Castrol’s Q4CY16 results were ahead of our estimates led by a modest 2% growth in volumes versus our assumption of a decline and higher-than-expected EBITDA margins at 28%. We maintain our positive view on the stock seeking comfort from expected favourable change in business mix towards personal mobility segment (>50% in two-three years), management’s renewed emphasis on volume growth and recent price hike, which will offset rising RM costs. ADD stays with TP of R470.
Revenues declined 1% y-o-y to R7.82 billion and EBITDA increased 3.5% y-o-y to R2.2 billion. Reported net income of R1.56 billion was boosted by one-off gain of R100 million on sale of property.
Gross contribution (sales– raw material costs) rose by 1% q-o-q to R89/litre led by stable realisations at R166/litre and modest 1% decline in unit raw material cost to R77/litre led by a good volume discount from supplier. Castrol’s volumes grew a modest 2% in Q4CY16, despite 8-10% decline in volumes during November 2016 due to demonetisation, reflecting reasonable growth in October and December. Gross margins expanded by ~50 bps q-o-q to 53.5% led by surprising 1% decline in unit raw material costs and stable gross realisations.
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EBITDA margins remained steady at 28.1%. Net working capital turned further negative to R465 million as on December 31, 2016, compared with a negligible –R4 million a year ago, led by sharp rise in trade payables to five months of RM costs versus four months earlier.