With Castrol scheduled to announce its annual results for 1997 next week, the hype that surrounded the stock in the run-up to the results seems to have dissipated along with the sagging strength of the stock market.The market has been hotly betting on an issue of bonus shares from the company, and through its conventional wisdom has tended to offer a better discount to companies on the verge of a bonus issue.
This, however, defies logic. The reason being that it has been clearly established that ex-bonus the stock returns to its pre-bonus market capitalisation, and could even drop lower (as the liquidity increases proportionately). The smaller players in the market, typically the kind who bought the company's shares on the back of such news, are the ones beating a hasty retreat from the scrip at present.
With the results round the corner, a view seems to be gaining ground that the company may not be that inclined to announce a issue of bonus shares for the just-concluded financial year. A bonusannouncement was hoped for on account of an improved performance in the current year, driven by the commissioning of the company's new plant at Silvassa. The company will benefit due to its exemption from sales tax for 10 years and income tax for five years, with a lower tax rate applicable for an additional five years bringing in substantial benefits to the company's net earnings from 1997onwards.
But this also should be the main reason why the company should not dilute these benefits per share to its shareholders by increasing its outstanding shares; the logic being that if the pie is getting bigger so should the slices. A profitable year should encourage the company to payout a higher cash dividend rather than tinker with its outstanding equity. Besides, the immediate financial picture may not be as rosy as was expected.
During the second quarter of 1997, when the company announced its expected performance to a group of analysts, the projected profit for the year was made out to be about Rs 175 croreand the expectation was that the company would be able to switch a part of its production to the new plant to avail of tax benefits. But the reality is that despite commissioned over a year ago, current reports suggest that the new plant is running at one-third its capacity.
The lubricants industry as such has been showing single digit growth rates and the explosive growth rate shown in the past will be hard to come by for Castrol, despite its ingenuity and record as a marketing company. So, obviously, there is no room within the lubricants market for a doubling of capacity, as Castrol has done, and this can at best be a long-term view taken by the company on its potential market. The company's current performance will be greatly enhanced by the tax breaks that it will receive rather than the jump in volumes or realisations.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
