Nirmal Bang is bullish on Castrol India
and has recommended buy rating on the stock with a target of Rs 349 in its December 31, 2012 research report.
“Castrol India has so far ably defended its market share in the lube oil industry despite its premium product offerings by leveraging on its strong brand. We view the street’s concerns over continued pressure on volume/market share as overdone as we expect: (1) Stagnancy in the industrial segment to be offset by robust retail demand, thus keeping overall volume stable, and (2) Pressure on margins in the coming quarters to ease with a judicious product mix. We expect volume CAGR at 1.9% over CY11-CY14E driven by retail/workshop channel, while adjustment in product pricing and launch of low-premium products are likely to help it recapture market share. We have assigned a Buy rating to Castrol India with a target price of Rs349 using weighted average methodology.”
“Our interaction with industry experts/dealers/mechanics/lube companies revealed that the company has regained market share at ~22% in September 2012 after shedding almost 200bps last year as a result of its premium product offerings (premium touched 30%-35%). The gain is on account of: (1) Premium pricing versus rivals stabilising in the band of 20%-25%, (2) Castrol being relatively immune to cost pressures, considering the company’s positioning as price leader, (3) Launch of low-premium products like Activ Go for bikes and RX Super for commercial vehicles to mark its presence in the mid-size segment. We expect volume to grow 2.4%/3.4% in CY13E/CY14E, respectively, after posting negative growth in CY11/CY12E. We expect it to report volume of 208mn/213mn/220mn litres in CY12E/CY13E/CY14E, registering volume CAGR of 1.9% over CY11-CY14E compared to 0.5% likely over CY09-CY12E. We believe volume growth would be driven by: (1) Rising exposure of the company towards the personal mobility segment, (2) Retail/workshop volume growth (on YTD basis volume grew 7% though industrial volume declined), (3) The company’s renewed focus on capturing market share by offering lowpremium products, (4) Growing penetration of Hub & Spoke model in commercial vehicles, where volume growth in light commercial vehicles (LCVs) arrests the decline in volume from heavy commercial vehicles (HCVs), and (5) Increased focus on small towns and rural areas, a key growth market in the personal mobility space, in conjunction with its plan to capture the business from the tractor segment.”
“We have assigned a Buy rating to the stock with a target price of Rs349 using weighted average methodology to capture medium to longterm potential. We assign 60% weight to PE and a 20% weight each to DCF/Gordon dividend
discount methodology. We believe a PE multiple of 30xCY14E earnings (two year average of 27x) will sustain to reflect: (1) Volume CAGR of 1.9% over CY11-CY14E compared to 0.5% over CY09-CY11, (2) Expansion in margins of 300bps over CY12ECY14E, (3) The company regaining market share with the launch of low-premium products and (4) MNC parentage aiding the launch of innovative products to compete with Shell and Petronas (5) Company’s price leadership position (6) Earnings growth at 13%/16% in CY13/14, which would result in RoE to improve to 72.7%/78.8% compared to 69.5% in CY12E,” says Nirmal Bang research report.
Institutional holding more than 40% in Indian cos
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