In an interaction with Deepesh Baxi, Chief Financial Officer and Wholetime Director, Castrol India Ltd

In this interview, Deepesh Baxi, CFO and Wholetime Director, Castrol India Limited, highlights how the lubricants’ market is faring at present and why this segment has the potential to grow at a quick rate in the near future while also outlining the company’s strategies to stay ahead of the curve

What is your outlook on the Indian automotive, industrial and marine lubricants market?

India is among the top three lubricant markets of the world and accounts for 6-7 per cent of the global lubricant demand. Castrol India Limited operates across three lubricant segments: automotive, industrial and marine, with a leading position in the retail automotive segment and a notable presence in specialised industrial fluids.

The outlook for automotive lubricants is:

• Personal Mobility: The two-wheeler and passenger car lubricant category is seeing a rise in demand. While the long-term outlook is positive, Castrol India will continue to drive growth in this segment backed by a wide distribution reach, strong brand-building and leveraging the growth of premium synthetic oils.
• Commercial Vehicles: Despite short-term challenges, this segment is expected to gradually pick up momentum. Growth in construction and off-highway sectors due to investment in infrastructure is also likely to lead to lubricants’ demand growth in this category. With the food and farming sector remaining resilient and growing, good lubricant demand growth is expected from the agricultural sector.

As regards the outlook for industrial lubricants, although the growth momentum in industrial output tapered down in 2021, industrial production has registered a consistent growth trend through 2021. The business confidence index has also trended positively, and as industrial activities build further momentum, the demand for industrial lubricants is expected to grow with optimistic prospects for the long term. With a strong focus on ‘Make in India’, projected growth estimates for the automotive sector and overall increase in manufacturing activities, it will have a positive impact on industrial lubricants.

In marine lubricants, we see a lot of positive trends in export and import activities across ports in India. This will have a positive impact on sales of marine lubricants. With current crude prices, there are a lot of projects that are active in the energy segment. This bodes well for the sector and the industry outlook for energy lubricants is positive.

What measures are you implementing to safeguard margins from rising input costs, supply chain challenges and foreign exchange fluctuations?

There are two ways of managing and safeguarding our margins. The first is to pass on the increase to consumers and the second is to reduce costs to a considerable extent. Castrol India has taken actions on both these areas. While all lubricant companies envisaged the rise in input costs at the beginning of 2022, Castrol India took an early call of introducing price increases at the right time and protected our margins for the rest of the year. Also, we made strategic choices on our expenditures (incurring only essential costs) and hence balanced our profit and loss with healthy margins. Often input costs are perceived as arising from base oil, but there are lot of other factors which are beyond our control like refinery shutdowns, new capacities, diesel margins, seasonality and regional arbitrage that impact our base oil costs. Base oil being a by-product of crude oil, 70-75 per cent of the same is blended with additives before being used in the final product. Therefore, while there is some degree of co-relation between crude and our base oil costs, many other factors impact our operating costs.

As regards safeguarding margins from supply chain challenges, close on the heels of the pandemic, the geopolitical situation with Russia and Ukraine created huge supply chain challenges for the energy sector. Port restrictions, China’s zero virus policy, etc. also created huge disruptions in trade routes resulting in increase of sea freight costs. At Castrol India, we are keeping a close track on the external environment and have strategic plans in place to ensure business continuity.

About safeguarding margins from foreign exchange fluctuations, these can erode incomes for companies dealing with different currencies. At Castrol India, we have in place a robust risk management framework for identification and monitoring and mitigation of foreign exchange risks. The company manages its foreign currency risk by hedging certain material costs that are expected to occur within a range of one to three month period for hedges of purchases of base oil and additives. In 2021, the company hedged more than 80 per cent of its expected foreign currency purchases for 1-3 months.

The competition in the lubricants market is intense and is likely to remain high in the foreseeable future. What strategy are you implementing to retain and further expand market share?

Castrol is one of the strongest brands not just in the lubricant category but is also amongst the top 10 brands in India in terms of valuation as per a Kantar study. The strength of our brand and our strong distribution reach makes us a brand of choice for consumers in personal mobility where there are a lot of first-time users in the market. This, enabled by a strong marketing strategy and an equally robust route to market, has helped us continue retaining and adding to our market share.

If we look at the four key pillars of our strategy:

• Castrol has a strong product portfolio with the right products for the right price point.
• We are pioneers in innovation and were the first to introduce a BS VI-compliant range of products in line with local regulations specified by the Government of India. Our products deliver high-performance and have the best-in-class specifications to cater to new-age vehicles.
• Our products are designed around consumer insights, and we don’t sell generic engine oils:

a) Castrol Activ: Our flagship brand for bikes has been designed with the needs of the daily commuting traffic and hence provides 3X protection from the start to the end of a ride.

b) Castrol POWER 1: Is designed for enthusiastic bikers and provides the best-in-class acceleration while protecting the bike.

c) Castrol MAGNATEC: Is designed to protect your car from the stop-start traffic of the city and give you a smooth drive every time.

d) Castrol CRB: This is a brand loved by truckers and tractor owners across India and is designed to provide longer engine life for the vehicle, which helps rural families secure their livelihoods.

• Strong distribution network and foray into service and maintenance. Castrol has always followed an innovative route-to-market approach, starting from being the first player to start bazaar trade and what we call as aftermarket with dealers, and then foraying into the independent workshop channel.
• Castrol is the most widely distributed lubricant brand in India, and we are now expanding our direct reach in rural India not just with our products but also with our unique Castrol Express Oil Change service, which provides automated and quick oil change for rural consumers.
• One of our key elements of service and maintenance play is our Castrol Auto Service (CAS) multi-brand passenger car workshops. Currently there are 163 CAS centres in 90+ cities across India.
• We engage in brand-building with consumers and mechanics. Our brandcampaigns are not just designed to communicate the value proposition of our products but are also created keeping in mind the deeper impact on the lives of consumers. For example: a health campaign for truckers and youth campaigns on Activ.
• Mechanics have been an integral part of the consumer journey. We support independent automotive mechanics with training and development on the latest technological advancements. Our ‘Super Mechanic Contest’ is now in its fourth year of running and we have had participation from over 400,000 mechanics. The contest is a strategic pillar of our mechanic advocacy and is endorsed by the Union Minister for Skill Development.
• Digitally enabled service ecosystems are an emerging business opportunity. Building on our digitalisation strategy, Castrol India has introduced digital initiatives such as FASTSCAN, FASTLANE and Castrol SUPER MECHANIC online academy including training programmes to offer a premium experience to customers and consumers.

Can you shed some light on how Castrol India is well-positioned to cater to the rapidly growing EV segment? What are the new business opportunities you are focusing on?

Based on our projections, the lubricants market will continue to grow at a healthy rate till 2030 - 2040 as current penetration is quite low in the cars segment. In 2021, EV car sales in India were about 0.2 per cent of the total new car sales. Therefore, the transition to EVs in the four-wheeler category will take a while and there will be room for growth for us in the traditional ICE space. Currently, Castrol India supplies EV fluids to two of the largest car OEMs in India: Tata Motors and MG Motor and, globally, works with almost half of global car OEMs on EV fluids.

The transition from internal combustion engines to electric is likely to happen faster in the two-wheeler and three-wheeler category. Castrol India is exploring technological collaboration with major two-wheeler OEMs in India and is very hopeful of arriving at positive outcomes. When it comes to electric mobility, the transition might involve multiple alternatives and we are working towards being prepared for all possible scenarios.

We acknowledge that electric vehicles will have an influence on our future product categories to meet changing market requirements. At the same time, we are also entering new categories such as automotive aftercare products and expanding our service and maintenance offerings. In June 2021, Castrol globally launched Castrol ON, a new brand for its range of advanced EV fluids to meet the needs of electric vehicle manufacturers. The range includes e-transmission fluids which improve efficiency and extend the drain interval; e-coolants which keep batteries cool during charging and driving; and e-greases which protect motor components, so they last longer.

Can you describe your experience as the CFO of one of India’s largest manufacturers of automotive and industrial lubricants? Also, could you highlight the key challenges that you faced during your tenure?

As an organisation, Castrol places high importance on employee wellbeing, health and safety, ethics and compliance, and adherence to best global and local corporate governance standards. As a listed company in India, Castrol India Limited has a strong and diverse Board of Directors who trust, challenge and provide guidance to the management team. As CFO of Castrol India, I am empowered to drive and partner the business for future growth. Along with my team, I ensure that risk management, controls and processes are robustly followed.

With Castrol India foraying into service and maintenance and electric mobility, I am helping shape our future growth strategy, advance digitalisation, bring key insights into decision making, and support the business to be future-ready through organic and inorganic growth opportunities.  Some of the key challenges I have dealt with in my tenure as CFO of Castrol India was dealing with the impact of the pandemic. Rising input and forex cost and supply chain shortages required us to think on our feet and take strategic actions to protect our business and our customer commitments. It was also a challenge to continue performing while transforming, build people capability and skill-sets of the teams and keep employee motivation high.