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Old 21st March 2012, 11:28   #1
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Default Indian Lube Industry - Modern Engines Reducing Oil Consumption

India's automobile production - includes cars, 2 wheelers, 3 wheelers, tractors, Commercial Vehicles - since 2005 would have increased by atleast 3 times (assuming 15% annualized CAGR growth). Naturally, you would expect the market leader like Castrol India's engine oil volume sales too to have grown by 3 times atleast.

As a shareholder of Castrol India, I was just checking out the 2011 Annual Report of the company. I found this rather surprising graphical image in the report -


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Castrol India's oil VOLUME sales have actually fallen from 226 million litres in 2005 to 208 million litres in 2011 - a FALL of around 8%! It cannot be explained off by saying that Castrol India is probably losing marketshare - because it is not - they have maintained their overall marketshare of 20% all these years.

The only reason for this anomaly could be that modern engine technology is reducing oil consumption - basically increasing the duration between oil changes drastically.

In any industry, falling volumes implies slow death to the companies in the business. But companies like Castrol India are thriving - their sales have grown from Rs. 1,868 Cr in 2005 to Rs. 3,428 Cr in 2011 - on falling volumes! Basically, their sales per litre of engine oil sold is going up


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This probably implies that the Indian automotive market is slowly but surely moving towards more expensive synthetic & semi-synthetic engine oils
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Old 21st March 2012, 12:57   #2
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

Is there a breakup available for the types of lube oil (mineral, synth, classification according to brands) that Castrol sells in the Indian market? It might be interesting to see if there is a market shift towards synthetics and long-drain-interval oils, which is doing this.

Also, any data regarding how many OE manufacturers take Castrol as their OE oil, and what is the volume offtake now vis-a-vis say, 2005-6? Given that Castrol is being forced out from OE supplies (which comprises a very large chunk of any oil co.'s sales - Shell / Indianoil / Idemitsu have made major inroads into this market AFAIK), the figures of 20% put up by Castrol may be related to the replacement oils / lubes market.
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Old 21st March 2012, 13:36   #3
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Talking Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

Quote:
Originally Posted by smartcat View Post
Castrol India's oil VOLUME sales have actually fallen from 226 million litres in 2005 to 208 million litres in 2011 - a FALL of around 8%! It cannot be explained off by saying that Castrol India is probably losing marketshare - because it is not - they have maintained their overall marketshare of 20% all these years.

The only reason for this anomaly could be that modern engine technology is reducing oil consumption - basically increasing the duration between oil changes drastically.

Basically, their sales per litre of engine oil sold is going up


Attachment 905403


This probably implies that the Indian automotive market is slowly but surely moving towards more expensive synthetic & semi-synthetic engine oils
Here are my thoughts:
a. Of course - your thought is spot on. Service intervals have gone up from 5k to 10k to even 15k in cars. That is a straight drop of 50-66% per vehicle. As older vehicles get retired/used lesser, the market shifts perceptibly.
b. Look at sales price per liter. Gawd. What am I paying 220-300Rs/liter for my engine oils when Castrol only reports 164 rs. That means that distributors/retailers are making 26% margin. Not a bad business to be in!
c. Disagree. Maruti has always used mineral oils. From 5k to 10k, they are still with mineral oils. So is Hyundai. Prima facie, with >60% share of the market (passenger cars) you would assume that the market is still dominated by mineral oils. I would not say its moving "slowly but surely towards syn/semi-syn" though those segments are definitely growing.
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Old 21st March 2012, 15:21   #4
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

Quote:
Originally Posted by SS-Traveller View Post
Is there a breakup available for the types of lube oil (mineral, synth, classification according to brands) that Castrol sells in the Indian market?
No info on this.

Quote:
Also, any data regarding how many OE manufacturers take Castrol as their OE oil, and what is the volume offtake now vis-a-vis say, 2005-6?
The management mentions that - in the past, majority of the sales was from traditional outlets like independent garages, petrol bunks and small retail outlets. But now, there is definite shift towards direct sales to manufacturer and to its dealerships - and apparently, this trend is going to continue in the future.

Quote:
Given that Castrol is being forced out from OE supplies (which comprises a very large chunk of any oil co.'s sales - Shell / Indianoil / Idemitsu have made major inroads into this market AFAIK), the figures of 20% put up by Castrol may be related to the replacement oils / lubes market.
Current marketshare scenario -

Castrol India - 20%
HPCL/BPCL/Indian Oil - 30%
Shell/Total/Gulf Oil/Tidewater Oil/Other MNCs- 25%
Small time local brands - 25%

I guess over a period of time, the small time local players will be jettisoned off the market.

Quote:
Originally Posted by phamilyman View Post
b. Look at sales price per liter. Gawd. What am I paying 220-300Rs/liter for my engine oils when Castrol only reports 164 rs. That means that distributors/retailers are making 26% margin. Not a bad business to be in!
7 - 8% each for the distributor and retailer is more likely

Remember that Rs. 164/litre is Castrol's AVERAGE realization. 2 wheeler/3 wheeler engine oil costs would probably be a lot lower than car engine oil's rates.

Quote:
c. Disagree. Maruti has always used mineral oils. From 5k to 10k, they are still with mineral oils. So is Hyundai. Prima facie, with >60% share of the market (passenger cars) you would assume that the market is still dominated by mineral oils. I would not say its moving "slowly but surely towards syn/semi-syn" though those segments are definitely growing.
OK, makes sense.

Castrol's products are based on crude oil - so the reason for the increase in average rates could just be because of higher crude oil prices. The second graph shows the increasing raw material prices.

Companies like castrol are not only able to pass on the costs to the end user - but looks like they are increasing their margins (through aggressive advertising, introduction of new brands/products that reduces wear and tear by X% and increases engine life by Y% and so on)
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Old 21st March 2012, 15:49   #5
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

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Originally Posted by smartcat View Post
Remember that Rs. 164/litre is Castrol's AVERAGE realization. 2 wheeler/3 wheeler engine oil costs would probably be a lot lower than car engine oil's rates.


Castrol's products are based on crude oil - so the reason for the increase in average rates could just be because of higher crude oil prices.

Companies like castrol are not only able to pass on the costs to the end user - but looks like they are increasing their margins
Thoughts:
a. Bike oil is NOT much cheaper than car oil, if at all. For two reasons - bike oils are expensive - castrol's products sit far above a servo in bikes, but not that much above in cars. Atleast as per my recce 2 weeks back. Secondly car oil is often sold in 3-5L cars even in retail markets (assuming all institutional sales are at 55/220L barrels) so per liter realization will be lesser than a 1L SKU. As an aside - semi syn Motul for bike costed me 450Rs/L retail. I would die before paying such a price for a semi syn car oil.
b. Agreed. They raise prices when crude goes up, then give crap gifts (to ensure dealers' inventory is not undervalued). Valvoline is a big culprit in this - have gotten pens, fairness cream and some other crap.
c. Yes, their margins have not suffered at all. I am sure it has to do with the sheer lack of quality all-around competition.

Last edited by phamilyman : 21st March 2012 at 15:50.
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Old 21st March 2012, 20:01   #6
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

If Castrol's volumes have gone down in a period when car sales have doubled, I don't understand how their marketshare is the same. There is definitely some number manipulation at work (WRT marketshare). Also, I find it impossible to believe that HPCL/BPCL/Indian Oil have only 10% more share than Castrol.

Quote:
But companies like Castrol India are thriving - their sales have grown from Rs. 1,868 Cr in 2005 to Rs. 3,428 Cr in 2011
Could also be a change in product portfolio where focus is more on the expensive lubes.
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Old 21st March 2012, 20:02   #7
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

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Originally Posted by phamilyman View Post
... distributors/retailers are making 26% margin.
Quote:
Originally Posted by smartcat View Post
7 - 8% each for the distributor and retailer is more likely
The cost differential between MRP and cost to distributor is over 20%. Retailers sell for about 5-7% below MRP. As Hitanshu said, it certainly is not a bad business to be in!
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Old 21st March 2012, 20:59   #8
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

Quote:
Originally Posted by GTO View Post
If Castrol's volumes have gone down in a period when car sales have doubled, I don't understand how their marketshare is the same.
Two possibilities:

1) Other players volumes too are going down (because of longer drain intervals)
2) Local players are losing, MNCs are gaining, PSUs are stable/gaining and Castrol has maintained their share.

Quote:
There is definitely some number manipulation at work (WRT marketshare). Also, I find it impossible to believe that HPCL/BPCL/Indian Oil have only 10% more share than Castrol.
Yeah, the Castrol report states that marketshare bit is an "internal estimate". Depends on how much you want to believe the management speak.

I checked the annual reports of BPCL & HPCL right now to see if they have any published data on their lubricants business. They do, but their sales volumes are published not in million litres but in "TMT" (something metric tonnes?). So we can't just add up the numbers to check.

But what I found out from a quick glance at the annual report of HPCL/BPCL is that they are stronger in industrial/heavy lubricants space (Railway engines, industrial diesel generators, construction vehicles, large trucks etc) - while Castrol seems to have more automobile (consumer) oriented brands/products.

So when castrol tallied up the stats, they COULD have excluded industrial segment numbers. That probably explains why Castrol estimates that other MNCs have 25% share.


Quote:
Originally Posted by SS-Traveller View Post
The cost differential between MRP and cost to distributor is over 20%. Retailers sell for about 5-7% below MRP. As Hitanshu said, it certainly is not a bad business to be in!
Between Castrol's average realization and MRP, there are government taxes too. But if the retailer really has such large margins, I will definitely consider opening a lube shop!
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Old 21st March 2012, 22:03   #9
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

What about average annual (or monthly) mileage of vehicles? I am fairly certain that although the car sales have doubled, the overall cumulative distance covered by all cars has not increased by more than 20-30%

A large number of the cars selling nowadays are probably second or even third cars - often being reserved only for weekend runs - so overall kilometers clocked is low

A family owning an older generation car mandating an oil change say every 5000 Km probably drove it ~ 50K a year - This means 10 oil changes a year.

Now a family owns 3 cars and drives one of them say 40K a year and the other two 10K each - at service intervals of say 10000 Km that works out to 6 oil changes for 3 cars - an average of only 2 oil changes a year!!
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Old 21st March 2012, 22:32   #10
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Default Re: Indian Lube Industry - Modern Engines Reducing Oil Consumption

I guess only Skoda can save lube companies from the falling volumes issue - we do hear lots of Skoda customers complain about excessive oil consumption!
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