Castrol India’s Q1 Profit Margin Falls As Costs Rise

Lube blender Castrol India’s profit margin fell in the first quarter as costs rose faster than sales, with the full impact of higher raw material prices and supply pressures yet to feed through.

The blender, whose brands include Castrol GTX and Castrol CRB, posted operating profit of 3.23 billion Indian rupees ($34 million) in the three months to end-March, up 3% year on year.

Operating profit margin fell to 20.9%, down from 24.6% in the previous quarter and the lowest in more than five years.

Costs rose 9.1%, outpacing the 8.7% rise in sales.

The faster rise in costs reflected the sustained depreciation of India’s currency more than higher raw material prices, which only began rising sharply in March.

Price pressure

Asia Group II base oils prices fell 5% year on year in the first quarter as weaker pricing in January and February outweighed a marked rebound in March.

“Given the inventory cycle, we saw minimal impact of these raw material increases into the COGS (cost of goods sold) that we reported in quarter one,” Chief Financial Officer Mrinalini Srinivasan said during an earnings call.

“The majority of the cost increases that we are talking about, we are now pending 2Q.”

Base oils prices rose sharply since the start of the second quarter.

Asia Group II prices averaged more than $1,600 per tonne so far in the second quarter, almost double year-earlier levels.

Raw material costs accounted for 61.5% of Castrol India’s total costs in the first quarter, up from 56.1% during the previous three months and the highest share in a year.

The surge in costs since March pointed to further pressure on margins.

“There could be some short-term volatility,” Srinivasan said. At the same time, “we will recover the structural margin for the company; we will want to go back into that same range of 21%, 24%.”

The company implemented price increases in March along with ongoing cost-optimisation measures.

Supply disruptions

Beyond higher costs, sourcing conditions had also become more challenging.

“At this point, while there's no significant material disruption on supply chain, we are seeing increased pressure on sourcing, both in terms of cost as well as unpredictability of lead times,” Interim Chief Executive Officer Saugata Basuray said.

The pressure persisted even with diversified supply sources and established supplier relationships.

“We are planning our inventory with an eye on extended lead times,” he said.