Castrol India Limited analyst Q&A

Thank you very much, Mr. Sangwan and Mr. Baxi. We will now begin the question and answer session. The first question is from the line of Kew al Kumar, an individual investor. Please go ahead.

Hello. I am Kewal Kumar. I am speaking from Delhi. My question is whether the company is thinking about the expansion in EV battery business as there will be demand for EV vehicles in the near future and our products like oil, mobile o il and grease etc. lubricants will be at a diminishing stage. And are there any plans to enter into EV charging or EV battery manufacturing or EV battery selling or EV battery s wapping business? And is there any such plan for the company?

So, thank you, Mr. Kewal Kumar for your question. I think as a company, we keep evaluating all growth opportunities related to automotive sect or or any adjacencies around automotive sector. As I said, we launched auto care range of p roducts this year, which we're getting a very good response. As far as EV batteries are concerned, we are already actively working on thermal solutions for EV batteries, and we have fuels that go into electric vehicles. So, we already supply our thermal fluids for two of the largest EV OEMs i n India, and we'll continue exploring any potential opportunities that we have. And I cannot talk about specifically batteries, whether we'll get into that or not, but EVs, definitely from a thermal management of problems that EVs have, we have, in fact, if you remember about 1.5 years ago or around that time, BP announced a £50 million investment in our global headquarters around thermal management of batteries and that's an area of interest for us.

Thank you. The next question is from the line of A ayush Agarwal, an investor. Please go ahead.

I have two questions. The first one is regarding t he EV like the previous person had asked. So, when looking at your distribution network and looking at your third party service center, would the transaction to EVs act as a headwind to their revenue? And the second question is regarding the indigenization of your fluids and other products business. So, I've noticed that there are quite a lot of related party transactions. I'm sure a lot of raw material and even finished product is being imported from your global supply chain. Do you see an expansion in domestic production going forward?

So, thanks, Aayush, for both your questions. Let m e kind of answer both the questions. First of all as well as impact of EVs is concerned in India, given low penetration of especially cars in India, our projection in our estimates show that and so does what we've seen in the public domain from our competitors and various other players in t he automotive sector, the Indian lubricant market will continue to be strong for the next going well into late 30s and 2040. So, the lubricants category will continue to grow while emergence of electric vehicles will be there. And as I said in my response to earlier question, we are also wor king on the EV fluids for electric vehicles. That is our view as far as EVs are concerned, so th e market will stay robust and strong going into the 2030s and till late 2030s. As you spoke about indigenization, I think we have three plants in India which cater to almost all our kind of needs and we manufacture all our lubricants except for a minimum quantity that we import, which are ve ry high quality products, some in the industrial sector, some in the automotive sector. A nd as far as raw materials are concerned, whatever we can procure locally, our intent is always to procure locally indigenously. But having said that, base oil, which is a key component which goes into manufacture lubricants and as India, we're a base oil deficit country, so everybody imports part of their requirements globally.

I was just going to follow up on my first question . So, my question was more about your third party network. As I understand it, a lot of your customers are actually licensed dealers and stuff, right? So, do you see any kind of headwinds to their performance?

No, we haven't seen any kind of compression as we' re reporting, we're seeing good topline growth in our business and we expect that likely to continue. So, that's why we're also kind of expanding our network.

Thank you. The next question is from the line of P rashant Galphade from ISJ Securities. Please go ahead.

I have two questions. My first question is has the Castrol India entered into the Auto Care segment, could you share insight on whether other s ubsidiaries within the Castrol International have entered into similar venture and if so, how the performance of their operations in the Auto Care segment? And my second question is what is the volume of lubricant sold in the current quarter?

So, the lubricant volume sold is this quarter is a bout 51 million liter.

Let me respond to the auto care question. I think there are certain other markets within the Castrol world globally which are selling auto care range of products. There is Turkey, there is China looking at these products and I think we're seeing good momentum and month-on-month growth as we build this category and as we build this product line.

I could not hear the volume of lubricants sold?

51 million liters.

Thank you. The next question is from the line of A ejas Lakhani from Unifi Capital. Please go ahead.

Mr. Sangwan, I'm trying to sort of really deconstr uct your growth engines and I'm alluding to something you mentioned, I think 2 or 3 quarters ba ck, but if I were to for example, just for a minute, just keep aside the lubricant business and break up my question in three halves. You had spoken about the network expansion, the auto servic es, the bike points. Could you point #1 expand on what is the strategy there? How do you ma ke a sort of headwind? What's the addressable opportunity? Where have you reached in that journey? Point #2, I'm at least not sure of how the key mobility solutions, digital business model proposition. What is it exactly? What are the investments that we have made? How do we ju st sort of look to monetize on the investment there, what's the business model there? And third, you've spoken about the adjacencies the like the pilot auto care range. So, could you suggest how we can as analysts track that particular space?

Yes. So, I think let me try and answer all three o f your questions. So, first of all, as far as the network is concerned, we continue going from streng th to strength. We cover almost between 35,000 to 40,000 workshops today as part of our dis tribution network and out of which we're creating a branded concept. So, when I spoke about 1.5 years ago or 2 years ago if you remember, we started with something called Castrol Auto Service network and today I'm very happy to say that we have more than 400 plus Castrol Auto Service workshops across 100 cities in India and we continue expanding on that. We have about 5500 b ike points and as I said, 40 express oil change centers where customers can buy oil on Jio-b p sites and change their oil. We also have about 40 plus express oil centers in rural areas, w hich are gaining good traction. So, IWS expansion will continue to be a focus area for us as we move ahead because two things happen. How does it add value to our business? First of all, I think we will get a larger share of the total oil and in that outlet and the 2nd is we're able to sell a much better product mix in those outlets because these workshops are trained by us in selling better products to their customers. So, that's kind of on the network. As far as key mobility solu tions are concerned, I think we finished the transaction in the first quarter of this year. We i nvested Rs. 487 crores in that to pick up a 7% stake in that organization and key mobility is expa nding. They're seeing good growth in their network, both in terms of their topline revenue. I can't talk specific numbers for that. I guess you'll have to go to bookkeep. But their efforts in digitizing the whole workshop space around availability of spare parts, giving quality custome r experience from a service experience, they have company owned company operated outlets, they h ave franchise workshops and there are two synergies. So, we sell our lubricants on their network, and they sell their spare parts in our network. Those are the kind of sources of value. An d by joining 2 trusted brands, which is myTVS and Castrol, I think we can deliver better consumer experience and customer experience to a new automotive aftermarket. On the third question, I think on Auto Care early days we see good traction and I think I cannot say in the next quarter we will be able to kind of share more granular details, but I think as we build this business, we are very positive on this business with the response that we have got from consumers and cu stomers because there is a general lack of good quality solutions available to consumers in th is category that they can trust. And we will be adding more products in the portfolio in the com ing quarters. So, I hope that answers your three questions.

The next question is from the line of Mohit Mehra from Guardian Capital. Please go ahead.

Sir this quarter-on-quarter dip in volumes, is tha t just due to monsoon or is there some other factors at play as well?

I think essentially there is a seasonality impact. Typically, our quarter 2 seems to be as a track record the highest quarter amongst the quarters and compared to quarter 3, monsoon of course has an impact, there is an impact of Agri and there fore some of our segments like CVO have higher sale in quarter 2 compared to quarter 3.

Sir could you provide a volume break up amongst th e different segments for this quarter?

So, our portfolio as such is about 40%, the volume breakup would be in personal mobility. About 35% would be in CVO, Commercial Vehicle and about 15% would be Industrial.

The next question is from the line of Varun Arora from B&K Securities India Private Limited. Please go ahead.

Sir, thank you for the opportunity. This quarter-o n-quarter the revenue actually de-grew by (inaudible 23 20) so could you care to answer on that, I know that there is seasonality but still if you could elaborate a bit on quarter-on-quarter abo ut revenue degrowth since it went down by 11%?

So, let me talk to that you are right, the sequent ial quarter is lower, but that is traditionally been the case with us even if I go back 10 years-15 years. The third quarter tends to be the lowest for us and then things again pick up as the Agri season picks up in September, October period, quarter 4 picks up again for us so and if I compare it to same quarter last year, we grew 8%, so at least we don't see that as an area of concern. I t is the normal pattern. In fact, if I can say anything on the volume front, this is possibly the second highest quarter we have ever delivered, so.

Thank you. The next question is from the line Geem on Mathai Ottathengil from Cactus. Please go ahead.

Sir my question is with the current Israel-Palesti ne War, how good are we placed because our Union Oil Minister Hardeep Singh Puri has said that we will be closely monitoring the Israel- Hamas conflict and if it spreads to the other Middle Eastern part is it going to affect the business in any way? And how well are we placed to handle such a situation?

So, let me try and answer the question in two part s. First of all, what will be the impact of Israel, Palestine, Hamas conflict, I think it is not for us to speculate on those matters. These are matters of international concern and I think let us see how that unfolds, but I think as far as handling uncertainty is concerned, Castrol is very well poised. So, if I go back even to the COVID years in 2020, when nobody knew what was happening in the world, we still delivered profit, we still served our customers and I think a lot of our base oil and input materials we import, but they come from Singapore side or Asia Pacific countries, so I think on that we are pretty well poised and we have the capacity and the capability to hand le any kind of uncertainties. The only thing I would say is inflationary pressures would increase. We see crude oil going up, we see base oil cost going up and that is the volatility or uncertainty we will have to live with and manage that.

Sir my question is regarding the raw material pric e, so what are the value for base oil in the quarter gone by and current value? And if you could also highlight on the additives that had surged recently over the past 2 years? And what are the current prices for that?

So, I think on an average, I would say that betwee n the sequential quarter, the base oil price has been flattish I don't think there has been a big change. As Sandeep said, we do expect the prices to go up in the next 3 months to 6 months. Additive s actually has behaved quite differently compared to base oil and compared to last year, I w ould say at least there has been an increase to the extent of 15% to 20%.

And the synthetic oils for this quarter, how much would it have been off our total revenues?

Synthetics are in the range of about 10% to 12% co ntribution, and I think we are seeing good growth in synthetic oils as the market shifts to better performing vehicles.

The next question is from the line of Aayush Agarw al, an Individual Investor. Please go ahead.

I have 2 questions, both are relating to your comi ng calendar years like 2024 onwards, so the first question is regarding the recycled plastic co ntent, which has increased substantially over the past few years. So, now that it has reached 30% , what kind of percentage targets are we expecting going forward? And the second question is regarding the growth of the dealer network, what kind of expansion are we expecting there in the years going forward in percentage terms?

So, I think I cannot give you Aayush very specific numbers. First of all, I think on the recycle plastic, our intent is to keep increasing the conte nt and we keep looking at solutions available which can withstand our quality requirements. First of all, I would like to say that we will be compliant with the government policy, whatever the government policy on recycled plastics as an Extended Producer Responsibility. And the second is we will keep looking at solutions which help us reduce our plastic content and increase PCR . Now specific target is difficult to give for 24, but that is our area of focus. The second quest ion you had was about expansion, I think expansion is always on our mind. As far as the retail market is concerned, we are the largest distributed lubricant player in the country and now we are looking at going deeper into India or Bharat that is where the demand is coming, and semi urban and rural areas is the next level of expansion that we are looking at.

Looking at this, recycling plastic content, does t hat actually increase the cost of the packaging materials that we are using?

So, far we have been able to manage costs, but at some point of time it will become a demand- supply situation, but we are very conscious of that , but I think we have committed to sustainability and I think we will find ways to be sustainable in a cost efficient manner that is what I would like to say.

Thank you. The next question is from the line of P rashant Galphade from ISJ Securities. Please go ahead.

I have 2 questions, sir. My first question is what is the revenue contribution of ON EV Transmission Fluids and Auto Care services in total revenue in the current quarter? And my second question is how much money has the company invested in the Auto Care segment so far? And what is the future investment plan? Additionally, could you share the business strategy for growing this segment?

So, let me answer the question. Sorry, I am just t rying to remember what the first question was because there are 3 questions. The first question w as EV Fluid and Auto Care contribution is very marginal. I think it is still very small, very low single digit, but this will grow in the future. And the second is from an investment perspective, I think we haven't put our own manufacturing facility for Auto Care, it is a third-party supply arrangement and that is how we operate. What is the strategy? I think the strategy is simply to serve consumers and customers because I think Indian consumers lack availability of good after Au to Care products and as the penetration of vehicles increase, we believe this category will gr ow. We have good branded competitors coming into this category which will also help energize the whole category of Auto Care segment and that is why we kind of participating in this.

Thank you. The next question is from the line of S umanta Ghosh, an Individual Investor. Please go ahead.

I have just one question like Castrol part of your product line 2-Wheeler forms a very important product line and with the advent or the emanating challenge of almost 20% of scooters are now EV, so how do you foresee how will you combat becau se it is a very premium and a very well accepted product from Castrol brand to the consumer.

So, thanks for asking that question, very good que stion and I think first of all, I would say electrification is good for the country, it is good for the environment, and it is good for consumers. So, we fully support electrification in terms of bringing solutions around electric vehicles to OEMs, to our consumers and I am sure you would have seen, we have also launched a range of EV Fluids under the brand of Castrol ON which is transmission fluids, greases, coolants for electric vehicles. The second thing is you are right, I think as the electrification grows it will have an impact on 2 Wheeler segment, but at the same time, I think that the growth that we see in cars because the penetration of cars is so low in India and the growth we see in cars will more or less in fact, compensate the shrinkage that possibly we will see in the 2 Wheeler segment. And the commercial vehicle segment and Agr i segment will also continue to stay robust. So, I think everything will balance out and on a total basis, we see the market still growing at about the 3% to 5% range over the next 10 years to 15 years.

I would like to know the EPS of this quarter. And comparison of EPS with the last quarter and last 9 months in terms of percentage?

Your question was how much was the EPS for this cu rrent quarter, right?

Yes and my question is EPS of current quarter and EPS comparison of last quarter to current quarter and last 9 months to current 9 months?

It is there in the press release the non-annualize d number is 1.97 for this quarter compared to last quarter sequential quarter, it was 2.28 and fo r the 9 months this year it has been 6.29 again non-annualized.

And what about the last 9 months EPS with the same period?

Last 9 months were same, 6.29 as you saw our profi t was almost on the similar lines. EPS is also similar, 6.29.

Thank you. The next question is from the line of M ohit from Guardian Capital. Please go ahead.

So, I was asking before and got cut off. We spent almost Rs. 500 crores for this partnership the ki Mobility partnership, so is it possible to share the volume that we are getting out of this, the volume profitability or some number?

So, I think Mohit as I said, first of all, we inve sted in this company from a strategic investment perspective because I think the ki Mobility is tryi ng to digitize the automotive aftermarket and it will take time as it progresses. The second thing is we are selling lubricants to them, but at this stage, we are not in a position to share the exact numbers on what we make from there, or how much lubricants we sell, but we are committed to th is partnership, we are committed to this investment because I think in a long run, it is going to be a good thing for the Indian automotive aftermarket.

Thank you. The next question is from the line of A ayush Agarwal, an Individual Investor. Please go ahead.

I would just like to follow up on the recycled pla stic discussion that we just had. So, you mentioned that you intend to follow the Extended Producer Responsibility guidelines that CPCB has set for you? Are you able to disclose the targets that the government has set?

No, the government wants us by next year I think t hat is if I remember correctly, by next year we have to collect 100% of plastic that we put back in the market. And in fact, we are already doing that this year so.

I think that is more than 100% is for the governme nt to decide, but I can't comment on government policy. All we are saying is we will be compliant with the government policy.

Right, because usually when the government sets ta rgets, they give targets for multiple years together. So, that is why I wanted to ask?

I don't have an answer right now, but if the gover nment has already issued targets for multiple years, I think that should be available in public domain anyways.

Thank you. The next question is from the line of M iraj from Arihant Capital. Please go ahead.

Sir, just wanted to understand our revenue model, how do we charge? Is it based on any escalation in input prices or how does the revenue model function and the profitability over here as well?

So, I think what we have is a strategic pricing fr amework that we operate against and end of the day, the price we charge for our products is based on the value we deliver to our consumers and customers and what they are willing to pay for good quality products. And is there any kind of fluctuations on input cost like any other manufactu rer, we take our decisions based on the environment.

Sir, would we be passing it on based on the lag, t he increase and decrease and what would be our safe set margins, the margin that you would require to make bare minimum?

I would like to give a forward-facing statement in to what pricing actions will take. We monitor the environment on a consistent basis and whenever we need to intervene, we do and historically we have been able to protect our margins and the gr oss profit that we operate in is available in our financial statements. And the intent is when we say that publicly is to continue operating on an EBITDA level of about 23% to 25% and so.

Thank you. This brings us to the end of the call. On behalf of Castrol India Limited, I thank you for joining this call. You may now disconnect your lines. Wish you a good day ahead.