Analyst/Investor Call Transcript – 31 July 2024

31 July 2024

MANAGEMENT: MR. SANDEEP SANGWAN - MANAGING DIRECTOR -

CASTROL INDIA LIMITED

MR. DEEPESH BAXI - CHIEF FINANCIAL OFFICER &

WHOLE TIME DIRECTOR - CASTROL INDIA LIMITED

Moderator:

Ladies and gentlemen, welcome to our 2Q FY 2024 Earnings Conference Call for Castrol India

Limited. Please note that all participant lines will be in the listen-only mode. And you can ask

your questions after the opening statements. If you need assistance during the call, please press

star then zero on your touchtone phone to reach the operator.

Also please note that this conference call may contain certain forward-looking statements, which

are based on the beliefs, opinions and expectations of the company as on the date of this call.

These statements are not the guarantee of future performance and involve risks and uncertainties,

which are difficult to predict.

We have with us Mr. Sandeep Sangwan, Managing Director, Castrol India Limited; and Mr.

Deepesh Baxi, CFO and Whole-Time Director, Castrol India Limited.

I now hand the conference over to Mr. Sangwan for his remarks.

Sandeep Sangwan:

Good afternoon, everyone. Thank you for joining Castrol India Second Quarter and First Half

2024 Earnings Call. This is Sandeep Sangwan. I hope you and your families are in good health

and doing well.

We're delighted to announce the strong growth that Castrol India Limited achieved in the second

quarter of 2024. Please note that our reporting follows the Jan to December calendar year and

therefore this is the second quarter for us. Our strong performance this quarter was driven by

strategic brand and marketing investments, continued innovation in our products and services

along with sustained brand investments has also supported our revenue growth.

Now let me hand over to Deepesh, who will walk you through some of our key financial

performance and key numbers for both the second quarter and the first half of this year.

Deepesh Baxi:

Thanks, Sandeep, and good afternoon to all of you. We released our second quarter 2024 results

yesterday, and I would like to share some key financial highlights with you. In 2Q '24, we

31 July 2024

And our Paharpur plant marks seven years of operating what we call DAFWC, which is a day

away from work on account of any injury or any safety-related incident, which is a huge safety

achievement. Thank you for your attention. I now invite you to share any questions, feedback or

views as we open the floor for discussions. Thank you.

Moderator:

The first question is from the line of Sahil Kanade from Asian Market Securities.

Sahil Kanade:

Just wanted to understand more on the data center. So you said the cooling fluids are ready. Just

wanted to understand what is the status and what is the potential revenue that we should expect

out of this?

Sandeep Sangwan:

I think, Sahil, there's a lot of interest around the data center, thermal management cooling fluids,

etcetera. And I think there are right question, but we are very early in this opportunity area. So

I think where we are is we have a range of fluids that are relevant for data center thermal

management as Castrol globally, we are setting up our R&D facility.

It's in the process, we're investing INR500 crores in our R&D facility on thermal management

of looking at the future. I think it's too early to talk any revenue. I think because a lot of work is

happening with our partners, customers around testing, proof of concept, a lot more to come, but

that's all I can say at the moment.

Sahil Kanade:

Right. And sir, so just to have some clarity on that. So is it that while you're working on this

globally, is this primarily done for customers in India? Or this will begin more as an offering to

outside of India and then gradually percolate into India?

Sandeep Sangwan:

So I think it's a global program. It's not an India-specific program or excluding India. I think we

leverage all the technology and innovation that is available from Castrol, our parent company

Castrol globally. The second is, I think a lot of development is happening in the Western world,

whether it's U.S. or Europe, okay?

And we work with those customers. But not to say that things are not moving in India. Even in

India, the data center growth is forecasted to be very robust over the coming 5-6 years. So we'll

leverage the learnings from rest of the world and bring what was relevant to our customers in

India as part of the offer from Castrol.

Moderator:

The next question is from the line of Balaji from Visterdom Stock Broker Private Limited.

Balaji:

Congratulations on the good set of numbers. I actually had two questions, I think one was asked

by Sahil previously, so I'll skip the question on the data centers. The second question I had was,

I know you have proposed INR3.5 interim dividend. Given it's 125th year for Castrol globally

and 115 years for Castrol in India and given our strong financial performance and cash reserves,

can we expect a liberal bonus from the management in this financial year itself?

Because I think the last time a bonus was given was in 2017 and prior to that was in 2010 period.

And there seems to be a trend of bonus in every seven years that we see being a loyal customer,

loyal shareholder of Castrol. So is there any bonus that we can expect in this financial year? And

also can we expect some more dividend in this financial year?

Page 4 of 13

Balaji:

Okay. And sir, one quick question. How is the business that we are looking at from the

partnership that we have with TVS Automobile, the Ki Mobility that we picked up stake. How

are we getting business? And what kind of additional revenues can we expect going forward

from that business?

Sandeep Sangwan:

Yes. I think our investment in Ki Mobility is a strategic investment. We're not a financial

investor. I think it was coming together of 2 brands, 2 trusted brands, I must say, TVS and Castrol

to build up the aftermarket service and maintenance ecosystem. And I think the business is

progressing well. Anything specific to Ki results, I guess you'll have to ask Ki Mobility people.

But I think as far as we are concerned, we are seeing progress because there are various sources

of value for us.

They're expanding their network. And I think in the last 2, 3 years, there's been a lot of learning

in terms of what work and what doesn't work. And we take -- we discuss that with Ki, but good

traction on network expansion. We sell our lubricants into their network. They sell their spare

parts into our IWS network. We have a joint branded workshop concept. And I think they're

expanding into more geographic areas. So more to come on that, but we are really happy with

the progress that has been made.

Moderator:

We have the next question from the line of Ashwini Damani from Manyavar Family Office.

Ashwini Damani:

Sir, just wanted to get your thoughts on 2 things, a, we have started spending on advertisement

as a customer myself, my service center decides on what lubricant is going. And I have little or

no choice, or maybe I don't even bother. So how do you think these kind of advertisement spends

will help you in when to take us, say, hiring Shah Rukh Khan, etcetera?

And the second question is, I think for the first time that we have done a lateral hiring at the

senior level, Mr. Kedar Lele. If we look at the history of Castrol, it's always been someone who

is from within the Castrol team or some British Petroleum that has become a managing director

or as a senior person. What is the thought process in hiring someone who is not from the industry,

or who is not from the family itself?

Sandeep Sangwan:

Okay. So, let me answer both your questions. The first question was around consumers, not

deciding on the lubricant brand. I think there is all kinds of consumers that are there in the

market. There are consumers who want to decide on the brand, who want to be fully aware of

what product is going into their car engine or a 2-wheeler engine, there's consumers who give

recommend.

So I think we work on all the fronts, we worked with the mechanic community also. We work

with workshops to educate them on the quality of our products and the performance credentials

and how our products is better value for money to be used in their vehicles.

So in addition to advertising, we do a lot of work with the mechanical community with

workshops. We cover about 28,000 2-wheelers workshops. We cover 9,500 car workshops. We

have a network of 530-plus Castrol auto service. So it's a combination of everything that builds

a strong business rather than just advertising on TV.

But as a consumer, our intent is also to build awareness of our products like Castrol EDGE is a

new launch. It's top end -- top of the line products in our cars portfolio. We launched variance

around hybrids. We've launched variants around SUVs. We've launched variants around

European cars.

So as a consumer, when you see the advertisement, at least you have a positive mindset towards

Castrol, okay? And then whatever the workshop recommends is something that we build through

our training of mechanics, and we have the largest kind of mechanic data set that we interact

with. So that's how advertising works.

Second question was on my successor. So first of all, we are very excited to have Kedar as the

new Managing Director, who will join us from 1st of October, and he'll take over as MD from

1st of November after change -- handover process with me. I think we wanted to have somebody

Indian leading the business, okay, and also bringing in capability to drive the business forward

and continuous drive in growth and Kedar comes with very solid experience having worked in

Hindustan Unilever. He understands India very well. He understands the business.

So I think it'll be a huge asset to Castrol India Limited in its growth journey and looking forward.

Our intent is to have the right set of capability, the right set of leadership leading the business.

And that's why we have Kedar joining as Managing Director.

Moderator:

The next question is from the line of Bharat Sheth from Quest Investment. We'll proceed to the

next question, which will be from the line of Vipulkumar Anopchand Shah from Sumangal

Investment.

Vipulkumar Shah:

Congratulations for a very good set of numbers. Can you give the volume number?

Sandeep Sangwan:

Yes. I'll pass it on to Deepesh, Vipul.

Deepesh Baxi:

So we did 61 million litres in this quarter.

Vipulkumar Shah:

So what should we equate it to in tonnages, if that is possible?

Deepesh Baxi:

61 million --sorry, what's the question?

Sandeep Sangwan:

Tonnage?

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31 July 2024

So that's why we want to grow volumes, we want to grow margins, bottom line, but we also said

that we want to operate in a 22% to 25% EBITDA range, which is I would presume best-in-class

from industry standards. And we've been able to maintain that while kind of rebalancing our

growth profile.

Chintan Modi:

Sure, sure. Apart from automotive, we are also present into industrials. How large could be that

industry? And would that be also kind of similar kind of a margin profile? And do we have any

aggressive plan to expand considering that lot of manufacturing activities picking up in India?

Sandeep Sangwan:

Yes. So again, an excellent question because the industrial market for lubricants and fluids is

huge in India, okay. But as part of our strategic choice, we don't play in all the segments,

okay?There's some very, very commoditized business in the industrial market, okay, which is

not the core strength of Castrol, I think where we play is where we can offer differentiated value

to our customers, okay, and we'll use their cost of operations or total cost of operations.

And we have focus sectors that we operate in. We operate in metalworking, we operate in

automotive, we operate and have very, for example, okay, where we have differentiated

products, and we're seeing good growth in that business. But will we ever become a completely

commodity players catering to very bottom of the end of the market? Unlikely.

Moderator:

The next question is from the line of Nitin Tiwari from Phillip Capital.

Nitin Tiwari:

Sir, my question was actually related to your product mix in this quarter. So how should we look

at it in terms of how was the sales distribution between, say, CV and 2-wheeler, etcetera?

Sandeep Sangwan:

Let Deepesh answer that, sir.

Deepesh Baxi:

Yes. So thanks for the question,. We grew 6% on volume basis. We grew about 8% to 9% in

commercial vehicle and the balance growth came from the personal mobility, which is cars and

bikes.

Nitin Tiwari:

Actually, I'm looking for national distribution of sales in percentage terms across 3 segments, so

if you could help with that.

Deepesh Baxi:

So I mean in general if you say, almost 40% to 45% of our distribution comes from bikes and

cars put together and about 40% will come from CVO, which is commercial vehicles. And the

rest is industrial and marine and those are much smaller part.

Nitin Tiwari:

So secondly my second question was actually on pricing and margins. So if we look at our

margin in terms of what we are making on rupees per litre terms, right? So that's roughly about

INR50, INR55 odd, which translates into about making on INR69 sort of sense per litre, right?

So how is this margin looking globally, if we look at international markets and then what Castrol

sells globally. So how is that number there? So why I'm asking this is that I want to understand

that where perhaps taken the market in India could head in premiumization in terms if at all, like

we move in that direction.

Castrol India Limited

31 July 2024

Sandeep Sangwan:

So I think, first of all, I think the margin profile you asked a question around how does it compare

globally. There are certain markets where the margins are higher. There are certain markets

where the margins are lower. It depends on the vehicle profile and the consumer profile.

So there are many factors that come into play if you start comparing India with other markets. I

think as far as we are concerned, our focus is on both growing volume, but we don't want to

grow volume for the sake of volume. So there is a lot of premiumization also to come in, okay?

So I give you the example of Castrol EDGE, which is a much higher priced product, but also

deliver better performance for vehicles. So the focus will continue to be -- also continue to

premiumize the portfolio so that we can keep our EBITDA profile that we've spoken about.

Nitin Tiwari:

So that's helpful. But the reason for asking this is that we have the premium player in the market.

And our -- I mean, EBITDA margins have been in the range of about INR50 to INR55 per litre

for quite some time. So do you see this number expanding from here? Is there a scope for this to

more expand from here on as well?

Sandeep Sangwan:

So there is definitely scope to expand this number, but will INR55 become INR100? Unlikely.

Okay, will INR55 become INR57, INR58, INR59? That's a continuous endeavour that we kind

of keep working on. But again, it also depends on mix. Say for example, if commercial vehicles

grow at a much faster pace. The margin profile on commercial vehicles is not same -- similar to

as what we get in personal mobility, so that...

Nitin Tiwari:

That's very helpful. And if...

Sandeep Sangwan:

What I would want to reassure our analyst community is that margin per litre is definitely a focus

area, and that is something that we watch very carefully.

Nitin Tiwari:

Understood. That's very helpful. And a final question, one more. So just wanted to understand

that across different product categories, and I'm talking about the broad category, which is 2-

wheeler, cars, etcetera. How many products are available in each category? And what would be

a typical price range for these products? Very broad numbers would be okay.

Sandeep Sangwan:

Yes. So on the -- let me give you, on car space, we operate with 3 brands. There's Castrol EDGE,

which is the most premium. Then you have Castrol MAGNATEC, okay, which is the second,

it's premium, but slightly lower than EDGE and then you have Castrol GTX. So those are the 3

brands in our profile. EDGE, then MAGNATEC and then GTX. MAGNATEC is center to

protection, EDGE is all about performance but performance with protection and GTX is for

cleaner engines, which operates at a slightly base level.

In 2-wheelers, we have Castrol POWER1, which is our premium brand, again, position and

performance and delivering superior performance to consumers. And then you have Castrol

Activ, which is all about protecting your engines. And then in commercial vehicles you have

CRB Turbomax and CRB and then you have Castrol Plus and Prima for the agri sector. So those

are the broad kind of brands that we operate with.

Nitin Tiwari:

Right. And what would be a typical sort of price range, if we look at these products?

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Castrol India Limited

31 July 2024

Sandeep Sangwan:

I think it will take a lot of time for me to go through the pricing, all the prices are available, if

you check on Amazon, you should be able to see all the prices in the market.

Moderator:

The next question comes from the line of Anuj Sharma from M3 Investment.

Anuj Sharma:

And I'm not sure if this was answered earlier. But between a like-to-like hybrid vehicle and a

normal ICE vehicle, what is the intensity of lubricants, which goes into it?

Sandeep Sangwan:

I think between a hybrid and ICE vehicle, it's pretty similar. There's no change. The product

requirement of the technical specifications change because hybrids operate in different

conditions. But from a volume perspective, there's no difference.

Anuj Sharma:

All right. That's helpful. And the second question is, given the evolution of ICE engine, do you

see a change in the drain intervals over the next 3, 5 years? Or do you think it is little bit pretty

much similar to what has been in the past?

Sandeep Sangwan:

I think drain intervals keep reducing, okay? We've seen that happen in commercial vehicles.

We've seen that happen in passenger cars, okay? But we have all kind of segments in the market.

So for example, the taxi or on-demand segment or fleet segment is a much higher usage of

lubricants even though the drain intervals have reduced, but there is a consumer behavior that or

the usage patterns, which lead to frequent changes in lubricants.

The other thing that happens in our industry is as the vehicles and engines become more efficient

and more advanced, the quality of lubricant required is much higher. So as a result, we are able

to kind of premiumize the market. So for example, if you go back 10 years ago, a car would be

using a 10W viscosity product. Now they use primarily 5W and there are many cars which use

0W products, which is a much thinner viscosity. So I think, it's a combination of everything that

we see and the net result is that the market still grows at about 4%, 5% on volume terms.

Anuj Sharma:

That's helpful. Just a question, the trend change in drain interval remains the same as in past? Is

that a correct assessment?

Sandeep Sangwan:

Sorry?

Anuj Sharma:

The rate of change in drain interval in future won't continue to be, let's suppose, what's been in

the past 5 years. Is that a correct assessment?

Sandeep Sangwan:

Difficult for me to say. I think it's for the OEMs to answer that question on where they're

investing in their technology and improvement because OEMs are also focusing a lot more

investments in to EV now. I think how much efficiency gains you'll get in ICE is something

from the OEMs to comment on rather than us. But what we will make sure is that we have

relevant products available for each kind of engine or vehicle type that comes in the market.

Moderator:

Next question is from the Mandar Pawar from Kotak Mahindra Asset Management Company.

Mandar Pawar:

My question is the opportunity related to the data center, I hear you talking about that, maybe

it's early to speak about it but just some technical aspects that we want to understand, one is, if