Buy Castrol India; target of Rs 275: Motilal Oswal

Motilal Oswal's research report on Castrol India

Castrol’s (CSTRL) revenue grew 9% YoY to INR13b in 3QCY24, driven by 8% YoY volume growth. EBITDA margin stood at 22.2%. Management highlighted that it remains focused on brand building, widening the distribution network, and launching new products, all of which we believe will contribute to volume growth and market share expansion. Management maintains a bullish outlook on India as a market and expects robust demand for lubricants to remain stable until late CY30s and early CY40s, largely attributed to the low penetration of cars in the country. While the threat from EVs is real, EV adoption is expected to be gradual. CSTRL maintained its guidance of growing higher than the industry’s average growth rate of 4-5% while aiming for 22-25% EBITDA margin for CY24. We estimate 22%/23%/24% EBITDA margin in CY24/CY25/CY26. Management guided INR1b annual capex, which is expected to rise to INR1.2-1.25b in a couple of years (INR600-650m capex incurred during 9mCY24). CSTRL has always enjoyed a strong brand legacy, and we are confident in its ability to maintain profitability through an improved product mix, stringent cost-control measures, and the launch of advanced products that command better realization. We reiterate our BUY rating with a TP of INR275.

Outlook

We also reduce our valuation multiple to 26x (average: 22.8x and mean + 1 S.D.: 30.6x) and arrive at our TP to INR275. We reiterate our BUY rating.