>CASTROL INDIA (KOTAK SECURITIES)

■ Good 1QCY10 results boosted by strong volumes. Castrol reported 1QCY10 net income at Rs1.17 bn (+54% yoy) in line with our estimate of Rs1.12 bn. The strong yoy jump in earnings reflects (1) higher sales at 54.6 mn litres (+20.8% yoy) and (2) higher gross realization at Rs120.1/litre versus Rs112.5/litre in 1QCY09. We maintain our REDUCE rating on Castrol noting the stock is trading 15% above our revised 12-month target price of Rs330 based on 17X CY2010E EPS.

■ Strong results led by buoyant demand
Castrol reported 1QCY10 net income at Rs1.17 bn (+45% qoq, +53.6% yoy) versus our expected
Rs1.12 bn. 1QCY10 revenues increased to Rs6.6 bn (+29% yoy) due to (1) sharply higher volumes at 54.6 mn litres versus 45.2 mn litres in 1QCY09 and (2) higher realizations at Rs120.1/litre versus Rs112.5/litre in 1QCY09. The strong yoy growth in volumes reflects (1) pick-up in demand and (2) low base. We highlight that qoq results comparison is not valid due to seasonality; 2Q and 4Q in a calendar year are the best quarters.

■ Retain REDUCE given rich valuations and strong outperformance
We reiterate our REDUCE rating on Castrol stock noting that (1) the stock is trading 15% above
our revised 12-month target price of Rs330 based on 17X CY2010E EPS and (2) recent strong
outperformance. Castrol stock has rallied 24.5% in the past three months versus the BSE-30
Index’s modest 0.3% rise over the same period. We believe that the stock provides unfavorable
risk-reward balance at current levels and would advise investors to book profits and wait for better opportunities at lower levels to get back in.

■ Fine-tuned earnings and target price to Rs330 (Rs320 previously)
We have fine-tuned our CY2010E and CY2011E EPS estimates to Rs19.6 and Rs20.6 from Rs19.9 and Rs20.3 to reflect (1) higher volume growth (+ve impact), (2) stronger rupee (+ve impact), (3) higher LOBS prices (-ve impact), (4) lower employee costs (+ve impact) and (5) CY2009 annual report. Key upside risks stem from (1) lower-than-expected LOBS prices, (2) better-than-expected recovery in demand and (3) stronger-than-expected rupee. We also note that the stock has historically traded in a P/E band of 14-18X (see Exhibit 2). Thus, we do not rule out the stock trading at a higher multiple given strong liquidity in the market.

To read the full report: CASTROL INDIA