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Price discounting discounts on products. Our channel checks suggest that Castrol has initiated discounts on certain products and also increased dealer commissions across key categories. A cut in realizations cannot be ignored when the valuations are rich even while factoring in expansion of margins and recovery in volumes. We raise CY2015-16E estimates by 15-16% to factor in lower crude prices and increase TP to `410 (`300 previously) as we ascribe higher multiple and roll forward to CY2016E.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
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Channel checks suggest discounts on retail prices and increase in dealer commissions Our recent visits to various lubricant dealers suggest that Castrol has initiated 7-10% discounts on retail prices (through higher volumes or discount on price) for certain product categories like CRB Turbo in the commercial vehicles segment and GTX in the cars segment. The company has also offered additional commissions of 2-5% (based on 3QCY14 gross realizations of `176/liter) to dealers across major product categories, over and above regular commissions of about 10%. Exhibit 1 shows that the company has provided (1) discount of `200 on a 10-liter pack of CRB Turbo and (2) extra volume of 0.5 liter on 7-liter pack of the same product. Exhibit 2 shows that the company has offered additional dealer commissions of `4-8/liter across various products. Competitive intensity has increased since the previous crude correction cycle of CY2008-09 Our discussions with the dealers and other industry participants also indicate that competitive intensity in lubricants business has increased since previous crude correction cycle of CY2008- 09, which poses risk to Castrol’s ability to retain retail prices in the current environment. Castrol’s key competitors in the private sector like Gulf Oil, Shell, Total, Valvoline, Veedol, etc. have presumably increased market share over a period of time led by (1) aggressive retail pricing strategies and (2) push through dealer network by offering higher commissions upwards of 20% as compared to 10% provided by Castrol and better credit terms with a credit period of 60-90 days versus 30 days offered by Castrol. In Exhibit 3, we compare Castrol’s performance with the lubricants segment of Gulf Oil over the past few years as an example, which shows Gulf Oil’s aggressive pricing strategies and other efforts have led to superior volume growth trajectory. Correction in crude price translates into lower raw material costs, albeit partially A sharp correction in crude price results in lower base oil price, which reduces Castrol’s raw material costs as base oil constitutes about 60% of raw material in value terms. Additives and chemicals constitute about 30% of raw material costs and packing material constitutes the remaining 10%, both of which have shown no/limited correlation with crude oil prices. Empirical evidence suggests that cost of additives and chemicals for Castrol has increased consistently despite periods of lower crude prices (see Exhibit 4). Also, the price of base oil (like other refined products) corrects relatively lesser than crude oil price, as refiners tend to retain a certain level of margins depending on the supply-demand balance at their end.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily28012015po.pdf
Price discounting discounts on products. Our channel checks suggest that Castrol has initiated discounts on certain products and also increased dealer commissions across key categories. A cut in realizations cannot be ignored when the valuations are rich even while factoring in expansion of margins and recovery in volumes. We raise CY2015-16E estimates by 15-16% to factor in lower crude prices and increase TP to `410 (`300 previously) as we ascribe higher multiple and roll forward to CY2016E.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Channel checks suggest discounts on retail prices and increase in dealer commissions Our recent visits to various lubricant dealers suggest that Castrol has initiated 7-10% discounts on retail prices (through higher volumes or discount on price) for certain product categories like CRB Turbo in the commercial vehicles segment and GTX in the cars segment. The company has also offered additional commissions of 2-5% (based on 3QCY14 gross realizations of `176/liter) to dealers across major product categories, over and above regular commissions of about 10%. Exhibit 1 shows that the company has provided (1) discount of `200 on a 10-liter pack of CRB Turbo and (2) extra volume of 0.5 liter on 7-liter pack of the same product. Exhibit 2 shows that the company has offered additional dealer commissions of `4-8/liter across various products. Competitive intensity has increased since the previous crude correction cycle of CY2008-09 Our discussions with the dealers and other industry participants also indicate that competitive intensity in lubricants business has increased since previous crude correction cycle of CY2008- 09, which poses risk to Castrol’s ability to retain retail prices in the current environment. Castrol’s key competitors in the private sector like Gulf Oil, Shell, Total, Valvoline, Veedol, etc. have presumably increased market share over a period of time led by (1) aggressive retail pricing strategies and (2) push through dealer network by offering higher commissions upwards of 20% as compared to 10% provided by Castrol and better credit terms with a credit period of 60-90 days versus 30 days offered by Castrol. In Exhibit 3, we compare Castrol’s performance with the lubricants segment of Gulf Oil over the past few years as an example, which shows Gulf Oil’s aggressive pricing strategies and other efforts have led to superior volume growth trajectory. Correction in crude price translates into lower raw material costs, albeit partially A sharp correction in crude price results in lower base oil price, which reduces Castrol’s raw material costs as base oil constitutes about 60% of raw material in value terms. Additives and chemicals constitute about 30% of raw material costs and packing material constitutes the remaining 10%, both of which have shown no/limited correlation with crude oil prices. Empirical evidence suggests that cost of additives and chemicals for Castrol has increased consistently despite periods of lower crude prices (see Exhibit 4). Also, the price of base oil (like other refined products) corrects relatively lesser than crude oil price, as refiners tend to retain a certain level of margins depending on the supply-demand balance at their end.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily28012015po.pdf
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