Castrol has decided to break away from the tried and tested method and has taken an emotional and lifestyle route, which brings freshness to the product category
It's scary, actually, for any creative person in an ad agency, when you have to write commercials for as boring a product as engine oil. It needs a big shot of adrenalin (and many beers) to get cracking on it. Also, brand managers in this category usually prefer the ultra rational route, where they can bombard chemical features and complex jargon at the target audience. This makes the creative director's task even more daunting.
Thankfully however, Castrol, in its new ad for multigrade diesel engine oil called Castrol CRB Turbo, has decided to break away from this tried and tested method, and has taken to an emotional and lifestyle route.
The ad features a trucker and his wife, as they are out on a long country drive. This trucker is no mean machine man, but he has a soft side. The biwi is maha upset that the chap has forgotten their wedding anniversary. And she sarcastically remarks that he never forgets to load his truck with Castrol. The trucker uses the opportunity to plug the brand, and says it's great for the long life of the truck's engine. But no, he hasn't forgotten what it takes to keep his marriage going for years and years. He's bought missus an earring set, which she wears happily.
It's not really a memorable commercial by any stretch of imagination. In fact, engine oil is forced into the conversation between the trucker and his wife. Although unnatural, the built-in charm of the situation ensures you ignore this trespass. However, I still appreciate the effort.
For a change, a woman is brought into a category like engine oil which has traditionally been a male bastion. This brings freshness into the product category. And of course, the emotional angle helps the ad stand out. Our truckers should enjoy this one. Also, quite cunningly, Castrol has used a pretty, Page 3 girl to play the role of the trucker's wife. This would not be the case in real life, but it's a smart move. She is the sort of a woman most truckers would want alongside on the long drive from Gurgaon to Chennai. So a little fantasy is a cool thing in this context.
All in all, the story and the treatment could have been better. But strategically, a clever move has been made. Why mustn't our hardworking, overloaded truckers be made to smile a bit? Can do no harm to an engine oil brand, right?
There is nobody in the system—promoters, lead managers, raters and regulator—who can be held accountable for the profit-pump and share-dump operation that seems common in IPOs
We had mentioned in our article "What ails the Indian IPO market-I that "that volumes of information in a public issue prospectus does not help retail investors with one crucial data—that is, expected profits, that determines the most crucial aspect of a public issue—valuation." Lack of knowledge about this data ensures that promoters and lead managers can price an issue exorbitantly and get away. That is why after listing, share prices of many stocks have simply crashed. Let's look at some examples.
In the calendar year 2010, 65 IPOs were launched. The 10 worst-performing IPOs turned out to be Emmbi Polyarns, Commercial Engineers & Body Builders Co, Tarapur Transformers, Midfield Industries, Cantabil Retail India, Aster Silicates, Tirupati Inks, Gyscoal Alloys, Sea TV Network ands DB Realty.
The worst among them were Aster Silicates, Tirupati Inks, Gyscoal Alloys, Sea TV Network and DB Realty, which fell 80%-84% from their issue prices. Could investors have avoided these issues? They certainly could have if they knew what the performance would be. Or they would have bought these stocks at a much lower price. Did the subsequent financial performance of the stocks show that these were horribly overpriced at the time of the issue? Well, DB Realty reported a net profit of Rs255.70 crore in 2011 which means that its EPS (Earnings Per Share) turned out to be Rs10.51. The issue was priced at Rs468 which means that it was offered to investors at a forward P/E of 44.52! Even if its key promoter Shahid Balwa was not cooling his heels at Tihar jail, the stock was not a great buy given its fundamentals. The lead manager for the DB Realty IPO was Enam Securities Private Limited. CRISIL had allotted 'IPO Grade 2' for the offering, indicating that the company had 'Below Average Fundamentals.'
Similarly, Sea TV Network reported a net profit of just Rs1.66 crore in FY2011 which means that its EPS turned out to be Rs1.38. The issue was priced at Rs100 —it was offered to investors at a forward P/E of 72.41! Gyscoal Alloys reported a net profit of Rs4.26 crore in 2011, which means that its EPS turned out to be Rs2.69. The issue was priced at Rs100; it was offered to investors at a forward P/E of 26.38. The current P/E is one-fifth of that.
Similarly, Aster Silicates and Tirupati Inks were offered to investors at a forward P/E of 59.65 and 30.30 respectively. Tarapur Transformers has slumped by 72% as compared to the issue price, which is not surprising since the company reported a loss of Rs4.83 crore for the year ended March 2011. But how was the pricing of a company done at the time of the issue?
None of this was known or knowable at the time of the issue—although as the ratings indicate, these companies had poor fundamentals. But the promoters and even the lead managers would have known that the pre-IPO profits were misleading—and based on the post-IPO profits, the shares would crash—given how expensively they were priced. These stocks should have been priced much lower, given the risks. That would have been possible if somebody in the system was obliged to commit a range of likely profits over the coming year. Today, thanks to the flawed rules we have imported from Wall Street, the company, the lead managers, the rating agency and the regulator remain unaccountable for what they say and what they do.
While equity is a risk investment, investors need not be open to incompetence or even legalese as a fig leaf or plainly fraudulent behaviour that is possible under the current hands-off system. Under the present system, IPO pricing and sales are often subjected to manipulation done by the promoters and executed by the lead managers, as Moneylife has pointed out several times in the past.
The onset of the monsoon has led to decrease in demand from the construction industry, which has dampened the demand for cement. The hike in interest rates has also affected realty sales, which are already at unaffordable highs
The onset of the monsoon has led to decrease in demand from construction industries, which has dampened the demand for cement, thereby exerting pressure on the prices. While cement prices remain soft in the monsoon, the extent of the drop in rates obviously depends on the demand. This year, demand has been especially bad.
Yesterday (Slowdown spreading across all core sectors in India), Moneylife had pointed out that during FY2011, eight core industries-coal, crude oil, natural gas, petroleum & refinery products, fertilisers, steel, cement and electricity had registered a growth of 5.72% against 6.64% a year ago, mainly due to sluggish demand.
Energy-intensive manufacturing units have reported a dull performance. The rate hike announcement by the Reserve Bank of India (RBI) on 16th June may further dampen demand.
How will poor demand impact the cement and the realty sector?
According to data from Emkay Global Financial Services, March 2011 saw a peak in prices of cement bags—the average price of cement across India was Rs276/bag, up by 18% from the average price of Rs233/bag in December 2010. The prices have corrected since—the average price in May was Rs269/bag, a drop of 3%. Up to 11th June, prices have gone down further to Rs261/bag.
Analysts say there will be a further price correction due to the fall in demand and increase in production capacities. The sustainability of current prices depends upon the pick-up in construction activities.
"There are no major infrastructure projects announced by the government; many projects are awaiting clearance, so demand hasn't picked up. In March, the prices of cement bags were at their peak. Now prices have fallen by Rs10-Rs40 per bag and further correction is expected. Utilisation in southern regions has been falling, though the central and northern regions have maintained around 90% and around 75-80% utilisation." said an analyst from a leading broking firm, preferring anonymity.
According to the Emkay report, "The sector continues to be plagued by cost pressures (the recent news flows of sharp hike in regulated coal prices in Indonesia could further dent margins as fuel costs might increase further), which in turn would put severe pressure on profitability of manufacturers over the next 2-3 quarters."
The realty sector, a major consumer of cement, is experiencing a severe crunch as well. The exorbitant prices of real estate have put off buyers and the loss in revenues is leading developers to default on their loan repayments.
The hike in interest rates by the central bank could result in banks passing on the rate hike to customers and home loans could become more expensive. This would put off buyers even more, leading to a further slump in demand.
The Union ministry of housing has reported that by 2012, India will need 26.30 million houses- but 92,000 units remain unsold in Mumbai.
"Around 180 units sold in Mumbai from January to March 2011 were priced above an average capital value of Rs20,000/sq ft. No wonder the market is slowing down perceptibly now. Around 3,350 units priced at Rs20,000/sq ft and above remained unsold by the end of March 2011 in the city," Himadri Mayank, manager—research & real estate intelligence service, Jones Lang LaSalle India told Moneylife.
Many developers have fared badly, leading to a pile-up of unsold inventory. If this continues, it won't be long before developers resort to fire sales, leading to a crash in real estate prices.