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  • Stock recommendation: Castrol India Ltd - Buy - TP Rs. 195

    Publish date: 2nd August, 2018

    Result Update

    Raw material pressure: Strong volume growth resulted in decent rise in revenue but headwinds in terms of higher base oil price and weaker currency impacted the margins. The company has undertaken average ~3% hike in selling price from July 2018 to combat the raising raw material cost pressure. New product launches led to impressive volume growth. Castrol has grown higher than industry growth rate (7.5% v/s 6% in H1CY18).

    Key Highlights

    • Castrol's performance is lower than our expectation. Castrol reported a PAT growth of 19% yoy to Rs.1.64 bn mainly on account of higher lubricant sales volumes, better realization and higher other income.
    • The company has recommended an interim dividend of Rs.2.25/share.
    • Personal mobility continues to be a key strategic growth driver. With the increased focus on commercial vehicle engine oil portfolio (CRB brand commands strong consumer loyalty) is also delivering results with record volume growth driven by launch of new products and aided by a favorable economic environment, with emphasis on infrastructure development.
    • The company has strengthened its specialties portfolio, introducing Castrol TRANSMAX driveline oils and Castrol SPHEEROL greases providing increased protection and reduced downtime.
    • Castrol is awarded the 'Overall Performance' trophy by Maruti Suzuki India Limited. The company has also been chosen as approved supplier for Suzuki Ecstar branded lubricants in their premium NEXA channel.

    Valuation & outlook

    • We expect CIL to report an EPS of Rs.7.3 (earlier Rs.7.4) for CY2018 and an EPS of Rs.7.8 (earlier Rs.7.9) for CY2019. CIL is focusing on new customer acquisition, and distribution expansion to boost Castrol's volume growth. New product launches will also boost lubricant sales. On the basis of our estimates, the stock at CMP is attractively valued at 13.2x EV/EBIDTA, 21.5x P/E and 13.8x P/BV on the basis of CY19E earnings. Based on our valuation multiples model, the target price of Castrol is Rs.195/share (earlier Rs.213) and we maintain BUY rating on the stock. We value the stock at 25x CY19E EPS (earlier 27x). We have lowered our target price to reflect the key headwinds like margin pressure, higher base oil prices and weaker currency.


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