Castrol India: Kotak Securities rates ‘buy’; Says quarter performance met expectations

By: | Updated: May 14, 2018 3:17 AM

In Q1CY18, Castrol’s net revenue increased 5% y-o-y to Rs 9.3 bn supported by higher sales volume and higher realisation.

castrol india, castrol india stock, castrol india growthRevenue growth was supported by volume growth across categories and price hikes undertaken to combat higher raw material cost. (Website)

Revenue growth was supported by volume growth across categories and price hikes undertaken to combat higher raw material cost. Adjusting for one-time volume growth in Q1CY17, the overall volume growth is 5% y-o-y in Q1CY18. Castrol’s performance is in-line with our expectation. Despite the sharp rise in input costs, it has reported profitable volume growth in Q1CY18. Along with personal mobility segment, it has also started focusing on commercial segment (CRB brand commands strong consumer loyalty) by broadening its participation.

New launches to boost volumes

Launched Castrol MAGNATEC engine oil with DUALOCK technology in the passenger car segment which provides 50% better engine protection in congested city driving conditions. In the commercial vehicle segment, Castrol CRB Turbomax with DuraShieldTMboosters was launched which delivers up to two times longer engine life. Despite a 7% y-o-y increase in raw material cost and 7% y-o-y increase in other expenses, CIL has reported a PAT growth of 2% y-o-y basis to Rs 1.82 bn (vs our expectation of Rs 1.86 bn) supported by both higher sales volume/better realisation, and higher other income. Overall revenue increased by 5% y-o-y to Rs 9.3 bn driven by volume growth across categories. Operating margin declined marginally by 30 bps to 29.6% in Q1CY18.

Valuation & outlook

We expect CIL to report an EPS of Rs 7.4 (earlier Rs 7.6) for CY2018 and an EPS of Rs 7.9 for CY2019. On the basis of our estimates, the stock at CMP is attractively valued at 14.3x EV/Ebitda, 23.3x P/E and 15.1x P/BV on the basis of CY19e earnings. Based on our valuation multiples model, the target price of Castrol is Rs 213/share (earlier Rs 220) and we maintain Buy rating on the stock. We value the stock at 27x CY19e EPS. CIL is focusing on new customer acquisition, and distribution expansion to boost Castrol’s volume growth. New product launches will also boost lubricant sales.

Revenue growth

In Q1CY18, Castrol’s net revenue increased 5% y-o-y to Rs 9.3 bn supported by higher sales volume and higher realisation. Castrol’s lubricant volume has grown 2.6% y-o-y (adjusting for one-time volume growth in Q1CY17, the overall volume growth is 5% y-o-y in Q1CY18) to 51.5 ltrs (witnessed volume growth across categories). Castrol has hiked lubricant prices by 2-4% and partly passed on the burden of higher base oil prices. The company has guided that its volume growth will be better than the industry growth. Industry growth is expected to be in the range of
4-5% y-o-y.

Raw material cost including purchases of finished goods

In Q1CY18, raw material cost has increased 6.7% y-o-y to Rs 4.6 bn due to higher base oil prices resulting from rise in crude oil prices and weaker rupee. In Q1CY18, Base oil prices have increased by $120/ton. Raw material cost (including purchase of finished goods) to sales ratio (%) increased by 75 bps y-o-y to 49.65% in Q1CY18. Raw material cost is dependent on lube oil prices and rupee movement. Staff cost has decreased 5.8% y-o-y to Rs 469 mn (-7.5% q-o-q). Employee cost to sales ratio (%) has decreased 60 bps to 4.9%. We believe staff cost is within acceptable range.

 

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