Castrol India Ltd - Q2FY18 Result Update - Religare

Better times to come

Castrol India Ltd's (CIL) Q3CY17 numbers were marginally ahead of our estimates with net revenue & PAT growth of 13.1% & 14.2% YoY respectively. Improvement in gross margins (+133 bps) and EBITDA margins (+149 bps) was encouraging. Healthy volume offtake, better realisations and stability in the base oil prices supported the overall growth. With anticipated revival in the Auto sector and GDP / IIP growth, lubricant consumption is set to improve over the next two years. We expect CIL to be a key beneficiary of this cyclical upturn. We recommend BUY on the stock with target price of Rs 446.

- CIL's net revenue grew by 13.1% YoY to Rs 861.4cr, led by a combination of healthy volume growth (~7.2%) and higher realisations. Personal mobility segment reported a healthy double digit volume growth (50% volume share), while the CV segment, which was impacted sharply in Q2CY17 due to GST related de-stocking and lingering effects of demonetization, witnessed some revival. Power brands (60% volume share and CIL's key focus area) did well to register double digit growth.

- Gross margins improved by 133bps YoY, aided by stability in the exchange rate and base oil prices. EBITDA increased by 19.1% YoY to Rs 253.6cr, while EBITDA margins gained 149bps YoY to 29.4%, led by higher gross margins and marginal growth in employee cost. Reported PAT grew by 27.5% YoY, aided by higher other income (Rs 33.3cr vs Rs 15.5cr in Q3CY16), which included one-off gains Rs 18.6cr from the sale of property. Excluding this, the Adjusted PAT grew by 14.2% YoY to Rs 159.6cr.

- Other key highlights of the concall: i) CIL entered into new exclusive supply partnerships with Piaggio and extended existing OEM partnerships with VW group and Volvo cars; ii) The company feels that electric and hybrid vehicles have still a long way to go and cars will still run on combustion engines in near to medium term; iii) The company is unlikely to incur any major CAPEX over the next 2 years.

Outlook & Valuation:

While H2CY17 was largely hit due to GST transition and lingering effect of demonetization, a marked revival was witnessed in Q3CY17. With anticipated revival in the Auto sector and GDP / IIP growth, lubricant consumption is set to improve over the next two years. We expect CIL to be a key beneficiary of this cyclical upturn. We feel the worst is over and expect better performance from CIL over the next two years, led by improved volume offtake (especially in the PCMO segment). Volumes in CV and industrial segment would revive gradually. While margins are likely to be impacted in CY17E, we expect an improvement in CY18E, led by improved product mix and operating leverage. Cash rich and debt-free status, superior return ratios and high and consistent dividend payouts should support the premium valuations and limit the downside in the stock price. We have maintained our EPS estimates for CY17E & CY18E and have incorporated projections for CY19E. We recommend BUY on the stock with target price of Rs 446.

Shares of CASTROL INDIA LTD. was last trading in BSE at Rs.389.65 as compared to the previous close of Rs. 397.3. The total number of shares traded during the day was 125839 in over 2080 trades.

The stock hit an intraday high of Rs. 399.4 and intraday low of 386.5. The net turnover during the day was Rs. 49370894.

Source : Equity Bulls

Keywords