Pursuant to Schedule V of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a Management Discussion and Analysis Report covering segment-wise performance and outlook (within limits set by Company’s competitive position) is given below:

(A) Industry structure And developments

Industry structure

The Company operates in all major market segments of the highly competitive lubricants industry – namely automotive, industrial and marine & energy applications. The industry is made up of over 30 established players. The Company is the market leader and along with National Oil Companies, accounts for 41%1 of the market. Other MNCs make up 20% of the market while the unorganized sector and small local players constitute the rest. The Company has established a well-entrenched position over the years in automotive lubricants which is the predominant segment in this industry.
A glimpse of Castrol India’s Silvassa plant

demand drivers

The main role of a lubricant is to reduce friction between metal surfaces, leading to reduction of heat generation and ultimately to the protection of the parts. Lubricants play an important role in a variety of automotive, commercial and industrial applications such as automotive, manufacturing, power generation and marine. Automotive vehicles require engine oils, transmission fluids, brake fluids and greases.

India is the world’s third largest lubricant market, behind USA and China, with a total consumption of approximately 2.15 mt in 20152. Demand for automotive lubricants is driven by the usage of vehicles in the country, while the growth in the market in recent years has been due to the rapid expansion of vehicle population. Demand for industrial lubricants has been observed to have a strong correlation with the Index of Industrial Production (IIP) which is largely driven by economic activity.

In case of marine and energy lubricants, demand drivers are global and local ship movements. Large-scale global movement of goods happens predominantly by sea and demand for shipping services drives fleet utilization rates and freight rates for shipping companies. This, in turn, fuels the consumption of marine lubricants. The installed base of offshore rigs along the coastline of India and their up-time drives demand for energy lubricants.

supply drivers

Lubricants are manufactured by blending base oils and additives, with base oil being the main component. Majority of lubricants continue to use mineral based base oil, despite a significant growth in demand for premium lubricants which use synthetic base oils in automotive and industrial segments.

With India being a net base oil deficit market as well as many additives not being manufactured locally, large scale import of base oil and additives takes place which exposes lubricants business to fluctuations in foreign exchange rates.

major industry developments

Automotive lubricants:

Overall vehicle sales grew by 9% during 2016 compared to the previous year. Commercial vehicle sales increased by 8% overall, and heavy commercial vehicle sales grew by 7% compared to the previous year. Light commercial vehicle sales declined by 9%, whilst tractor sales moved up by 17%. Passenger car sales (including utility vehicles) also increased by 7% and two-wheeler sales moved up by 10%.

The demand for finished lubricants in 2015 in India increased by 1% over the previous year. The major contributor to this was the consumer segment, growing at a high rate, while the industrial and commercial segments experienced flat to moderate growth rates.

At an overall lubricants level, there was growth of 3% until October 2016 which saw a decline of approximately 11%3 in the last two months of 2016 post demonetization. The impact is expected to ease out in the first few months of 2017.

Other longer term macro-trends in the industry remained largely unchanged.

With Indian households generating higher disposable incomes, there has been a significant boost in vehicle sales for personal mobility, both for two and four wheelers. First time users of personal mobility vehicles, along with growth in usage of two-wheelers in small towns and emergence of gearless scooters driven by increasing number of women riders has also led to a growth in two wheeler sales.

The choice of lubricant and its specification plays a key role in enabling Original Equipment Manufacturers (OEMs) to comply with tightening regulations on tail-pipe emissions. The lubricant industry therefore needed to respond with new products which are able to cope with this requirement. These improved lubricants, are also able to maintain their physico-chemical and performance properties for a longer period of usage than earlier generation lubricants, leading to lengthening oil drain intervals.
However, this has an impact on structural demand in the industry. Therefore, other drivers remaining unchanged, the growth in demand for lubricants is expected to lag vehicle
population growth rate in the foreseeable future.

On the back of revival in the mining and infrastructure sectors, off-road vehicle sales and utilization has seen an upward trend for the first time.

Industrial lubricants:

The total industrial lubricant market in 2015 in India was estimated at 1.4 billion litres. Industrial production, measured by the IIP, showed a marginal cumulative growth of 0.3% for the period April to December 2016.

Marine and Energy Lubricants:

World trade grew slower than expected in 2016, expanding by 1.7% (12.6% in 2010), below April 2016 forecast of 2.8%, as per World Trade Organization estimates. Globally, the shipping industry went through a slowdown and the Indian shipping industry followed this pattern. The Baltic dry index too was at a low in 2016.
Castrol OPTIGEAR low friction gear oils that optimize efficiency
Trend of crude prices and Rupee/USD for 2016.
In India, the Government’s push to de-bottleneck infrastructure projects has improved prospects, with trade growth estimate pegged between 1.8% - 3.1% in 2017. 

Also after a pause of a few years, leading Indian upstream operators began to relook their exploration and production activities in 2016. Oil prices remained at lower levels and as a result, market for rig supply and rig fleet utilization declined throughout the year with day rates following suit. Spending by oil companies in upstream sector which had
gone down by 20% in 2015, further dropped in 2016.

Impact of foreign exchange, crude oil and raw material prices

The year 2016 started with crude price touching its lowest since many years before picking up in late first quarter and ended the year almost at $53 bbl. Overall, low average of crude had a favourable impact on base oil prices, supported by forex, especially in the first half of the year.

On the back of overall lower crude prices, additives and chemicals witnessed favourable pricing. However, benefits were eroded by Indian Rupee depreciation especially in the latter part of the year. Polymer prices continued to decline throughout the year but benefits were largely negated by rising steel prices from the second quarter of the year, which impacted cost of packaging.
The year 2016 started with declining base oil prices largely on the back of softening crude before moving northward in the second quarter. Rising crude coupled with seasonal demand of base oil pushed the prices by almost $110 per metric ton in a short span of two months. During this phase, base oil market witnessed acute supply crunch due to technical issues in several refineries which made the situation worse.

Base oil market was stable to soft in second half of the year but price reductions were marginal due to continuous rise in crude prices.

Overall, base oil market was volatile throughout 2016 but the Company ensured continuous value generation by leveraging term contracts.
Trend of base oil movement for 2016.
However, despite a highly uncertain and challenging business environment, the Company continued to generate value for its investors through strategic sourcing, value improvement initiatives, extensive focus on service and quality and continuous monitoring of costs.

The Company worked on a best value purchase model and value-based inventory management, keeping a close watch on cash-costs and working capital.

(B) Opportunities and Threats

(i) opportunities

  1. personal mobility: With multiple opportunities in personal mobility including growth of first time users, increase in usage in smaller towns and growing number of women riders, the Company is tapping these segments for growth.
  2. OEM partnerships: The Company works with OEMs to address more stringent emission norms and increased demand for fuel efficiency. E.g.: Castrol VECTON RX Fuel Saver.
  3. Medium/Light Commercial Vehicles (MLCV): While the MLCV segment has been moderately impacted by the economic downturn, it is still under-penetrated and offers the Company good opportunities to explore.
  4. Improving technology in trucks: With the advent of stricter emission norms resulting in newer technologies for trucks, the CI4+ segment is becoming an important and growing segment in the commercial vehicle category where the Company enjoys a strong position.
  5. Distribution: The Company already enjoys a large distribution network in retail market. Renewed focus on distribution and customer reach in different market segments will enable superior performance.
  6. Upstream: As upstream operators are beginning to relook exploration and production activities, this is likely to bring in more rigs to Indian waters with an opportunity to increase volume in energy lubricants.
  7. Maritime Sector: With the maritime sector getting a boost by the government, this may mean a demand for more coastal ships, barges and passenger vessels, and therefore for marine lubricants.

(ii) threats

Economic Uncertainty

After relative stability of low crude prices in 2015 and in the first half of 2016, The Company has seen an upward trend of base oil costs from late 2016. This is likely to continue throughout 2017 based on current and future market environment estimates.

The Company is well prepared to be fully compliant on GST laws and policies as and when they become effective.


While the Indian manufacturing industry is expected to do better in 2017, there could be some correction in inventory levels and hence production, on account of GST rollout, which could have a short term impact on sale of industrial lubricants.

The temporary effect of demonetization is expected to continue in the first few months of 2017.

Competitive Activity

Competition in the lubricant market is intense and is likely to remain so in the foreseeable future. Most international players have identified India as a focus market.

Competition’s response to rising cost of goods might be slower than the Company, putting pressure on volume growth.

There is also a trend of some OEMs introducing lubricants under their own brand name, further impacting the competitive landscape.

With oil prices still trading around $50 bbl, competition in marine market will increase and margins will come under further pressure. The number of rigs under contract may continue a downtrend and rig rates will remain low which could continue to impact the
Company’s energy business.

(C) Segment Wise / Product Wise Performance

Automotive lubricants

The Company continued to deliver a strong performance in the automotive segment and achieving top line growth, driven mainly by the performance of its power brands – Castrol Activ, Castrol POWER1, Castrol GTX, Castrol MAGNATEC, Castrol EDGE, Castrol CRB and Castrol VECTON. Castrol, as a brand, continued to pioneer and drive the premiumization and synthesization of the category in response to demands from OEMs for better performing and environment-friendly products. The Company further strengthened its close association with its key strategic OEM customers, while also selectively making a play in the mid-price segment in certain categories.
Micro marketing through Castrol MAGNATEC mobile unit to build influencer advocacy
The Company developed specific channel loyalty programmes to support the requirements of the different channels to drive growth in the market. Innovative micro marketing campaigns were used to engage 25,000 car mechanics and to further strengthen Castrol brand equity among the mechanics community, who are key influencers in the automotive market.

The Company continued to derive sustainable benefits from its pioneering technology and product development capabilities which helped it to closely work with its customers and meet their specific demands. Some evidences of such solutions are Castrol GTX ECO which is the first eco-product for passenger cars in the Castrol GTX range and Castrol GTX ULTRACLEAN, which offers superior sludge protection compared to tough industry standards4.

The following sub-sections detail out the performance of each category within automotive lubricants.
Castrol GTX ECO - first eco-product for passenger cars in
the Castrol GTX range

personal mobility:

two-wheeler oils:

  • Castrol Activ continued to dominate the category on television as well as on digital media. The Company leveraged its association with the Premier Kabaddi League to drive connect with the youth through an innovative campaign which brought alive the product proposition of “Vaada chipke rehene ka”.
  • The Company continued to grow sales of Castrol Activ Scooter, a product customized for gearless scooters, through advertising and building distinct brand recall with youth and women scooterists. The Company associated with the very successful and popular web series ‘Girl In The City’ which was one of the most watched web series with more than 40 million views.
  • Castrol POWER1 continued to engage young passionate bikers via the social community - ‘Castrol Biking,’ which is 1.6 million strong. The biker web series SQUADRANN and the Moto GP association went viral and were a huge success on social media.

passenger car oils in retail and independent workshops:

  • The Company continued driving synthetic products, focusing on key metro cities through 360 degree marketing and activation plans aimed at growing share in the aftermarket.
  • The lead brand, Castrol MAGNATEC, was promoted through outdoor, radio, digital platforms and mechanic advocacy programmes.
  • The Company further strengthened its participation in the synthetics’ category through introduction of Castrol GTX ULTRACLEAN, which offers superior sludge protection compared to tough industry standards4.
  • The Company focused on optimizing current formulations in the personal mobility segment through value engineering. Castrol GTX Essential was introduced for CNG-powered engines including three-wheelers. The global pilot launch of Castrol GTX ECO - the first eco product for passenger cars in the Castrol GTX range was conducted in India using an innovative base oil blend of virgin base oil and re-refined base oil.
Innovative micro marketing campaigns were used to engage car mechanics

passenger car oils in oem Franchised workshops:

  • Since 2011, the Company has maintained a dedicated range of products, under the Castrol Professional series, to cater to the specialized needs of this segment. With Castrol EDGE Professional, Castrol MAGNATEC Professional and Castrol GTX Professional product variants, the Company meets the varied engine oil requirements of partner OEM workshops like Maruti Suzuki, Tata Motors, Ford, Volkswagen Group and Jaguar-Land Rover.
  • Loyalty programmes in this channel led to improved account retention and growth, leading to share gain in existing accounts for the Company.

commercial vehicle oils:

  • The Company refreshed Castrol CRB PLUS, offering an improved formulation giving superior claim of 400 hours of protection.
  • The Company launched an integrated activation programme reaching consumers and influencers across key CVO brands in engine oils and specialties portfolio.
  • The Company continued promoting Castrol VECTON through ‘VECTON on WHEELS’ - a state-of-the-art mobile activation unit to drive brand awareness and advantage amongst consumers and mechanics.
Castrol CRB PLUS, an improved formulation for commercial vehicle oils with a superior claim of 400 hours of protection

Industrial lubricants

The year was very successful for the Company’s Industrial business as it delivered strong top line growth driven by volume growth despite tough external environment and intense competition. The Company increased its share of business in key customer accounts and also won new prestigious accounts by providing superior technology and better customer service. Wind energy was another segment where the Company delivered a 30% volume growth over 2015. An environment-friendly high performance metal working oil Castrol Alusol SL 51 XBB, which is Boron and Biocide free, was also introduced.

marine and energy lubricants

While marine and energy lubricants’ performance was affected due to sluggish shipping and upstream activity, the Company continues to focus on customer intimacy and provides products and services that are best-in-class in this segment. Introduction of environment-friendly biodegradable lubricants for stern tube and value added services like fleet optimiser and Scavenge Drain Analysis (SDA) were embraced by marine customers. The Company also launched a unique chemistry product for use in low sulphur environment, which has a state-of-the-art ash control technology. In addition, the Company continued to focus its efforts to bring in more efficiency in its operations and concentrate on value driven and profitable customers to maintain its value and thought leadership position in the marine segment.

The Company maintained its leadership position in offshore drilling during the year by focussing its efforts on value offers despite minimal drilling activity. Introduction of environment-friendly biodegradable lubricants for offshore drilling sector was welcomed by major drillers in country.

All these factors will support long term business growth once market conditions begin to improve.


The Company implemented many new initiatives to strengthen its quality standards. Implementation of end-to-end quality programmes such as ‘Q standard’ at manufacturing sites and third parties, focus on quality assessments at warehouses and suppliers, upgradation of laboratory equipments and improvement of packaging standards have helped in systematic reduction of quality related customer complaints. Manufacturing sites continue to maintain high standards through ISO 9001 and TS16949 certifications.

During the year, the Company participated in the Ramkrishna Bajaj National Quality Award and won the Performance Excellence Trophy for 2016. The criteria for this performance excellence award are embodied under seven categories - Leadership, Strategic Planning, Customer Focus, Measurement, Analysis and Knowledge Management, Workforce Focus, Operations Focus and Financial Results.

(d) outlook

The outlook for 2017 has been examined closely by the Company through the broad dimensions of demand drivers and distribution channels.

demand drivers

The key drivers of demand growth in each segment where the Company operates are explained below:

Automotive lubricants

Two-Wheelers: Despite the impact of demonetization in the initial part of 2017, the two-wheeler population is expected to grow by 10% during 2017. The rural segment will be leading the growth in motorcycle sales in India and this will provide further opportunity to the Company with its vast distribution network. The scooter oil sub-category has done very well in 2016 and is expected to continue the momentum of growth in the coming years.

Passenger Cars: The passenger car population is expected to grow by 7% in 2017 while the passenger car engine oil market is also expected to grow at approximately the same pace in 2017.
commercial vehicles: Overall, commercial vehicle population is expected to grow by 5% in 2017; however lubricants’ demand for this category is expected to grow slower in comparison, due to the impact of demonetization and advancement of the engine oil technology leading to longer oil drain intervals.

The Company expects lubricant demand growth in MLCV segment parallel to the growth in vehicle sales and in the construction and off-highway sectors as a result of revival in the infrastructure investments. The Company also expects growth in the lubricant demand in the agriculture market.

Industrial lubricants

The industrial output growth in 2017 is likely to be around 7% basis industry estimates.

With economic reforms gaining momentum and a strong IIP performance in November 2016, India’s long term prospects for growth remain optimistic. The ‘Make in India’ programme is expected to drive the growth of the manufacturing sector including some key industrial sectors like automobile manufacturing, automotive components and machinery manufacturing. An increasing trend of global OEMs setting up manufacturing units in India for local and export consumption should also bolster growth prospects in 2017.
Castrol UDAAN - Onground activation campaign for commercial vehicle oils

marine and energy lubricants

The marine industry continues to operate in a very challenging environment. Though outlook for the shipping sector looks subdued for short term, it may improve in long term as government is taking several initiatives on this front. Approval for incentives to promote domestic shipbuilding industry will also provide some boost to the sector. The government is also aiming to increase cargo and passenger movement through waterways from the current 5% to 30% in the next 15 years. 

The performance of dry bulk and container operators, however, will continue to be affected by weak global trade growth and persistent overcapacity. Nevertheless, the tankers’ segment, which accounts for a majority of vessels, will remain an exception due to its better demand-supply situation.

After two long years of contraction, it is expected that companies providing workers and equipments to oil and gas exploration companies may start expanding or rehiring in 2017.

channels of distribution

The Company’s products are distributed through 350 distributors who service approximately 90,000 customers. The Company also leverages its distribution network to reach a wider Independent Workshop network through Castrol Bike Points, Castrol Car Care, Castrol Pit Stops, Castrol Authorized Service Associates and Independent Workshops. Castrol subdistributors reach additional outlets in rural markets.

The distribution network covers outlets that contribute to over 70% of the Company business. The Company also serves over 3,000 key institutional accounts directly and in some case through its distributors.
Demand for premium products has seen an upward trend especially in urban India, whilst rural consumers have also begun to make their presence felt with higher levels of consumption demand. The Company has yet again pioneered the development of effective and efficient distribution networks to harness these opportunities.

Over the last two years, innovations in the route-to-market have led to exponential growth in the Company’s business. The Company has continued to drive simplification and digitization to service customers better.

Personal Digital Assistants used by distributor sales representatives (DSR) to collect orders from market and integration with Secondary Billing Software has also driven significant efficiency for distributors while eliminating human errors from the process. Building DSR capability by ensuring that 100% DSRs were trained in various aspects of sales and product knowledge has been another key achievement.
A new look Castrol Bike Point to enable premium brand experience for our customers

(e) rIsks And concerns

The Company expects volatility to increase during the first half of 2017, with rising input costs due to increase in base oil prices driven by an imbalance between supply and demand situation as well as volatility of crude prices, foreign exchange and the continued impact of demonetization. The Company expects prices of lubricants to rise leading to some short term pressure on volumes and margins due to the competitive landscape.

With India being a growth market, opportunities for employability and for commensurate roles are higher. The Company’s strong capability offer which nurtures and develops its talent makes its employees more relevant to the market, thereby increasing the risk of attrition for the Company.

Health, Safety, Security, Environment is a critical focus area for the Company. The Company’s goal is to cause no harm to anyone and to the environment. Given the extremely challenging driving conditions in India, road safety is an area of particular focus for the Company when its front line and transporters are driving across the country.

Similarly, product quality and integrity continue to be focus area for the Company. Its vision for Quality is “right quality first time every time” - a key enabler to help the Company provide a premium customer experience.

The Company has a robust risk mitigation plan to minimize identified risks through continuous monitoring and mitigating actions.

(F) InternAl control systems And theIr AdeQuAcy

The Company maintains an adequate and effective Internal Control System commensurate with its size and complexity. It believes that these Internal Control Systems provide, among other things, a reasonable assurance that transactions are executed with management authorization and they are recorded in all material respects to permit preparation of financial statements in conformity with established accounting principles, along with the assets of the Company being adequately safeguarded against significant misuse or loss. An independent Internal Audit function is an important element of the Company’s Internal Control System. The Internal Control System is supplemented through an extensive internal audit programme and periodic review by management and Audit Committee.

(G) dIscussIon on FInAncIAl perFormAnce wIth respect to operAtIonAl perFormAnce

The Company delivered a strong Gross Profit growth of 8% in 2016 over 2015, driven by higher volume and lower material cost. Cost of sales declined during 2016 by 4% over the previous year primarily due to lower base oil prices. The Company managed to sustain realizations due to its focus on the personal mobility segment and sale of premium product mix.

Operating and other expenses increased by Rs. 37 Crores as compared to 2015 due to investment in safety, people, brands, Corporate Social Responsibility (CSR) and business growth opportunities. The Profit After Tax (PAT) has increased by Rs. 59.7 Crores and is at Rs. 674.9 Crores compared to 2015 mainly due to higher gross profit.

Given the volatility in base oil prices and forex, 2017 is expected to be a challenging year but the Company is optimistic about the long term prospects of the Indian lubricant market and its business growth. The Management is confident that Castrol India will continue winning in the market in 2017, thanks to the commitment of its employees, strength of the Castrol brand, its enduring relationships and its clearly articulated and focussed strategy.

(h) mAterIAl developments In humAn resources / IndustrIAl relAtIons

People are the Company’s key assets. The focus in 2016 was on enhancing employee engagement and driving performance excellence to achieve the Company’s long term vision. Employee capability was further strengthened by empowering line managers through leadership development programmes to effectively help nurture their teams in realizing their potential. The Company is happy to inform that internal candidates filled 40% of the vacancies in 2016.

The Company continued to actively drive the Ethics and Compliance agenda via trainings, programmes and employee engagements focussing on the importance of cultivating a culture of SpeakUp, ListenUp, Always doing the right thing, non-retaliation and zero tolerance to non-compliance.

The Company has continued to focus on building a diverse and inclusive workforce and has initiated a market mapping exercise to help identify future diverse hiring pools.

control and compliance

In 2016, the Internal Control templates and key controls on the entire Human Resources and payroll processes were checked by the Internal Audit team to provide assertions to the management on design and operating effectiveness of processes. The audit showed a continuous improvement in accomplishing ‘A’ level rating - indicating that the key internal controls provide a high level of assurance that processes are operating efficiently and effectively for the fifth year in succession, with each year delivering better process improvements. The Company implemented a real-time compliance monitoring tool for all compliance reporting across various units and ensured 100% reporting culture.

employee relations at plants

The Company has closed out the Long Term Settlement at its Silvassa and Patalganga plants during 2016.

It enjoys harmonious internal and external industrial relations. The engagement and communication with the workmen through initiatives like the plant performance reviews and leadership team interactions and town halls have been appreciated. The strength of the employee relations at the plants is also indicative by the absence of unionization of contractual labour, which is prevalent in the neighboring industries.

The Wadala technology centre was closed down and the Analytical Laboratory has been shifted to Silvassa plant, wherein a state-of-the-art technology laboratory is being constructed. The Company ensured that the workmen of the Wadala centre were treated with care during their exit as part of this closure.

The total number of people employed in the Company as on 31 December 2016, including factory workmen, was 711.

health, safety, security and environment (hsse)

The Company continues to accord highest priority to health and safety of the workforce and the communities it operates in. The Company has been fully committed to comply with all applicable laws and regulations and maintains highest standards of Occupational Health, Safety and Environment. The Company has an HSSE policy which uniformly applies to every member of the workforce, including all contractors.

The Company has implemented best-in-class internal standards - Operating Management System (OMS) to ensure safe, systematic, reliable and environmentally friendly operations throughout its operations. All three blending plants are certified to the Environment Management System (ISO 14001:2004) and Occupational Health & Safety Management System (OHSAS 18001:2007). The Company is also certified for ISO 9001:2008 (Quality Management System Standard). The Company is periodically certified by internationally recognized and accredited bodies against these standard requirements.
SMART programme – Our global driving safety programme for professional drivers to keep them safe on the roads
The Company is also taking numerous environment management programmes and projects to minimize environment footprint, energy and water consumption as well as waste generation from manufacturing operations. This involves optimizing the manufacturing batch sizes, maximizing the use of natural lighting, use of LED and energy efficient lighting as well as regular water monitoring and audits.

Safety and Environmental Performance has been integral to business performance and the Company continues to focus on the goal of ‘no accidents, no harm to people and no damage to the environment’ with the primary objective that everyone goes home safely every single day.
High speed filling line at Castrol India’s Patalganga plant