains reasonably tight. So we are not going to see any easing of base oil prices in the near term and the rupee increase that we are going to see the effect of Q4 is going to probably squeeze our margins to next couple of quarters.

Q: Your advertisement spends actually came down this quarter to 5.9 percent of sales versus may be around 8 percent that has been the average. Has that been the conscious decision and would that be the new normal for the company now?

A: If you look at the ad spends little bit longer term in the quarter yes it is below. If you look at our nine month performance even though the ad spend by itself is little lower, our overall expenditure in terms of costs is infact Rs 22 crore higher than what it was over the nine months of last year. So we continue to invest, it moves from quarter to quarter depending upon where in the quarter we see the reason for expenditure. Overall we continue to stay strongly invested. We are not going to let up on any of our investments either on people or ASP and we believe India is a growth market for the future. We are very bullish about the longer term prospects for India and whether it is our supply chain or it is our people or it is ASP we will continue to invest in it.

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First Published on Oct 18, 2013 03:20 pm
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