Castrol India - 4QCY21 Result Update - Attractive Valuation; Upgrade to BUY

Castrol's (CSTRL) 4QCY21 revenue grew by 17% YoY and 2% QoQ to Rs10.9bn (10% below our estimate). Despite the 9% increase in crude prices QoQ, the overall cost of raw material for CSTRL remained largely unchanged. This led to an expansion in gross margin to 49.8% (up 20bps QoQ but down 960bps YoY). Reported EBITDA grew by 3% YoY and 1% QoQ to Rs2.7bn (3% below our estimate). EBITDA margin largely remained flat QoQ but contracted sharply by 316bps YoY to 24.4%. Net profit grew by 1% QoQ and remained flat YoY at Rs1.9bn (3% below our estimate). The company declared a final dividend of Rs3/share (paid interim dividend of Rs2.5/share), on a total dividend of Rs5.5/share, and the implied dividend yield is ~5%. CSTRL's stock price has corrected more than 23% in the last 3 months, which is inversely proportional to the 19% rise in crude prices. We believe the stock price is factoring a higher crude price scenario (>US$90/bbl) for the long term. However, we believe in the long term, crude prices will correct from the 7-year high level mainly due to 1) the US-Iran nuclear deal that could bring back 2% additional global oil supply, and 2) OPEC+ countries stick to pump 400kbpd addition oil every month till Sept'22. Hence, we have tweaked down the 1-year Target Price to Rs139 (earlier Rs146) and upgraded our rating on the stock to a BUY from HOLD.

Lubricant Demand Sees Recovery

The management indicated that volumes have recovered in 4QCY21 as economic activities resumed; volume stood at 51.5mn ltrs vs. 50mn ltrs in 3QCY21. In terms of volume mix, ~45% was from two-wheelers, ~20-25% from CVs, ~20-25% from passenger cars and the rest pertains to industrials. The delay in agriculture activities and slowdown in tractor sales impacted lubricants' volume from commercial vehicles. We expect lubricants' demand from personal mobility to remain strong, while a revival in demand from the CV segment would depend on the overall recovery in the Indian economy. However, the overall lubricants' demand in the long run is expected to remain soft due to the higher drain interval period to change lubricants. In the long term, an increasing rate of penetration/registration of electric 2W vehicles (mostly scooter segment) could be a drag on volume growth.

Outlook & Valuation

CSTRL's alliance with Jio-BP retail network provides a long-term volume growth opportunity and scope for market share gain, while a focus to diversify the revenue stream is also a step in the right direction. Thus, we expect the company to clock a volume CAGR of 5% over CY21-CY23E. However, base oil prices are set to be at elevated levels due to the higher crude oil prices and will impact CSTRL's gross and EBITDA margins. Apart from the implication of base oil prices, forex also plays an important role in margins. Higher crude prices will drag EBITDA margin to 25.8%/27.3% in CY22E/CY23E respectively, compared to the average EBITDA margin of 29% over CY15-CY19. To some extent, the net profit margin would be impacted. Thus, we lower our PE valuation multiple to 15x (earlier 15.5x) and reduce the target price to Rs139 (earlier Rs146). At 15x CY23E EPS, CSTRL's valuation looks attractive and is at a discount of 20% to its historical average 1-year forward PE multiple of 18x, and the stock also offers a decent dividend yield of ~5% in CY22E. Further, the balance sheet is robust with net cash of Rs13.2bn (12% of the current market cap). Hence, we upgrade our rating on CSTRL to a BUY from HOLD, with a reduced target price of Rs139.

Link to the report

Shares of Castrol India Limited was last trading in BSE at Rs. 112.20 as compared to the previous close of Rs. 113.70. The total number of shares traded during the day was 175155 in over 3927 trades.

The stock hit an intraday high of Rs. 113.40 and intraday low of 111.20. The net turnover during the day was Rs. 19643288.00.

Source : Equity Bulls

Keywords

CastrolIndia INE172A01027 Q4CY21 ResultUpdate RelianceSecurities