Castrol India : Analyst/Investor Call Transcript – 13 February 2023

I would now like to hand over the call back to Sandeep.

Sandeep Sangwan:

Thanks, Deepesh. Apart from financial performance, I would like to draw your attention to some

key business developments of Castrol India. In November '22, we announced a partnership with

Ki Mobility Solutions, or KMS, to leverage each other's strength and expand India's automotive

aftermarket ecosystem via myTVS, KMS' digitally integrated multi-brand service platform for

2 and 4 wheelers.

The all-cash deal included an INR 487 crores investment by Castrol India and acquisition of

about a 7% stake in Ki Mobility Solutions, and this transaction was completed in January '23.

With this strategic investment, we aim to expand our presence in service and maintenance for

both internal combustion engine and electric vehicles and leverage myTVS' digital and

operational capabilities. This alliance will also offer potential for Castrol and Ki Mobility

Solutions to collaborate and partner in select markets beyond India.

Castrol's future-ready strategy focuses on an enhanced play in service and maintenance and a

foray into new segments, including automotive aftercare and electric mobility. In fourth quarter

'22, we expanded our service and maintenance network with 230 Castrol Auto Service centers,

about 5,000 Castrol Bike Points and 40-plus Castrol Express Oil Change outlets across India.

With the EV space evolving rapidly in '22, we supported 200 top-tier car and bike mechanics in

Delhi and Chennai with our Automotive Skills Development Council certified EV readiness

training. This year, we plan to extend our training to mechanics in other cities across India and

help create an ecosystem enabled to serve EVs better. In '23, we will also launch our Castrol ON

range of EV fluids for the aftermarket and collaborate with 2-wheeler and 4-wheeler OEMs to

support their EV transition.

On the brand side, Castrol Activ is one of our leading premium engine oil brand that is trusted

by consumers. In fourth quarter '22, we launched a new marketing campaign,

CompromiseMehngaPadega, for Castrol Activ, demonstrating Activ's superior protection for

bike engines and how it shields bike owners from expenses related to engine breakdown.

Health, safety, security and compliance are some of the key pillars on which we operate our

business. I'm pleased to share that Castrol India was authorized by the Directorate of

International Customs as an Economic Moderator: Tier 2 certified organization in recognition

of the high safety, security and compliance standards demonstrated by us.

On that positive note, I'd like to thank you for your attention and would like to open the session

for your questions, feedback and views. Thank you.

Moderator:

The first question is from the line of Bharat Sheth from Quest Investment Advisors.

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Castrol India Limited

February 13, 2023

Bharat Sheth:

If I look at full year number, is it fair understanding that the larger -- see, top line has grew

almost 13%, 15%. So large part of the growth has come because of price or volume, both? And

second, on core business, we were working on to enter into CV mark -- CV, OEM and so what

is the status of that? I have a second question, I'll come back in queue.

Sandeep Sangwan:

Yes. So I can take that. I think you're right, the top line growth has largely been driven by pricing,

but there is volume also in. So our volumes have grown versus '21. And in fact, if I take the pre-

pandemic normal year 2019 also versus that we've grown our volumes. But given that it was

such an inflationary environment where cost increases are hitting us month after month,

especially during the first 9 months, the priority was to balance margin protection and volume.

And I think we've managed that very well, delivering a bottom line growth of about 8%. So that's

the first bit.

I think as far as commercial vehicles are concerned, your second part of question, we play very

actively in the commercial vehicle segment, okay? We have some OEM relationships that we

have established. And I think our strategy is to continue to be a premium branded player, which

will continue to grow and support our commercial vehicles category with innovations with new

products. So for example, all our products are BS-VI compliant. We also introduced a product

which is relevant for one of the large OEMs and CVO market. So we'll continue participating in

the commercial vehicle segment.

Bharat Sheth:

I mean taking forward to your first answer, is it possible to give some kind of a broadly volume

and value growth, if you can, I mean, how much is because of the volume and how much is the

pricing? And currently, what is CV contribution in our overall business?

Sandeep Sangwan:

Yes. So commercial vehicles contribute to about, let's say, about between 25% to 30% of our

business from a margin perspective, the volume contribution is much higher because margins

are better in personal mobility sector. And I think on volume and turnover road, Deepesh, do

you want to take that question?

Deepesh Baxi:

So I think on a full year basis, we have grown volume from 208 million liters to about 210

million liters. What we have -- as Sandeep explained, a hit by is the cost inputs increase, and

that increase on a full year basis is almost by 20% on a per liter basis. And that is what we have

tried to recover during the year through pricing intervention.

Moderator:

We'll take the next question from the line of Hemal, an individual investor.

Hemal:

Just want to clarify, so just based on that the October-December volume would be around 48

million approximately, is that accurate?

Sandeep Sangwan:

Yes, that's right.

Hemal:

But are there like a 10% volume decline year-over-year. Is that also accurate or?

Sandeep Sangwan:

No, that won't be accurate. I think the volume decline only in the fourth quarter, I would say, is

in the range of 4% to 5%.

Castrol India Limited

February 13, 2023

Hemal:

4% to 5%. Okay. The other part of the opening remarks was that the base oil price seems to be

stable, but the additives price costs have continued to increase. So have you taken any -- are you

continuing to take any price rise going forward in January, February? Or do you think the price

rises have now peaked is what -- like if you can throw some light on the reality of the competitive

market space that you're playing because the EBITDA margin obviously suffers because of that?

So is price rise a further possibility in our business going forward?

Sandeep Sangwan:

So let me answer that question. First of all, I think in the year 2022, given the strength of our

brand of Castrol and Indian tractor consumers put in our brand, we've been able to protect our

per liter margin. So that's the first kind of fact I love to put on the table. And as I said in the

beginning, our intention was to protect our margins and balance our volumes.

Coming to the cost pressures on additives, I think cost is a combination of multitude of factors.

There's base oil, there's additive, there's forex involved. And we have a pricing strategy, which

we adhere to, and we are a premium branded player. Now depending on where the cost

environment is, we will take pricing actions in line with our strategy, but our intent is to continue

delivering value to our consumers and customers. So I cannot say for a definitive answer, then

further price increases decreases, I think we'll continue monitoring the environment. As we've

done in '22 and take appropriate pricing actions that help grow the business, but also deliver

value to our consumer and customers.

Moderator:

The next question is from the line of Abhijeet Bora from Sharekhan by BNP Paribas.

Abhijeet Bora:

I missed upon the annual volume number. Can you just share it again?

Sandeep Sangwan:

Annual volume is 210 million liters.

Moderator:

The next question is from the line of Douglas Turnbull from Invesco.

Douglas Turnbull:

My first question is just I wonder if we could get a bit more of your expectations for the coming

year in terms of -- I know you've already commented on price, but it really depends on the cost

case. But in terms of your volume growth expectations and how you see that sort of balanced

against the ability to regain some of the margins that we have lost over the course of this year?

That would be my first question. We just be some more forward-looking colour coming year,

please.

Sandeep Sangwan:

Yes. So Douglas, thanks for your question. So I think the way I would like to share the answer

with you is the lubes category, we project will grow at about 4% next year, okay? And there will

be differential rates of growth amongst personal mobility, commercial vehicle, but overall, the

market should grow at about 4%, that's our projection. And typically, we want to grow ahead of

the market. So you can hope a couple of percentage ahead of the market. So that's what our intent

is, okay? But we'll also have to see how the environment plays out.

And the second is from a margin perspective, I think as I said in my answer to the previous

question, we've been able to, given the strength of our brand holdout per liter gross margin level

and intent would be to continue making sure that we are holding those margins or improving

those margins, that's what our intent is.

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