Corporate Front: Strategy, Can Castrol Continue To Lubricate Its Future?

CORPORATE FRONT: STRATEGY
Can Castrol Continue To Lubricate Its Future?

There's a shakeout coming in this slow-moving business, and the stockmarket darling will have a fight on its hands.

By Papiya Pal

R S Savoor Castrol India (Castrol) is, finally, going to lubricate the most complicated piece of machinery in the country: the Bombay Stock Exchange (BSE) Sensitivity Index, a.k.a. the Sensex. On October 13, 1998, 8 decades after it set up shop in India, the Rs 1,010.78-crore Castrol received a 2-page notification from the BSE informing the Mumbai-based company of its inclusion in the 30-share index. But Castrol cannot afford to bask in its moment of glory. For, the 51 per cent subsidiary of the œ2,936-million Burmah Castrol faces a mountain of challenges in lubricating its impressive growth rate.

Sure, the prophets of doom have been pointing fingers at Castrol since 1992, when the imports of base oil (a crucial raw material for making lubricating oil) was decanalised, and the selling price of the end-product was decontrolled. But Castrol's response has been magnificent. The company's sales grew by 246 per cent between 1992 and 1997, from Rs 291.54 crore to Rs 1,010.78 crore. Its net profits have shot up by 387.24 per cent, from Rs 32.46 crore to Rs 158.16 crore, for the same period. Says R.S. Savoor, 54, CEO, Castrol: "The fact that we are a focused lubricants company has given us addi tional strength in terms of growth so far. We have to concentrate on that."

Castrol's growth has been at the expense of the public sector oil companies, like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL), and IBP. The marketshare of the public sector quartet has dwindled from 85 per cent in 1993 to 69 per cent in 1997. In contrast, Castrol's marketshare has grown from 6 to 16.20 per cent over the same period. And while the Rs 4,500-crore lubricants industry has grown between 3.50 and 4 per cent, Castrol has raced ahead with growth rates of between 9 and 10 per cent.

The challenge before Castrol is to maintain these industry-beating growth rates. And that is going to be tough. For one, volumes growth has been hit, thanks to superior, longer-lasting lubes. Adds Ashit Kothari, 31, Vice-President, SMIFs Securities: "The slack in the economy, especially in the road transport sector, will dampen demand." Admits Naveen Kshatriya, 49, Executive Director (Consumer Division), Castrol: "Since we are in an industry where demand is derived, our growth is partly dependent on the behaviour of user-industries." The stretch target: with the industry expected to grow at 4 per cent this year, Castrol will have to capture 50 per cent of the incremental demand (40,000 kl) to maintain its volumes growth of 10 per cent.

Castrol is already feeling the pressure. Consider its third-quarter results for 1998. During the first 9 months of 1998, sales grew by 5.95 per cent to Rs 764.54 crore, slightly higher than the industry growth rate. And Castrol has protected its margins (20.06 per cent) thanks to a reduction in the interest burden by 63.54 per cent, from 5.13 crore in Q-3, 1997, to Rs 1.87 crore this year. It helps that Castrol's 180 million litre plant at Silvassa--which was commissioned in August, 1996--enjoys a 5-year tax holiday, and an exemption from sales tax for its products. The plant will contribute 40 per cent to Castrol's total production in 1998.

Also, the price of base oil--which makes up approximately 90 per cent (by volume) and 60 per cent (by value) of lubricants--has been falling. From $410 per tonne in early 1996 to $260 in December, 1997, the price of base oil dropped to a 15-year low of $230 per tonne in August this year. As Castrol imports 76.35 per cent of its requirement for base oil, this has partly mitigated the effect of the 16 per cent devaluation of the rupee and a 4 per cent Special Additional Customs duty. But base oil prices, which have touched rock bottom, are expected to pick up soon. "If it goes down further, refineries will not be able to justify operations," says Kothari.

Moreover, the prices of additives, which account for 40 per cent of the company's total cost of production, have increased by between 10 and 15 per cent in August, 1998. These factors will put increasing pressure on Castrol since some of its products command a premium of between 15 and 50 per cent over the competition. And as Castrol increased the prices of its products by an average of Rs 3 per litre this year, after a 3-year gap, the company will not be able to pass on the burden to the consumer. Particularly when a spiffier public sector is working hard to regain lost ground, new private sector players, like Tata BP, and 22 sundry transnationals are also hankering for a part of the action. "We do not deny that there will be pressures," says Savoor, "but our brand equity is unmatched."

But the rules of the game are changing fast. Not only is Castrol vulnerable to discount wars, but the public sector has now taken the battle to its territory. The IOC has tied up with Mobil (Indo Mobil) while BPCL has a 49:51 joint venture with Shell (Bharat Shell). In a more aggressive avatar, these companies have enhanced dealer commissions--Castrol has consistently paid its dealers a higher commission than its competitors--and have also begun entering the private sector territory, or the bazaar trade, which encompasses retailing outlets like servicing centres, auto repair outlets, and garages. The market-leader IOC, for instance, has set up 150 exclusive outlets, Servo Shops, across India, and plans to launch another 200 by March, 1999.

Says N. Srikumar, 44, Chief Manager, IOC: "We cannot afford to ignore the bazaar trade as it has been growing at 8 to 10 per cent, and worldwide, the bazaar accounts for more lube sales than gas stations." But Castrol--which has a substantial distribution network of 5,000 dealers and 18,000 company-owned retail outlets--cannot sell its products through petrol bunks. Neither, for that matter, can companies like Elf Lubricants, Gulf Oil, Tata BP, and Tidewater, which are aggressively increasing the friction in the marketplace. Says Kalyan Dasgupta, 56, CEO, Gulf Oil: "Competition has intensified in the bazaar with price-undercutting and freebies. So, retailer and consumers are demanding higher credit periods and better prices, respectively."

In response, Castrol is expanding its reach. Says Savoor: "Castrol's products are now available in 60,000 retail outlets throughout the country. Our aim is to reach all the 80,000 points from which lubes are sold." In addition, the company is also planning to target the traditional, high-volume PSU strongholds, like defence, railways, and heavy PSU requirements. But while Castrol might dilute its premium-pricing strategy for these sub-markets, the company is not willing to abandon its price leadership position yet.

Says Savoor: "Our products are sold at a premium, but users know that our quality justifies the price." To justify its positioning, the company will continue its high advertising and promotion spend, which has increased from 2.20 per cent of sales in 1993 to 4.70 per cent in 1997. It will also continue to please its dealers: Castrol's credit facility increased from 24 to 52 days over the same period. But, warns Walter Viera, 59, President, Marketing Advisory Services: "While companies have to depend more on the push than on the pull, the higher the credit and the longer the credit period, the more difficult it becomes to recover."

Finally, Castrol will continue to emphasise on its wide product range, and innovations on packaging. In 1997 alone, Castrol launched 25 new products in the industrial lubricants segment. The company will also try to replicate the success of its 40-ml pouch pack for scooter-owners, which was launched last year and has registered sales of 1.70 crore pouches. Meanwhile, Burmah Castrol is replacing its regional structure with 4 global business streams: consumer, commercial, industrial, and marine markets. Castrol, incidentally, is the only group company to be quoted on a stock exchange, worldwide. But, tellingly, it is also the second-most profitable Castrol unit, worldwide. And that must count for something as it prepares to ride the lubes shakeout to come.

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