Reduce Castrol India - Kotak

Castrol India Ltd. has shown lower than expected performance in Q3CY12. CIL has reported a PAT de-growth of 9.9% YoY to Rs.8.57 Bn mainly on account of 1). Flat volume growth, 2). Higher total expenditure, 3). Higher depreciation cost and 4). Lower other income.

- Despite softening of base oil prices, cost of raw material increased significantly due to continuing rupee depreciation, putting margin under pressure. The adverse impact of the Rupee depreciation was Rs. 580 Mn, in Q3CY12.

- Total volumes were flat versus the same quarter last year. Automotive volumes grew by 3%, faster than the market, enabled by strong marketing programs targeted towards consumers, trade and influencers. However, the increase was offset by decline in the industrial and marine volume which was impacted by the overall industrial slowdown.

Outlook and valuation:

- Our revised earnings estimate with EPS of Rs.8.7 CY12E and Rs.9.7 CY13E and cash EPS of Rs.9.2 CY12E and Rs.10.3 CY13E

- On the basis of our estimates, the stock at current market price of Rs.323 is expensively valued at 11.3x EV/EBIDTA, 33.2x P/E and 22.2x P/BV on the basis of CY13E earnings.

- Based on our DCF valuation model, the 12-month target price of Castrol is Rs.302. We believe the current price discounts most of the positives and hence we maintain REDUCE. Castrol's management has also guided that the next few quarters are likely to be challenging.

Source : Equity Bulls

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