Buy Castrol (India); target of Rs 135: Motilal Oswal

Motilal Oswal's research report on Castrol (India)

CSTRL’s EBITDA and PAT missed our estimates in 1QCY23, due to higherthan-estimated raw material costs and tax expenses. Realizations improved 12% YoY, but declined 4% QoQ in 1QCY23. Volumes increased 15% QoQ to 55m liters; however, it declined 7% YoY. The company gained market share in the car segment, while maintaining market share in the commercial and agricultural segment. However, it lost some market share in the two-wheeler segment. The management expects the core lubricant market to remain strong till 2040s. The car segment is expected to grow 20% over the next three to five years, due to low penetration of four-wheelers in India. The two-wheeler segment is also expected to grow in the near term; however, the adoption of EVs is expected to grow at a considerably faster pace in this segment. The company intends to grow at a slightly faster rate than market growth rate in the respective category of lubricants while also maintaining EBITDA margins in the 23-25% range.  CSTRL has always enjoyed its brand legacy, and we believe it will be able to secure its profitability with a better product mix, cost control, and the launch of advanced products with better realization. We reiterate our BUY rating on the stock.

Outlook

On a one-year forward P/E basis, the stock trades at a ~40% discount to its LT P/E average of 24.5x. We value the stock at 15x CY24E EPS to arrive at a TP of INR135. We reiterate our BUY rating on the stock.

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