Although Chevron Lubricants PLC, among the higher dividend payers quoted on the Colombo Stock Exchange, had seen after-tax profits fall 26% last year to Rs. 2.565 billion, in an environment of intense competition in the lubricants market, both the company’s chairman, Mr. Rochna Kaul, and MD CEO Kishu Gomes were cautiously optimistic of the future.
Kaul attributed the decline in net earnings mainly to margin erosion as a result of increased input costs and decline in volumes due to intense competition. He noted in the company’s recent annual report that the company had declared and paid three interim dividends totaling to Rs. 10 per share and a fourth interim dividend of Rs. 2.25 per share was declared last February.
He expected competition in lubricants to further increase with the anticipated issue of licenses to new entrants remarking that the lack of an effective mechanism to control illegal operators in the industry remains. But due to the strength of their brand and access to technology advanced products, he expressed optimism that "we will be able to deliver shareholder value."
Kaul also commented favorably of the launch of a public awareness campaign by the ministry during the last quarter of 2017 to educate consumers in "choosing lubricant products cautiously without falling prey to gray market products."
Gomes described 2017 as a challenging year for Chevron with profits dipping 26% from the previous year when they were able to capitalize on favorable input costs.
"The steep rise in base oil costs, compounded by the depreciation of the LKR against the USD and the gradual increase in commodity prices, caused a significant inflationary pressure on costs during the year," he said.
While distribution costs increased substantially compared to the previous year particularly due to the 0.5% increase in the lubricant license fee (subject to a Rs. 10 million cap) to 0.75% resulting in the fee going up from Rs. 10 million to Rs. 74 million.
They had increased prices to counter mounting cost pressure but this strategy was not effective in the retail market with consumer disposable income depressed by rising inflation. Adverse weather due to prolonged drought and floods had affected several districts disrupting regular momentum of economic activities and also curtailed lubricant consumption.
They had responded to intense price competition and had achieved some volume gains during the latter part of the year but at the expense of lower margins.
But there were some noteworthy successes like a toll blending arrangement with YAMAHA to blend and supply that brand genuine oil under the YAMALUBE brand to be sold via the local YAMAHA distributor. They also had an agreement with Abans Auto to blend and supply motorcycle oils co-branded with Havoline. Among other wins, they had contracted into supplying oils to power plants.
Focus on export markets had had continued with exports to Bangladesh growing and exports to the Maldives sustained.
Commenting on the outlook, Gomes said that the country’s lubricant industry was mature and competitive with 13 players and three blending plants operating with excess capacity. The government "may" issue additional licenses during the year, further changing the competitive landscape.
"While the company has access to latest product innovations and robust channel strategy, our ability to command the right price and influence customers to purchase packed products rather than loose sales will largely determine our future profitability," he said. "Sustained growth in the export markets will also be crucial for our success."
The directors of the company are RM Kaul, Kishu Gomes, Teek Hong Kee, Deva Rodrigo, Harsha Amarasekera and Anura Perera.
Kaul attributed the decline in net earnings mainly to margin erosion as a result of increased input costs and decline in volumes due to intense competition. He noted in the company’s recent annual report that the company had declared and paid three interim dividends totaling to Rs. 10 per share and a fourth interim dividend of Rs. 2.25 per share was declared last February.
He expected competition in lubricants to further increase with the anticipated issue of licenses to new entrants remarking that the lack of an effective mechanism to control illegal operators in the industry remains. But due to the strength of their brand and access to technology advanced products, he expressed optimism that "we will be able to deliver shareholder value."
Kaul also commented favorably of the launch of a public awareness campaign by the ministry during the last quarter of 2017 to educate consumers in "choosing lubricant products cautiously without falling prey to gray market products."
Gomes described 2017 as a challenging year for Chevron with profits dipping 26% from the previous year when they were able to capitalize on favorable input costs.
"The steep rise in base oil costs, compounded by the depreciation of the LKR against the USD and the gradual increase in commodity prices, caused a significant inflationary pressure on costs during the year," he said.
While distribution costs increased substantially compared to the previous year particularly due to the 0.5% increase in the lubricant license fee (subject to a Rs. 10 million cap) to 0.75% resulting in the fee going up from Rs. 10 million to Rs. 74 million.
They had increased prices to counter mounting cost pressure but this strategy was not effective in the retail market with consumer disposable income depressed by rising inflation. Adverse weather due to prolonged drought and floods had affected several districts disrupting regular momentum of economic activities and also curtailed lubricant consumption.
They had responded to intense price competition and had achieved some volume gains during the latter part of the year but at the expense of lower margins.
But there were some noteworthy successes like a toll blending arrangement with YAMAHA to blend and supply that brand genuine oil under the YAMALUBE brand to be sold via the local YAMAHA distributor. They also had an agreement with Abans Auto to blend and supply motorcycle oils co-branded with Havoline. Among other wins, they had contracted into supplying oils to power plants.
Focus on export markets had had continued with exports to Bangladesh growing and exports to the Maldives sustained.
Commenting on the outlook, Gomes said that the country’s lubricant industry was mature and competitive with 13 players and three blending plants operating with excess capacity. The government "may" issue additional licenses during the year, further changing the competitive landscape.
"While the company has access to latest product innovations and robust channel strategy, our ability to command the right price and influence customers to purchase packed products rather than loose sales will largely determine our future profitability," he said. "Sustained growth in the export markets will also be crucial for our success."
The directors of the company are RM Kaul, Kishu Gomes, Teek Hong Kee, Deva Rodrigo, Harsha Amarasekera and Anura Perera.
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