Thursday, May 7, 2009

>Castrol India Ltd. (DOLAT CAPITAL)

Castrol India Ltd. (CIL) has reported a good set of numbers considering the economic slowdown, which has impacted both the automotive and industrial segment. Despite the volume pressure, CIL recorded a top line growth (YoY) of 2.6% due to product price hikes taken in CY08. The full effect of fall in base oil prices (came down by ~50% from its peak) would be fully reflected from Q2CY09. The strong brand pull would enable CIL to hold on to its market share. Our ground level interaction suggests that the price cuts taken in February 2009 would augur well for CIL. We reiterate our Accumulate recommendation with a price target of Rs 371 to trade at 15x CY09E earnings.

■ The revenue grew by 2.6% on a YoY basis to Rs 5059 mn despite the volume pressure. This is on the back of the three price hikes taken by CIL in CY08. The volume pressure is expected to continue in the coming quarter.

■ The raw material price increased by 4% on a YoY basis. Going forward, we expect this to come down sharply on a YoY basis due to the correction in base oil prices.

■ The PAT margin expanded by 30 bps on a YoY basis. We expect the margin to expand further considering the fall in raw material prices.

Key Developments:

■ CIL has taken a price cut of Rs 10-12 per liter, thereby reducing the lubricant prices by 5~7% across the product portfolio. The same has been done in light of the price correction in base oil prices (~50%). The cut would reduce the price gap with competition and arrest the brand shift from Castrol.

■ Going forward, CIL plans to increase the proportion of synthetic based lubricants (higher margins) in their product portfolio and phase out low margin products.

■ The refurbished CRB products are well accepted in the market.

■ CIL would go slow on Castrol Bike Zone roll outs.

The price cut taken by CIL is marginal as compared to fall in the base oil prices. This strategy would enable margin expansion. The full impact of the fall in raw material cost would be visible from Q2CY09. The improvement in the economic activities and thrust on personal mobility segment would augur well for CIL. At CMP of Rs 318, the stock is trading at 12.9x and 12.0x of CY09E and CY10E earnings respectively. We reiterate our Accumulate recommendation with a price target of Rs 371 to trade at 15x CY09E earnings.

To see full report: CASTROL