Buy Castrol (India); target of Rs 146: Motilal Oswal

Motilal Oswal's research report on Castrol (India)

Castrol (CSTRL)’s revenue missed our estimate while its EBITDA and PAT were above estimates. Realizations were flattish QoQ but grew 12% YoY in 1QCY22. Volumes were higher than the pre-pandemic levels, at 59m liters, with the Personal Mobility segment contributing 40-45% to overall volume sales and CVs contributing 40% while Industrial volumes formed the remaining in 1QCY22. CSTRL took price hikes of ~INR12-20/liter in its various segments and product categories. Its market share in the Bazaar segment was at ~20%. The management expects lubricant demand to sustain until at least 2035-2040 as there is a huge room for ownership penetration that would not be fulfilled entirely by EVs alone (at least in the 4W category). It is also working on a global range of EV fluids, ‘Castrol On’, with various OEM players. Though Base Oil price is likely to be high in the near term, we expect the price to decline in line with the correction in Brent price. Better volumes are expected to bring down CSTRL's operating costs with an improvement in margins to 24-26% for CY22-23E. Consequently, we raise our EBITDA and EPS estimates by 19% each for CY22 and 17% each for CY23. CSTRL has always enjoyed its brand legacy, and we believe it will be able to secure its profitability with better product mix, cost control measures and launch of advanced products with better realizations. Reiterate BUY.

Outlook

On a one-year forward P/E basis, the stock trades at a ~47% discount to its LT P/E average of 26.2x. We value the stock at 15x CY23E EPS to arrive at our TP of INR146. Maintain BUY with 37% potential upside.