Thoughts of novice investor, invested in Castrol
I had looked at Castrol and Gulf Oil.
I finally chose Castrol. I had bought it when the dividend yield was 4% for Castrol, which was greater than that of Gulf oil.
Furthermore, I liked the operating margin of Castrol (27-30%) compared to 16-18% for Gulf Oil. I believed the high opm means better pricing power.
Castrol
Sales have not grown much and opm is range bound. The company is not trying to gain market share by cutting price.
Castrol has made limited investment in PPE in last 10 years. So the mgmt itself believes there isn’t going to be growth in sales.
the company was planning to increase size of its Silvassa plant (from 80ml to 120 ml) but as per latest news the mgmt. seems to have shelved the plan.
Gulf OIL
there has been increase in capex and opm has stabilized
The problem with this industry is that volume growth is very slow.
The commercial Drain interval of CVs over the last 9‐10 years has increased. This has led to slower volume growth.
One thing I would like to add is the CV drain interval is distance as well as time interval concept. I feel the market understands drain distance intervals but not the concept of time interval.
Another issue is that new vehicle sales have been very sluggish.
Source: • India: automobile industry sales by type 2021 | Statista
EV Technology is also a concern. I believe it is a big concern for 2 wheelers. Majority of the users wont travel long distances using a 2W, so EV technology for 2W will be economically viable . But I am not worried about Commercial vehicles and Passenger Vehicles. For Castrol considerable sales come from 2W.
Although, even EV do require fluids and castrol has some product offering for this segment. But sales are negligible as of now.
I own Castrol stock(6% of portfolio). I kept it because it pays a decent dividend. From a 20 years holding period perspective, this sock may make some money. The lubricant market will grow but I am not sure exactly how much will be impacted by EV. However the growth will be slow and agonizing. I still remain invested because I like the odds but I won’t be making any more investments in the near term.
one more thing castrol has been losing market share from 18% (below)in 2015 to 12% (above) in 2019. Gulf has increased its market share.
Source:
castrol—initiation—211020 (1).pdf (1.2 MB)
PC_-Indian_Lubricants_Sector-_Sep_2016_20160920081315.pdf|attachment (994.7 KB)