Retain ‘sell’ on Castrol India, target Rs 385: Kotak

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Published: February 26, 2016 12:12:14 AM

Castrol’s reported results were well below our estimates led by 4% y-o-y decline in volumes and 1% q-o-q decline in gross realizations.

Castrol’s reported results were well below our estimates led by 4% y-o-y decline in volumes and 1% q-o-q decline in gross realizations. The company’s adjusted EPS grew 25% to Rs 12 in CY2015, though the growth is lower than expectations despite significant savings on base oil costs. Valuations remain expensive at 31.2X CY2016E EPS, despite a weak volumes trajectory. We cut estimates by 6% and retain SELL with a revised TP of Rs 385, based on 28X forward EPS.

Castrol’s revenues declined 8% y-o-y to 7.9 billion, 6% below our estimate due to lower-than-expected volumes. Lower raw material cost drove 2.4% y-o-y growth in EBITDA to 2.1 billion, though 18% below our estimate, due to higher other expenses; margins moderated 72 bps q-o-q to 26.8%.

Net income was 19% below our estimate at 1.4 billion (+7% y-o-y), further impacted by higher effective tax rate. Gross contribution was robust at 90.8/liter (+14% y-o-y, +2% q-o-q). The company reported 25% growth in adjusted EPS to 12 in CY2015 driven by 600 bps expansion in EBITDA margins to 27.1%, partially offset by 2.5% decline in volumes.

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