Stock Fundamentals

Castrol India: In full throttle - Buy

Anand Kalyanaraman | Updated on January 17, 2018




Prospects are bright for this market leader, thanks to favourable business conditions

Lubricant maker Castrol India has been having a good run. After rising 30 per cent in the year-ended December 2015 and 17 per cent in the March 2016 quarter, the company’s profit grew 12 per cent in the recent June 2016 quarter to ₹207 crore, its highest so far.

This has been driven by the continued up-tick in the auto industry, which has aided the sales of automotive lubricants — Castrol’s mainstay.

Also, benign raw material prices, thanks to weakness in crude oil, has translated into higher margins.

In the half-year ended June 2016, the overall volume growth was good at 7 per cent while raw material as a proportion of sales fell to 39 per cent from 44 per cent in the year-ago period.

So, despite sales price moderation, the company’s revenue for the six months ended June 2016 rose 6 per cent year-on-year; operating margin increased to 30 per cent from 26 per cent in the year-ago period and net profit grew 15 per cent.

Despite the good show and a rally after the recent results, the Castrol India stock is down 13 per cent over the past year and about 4 per cent this calendar. Volatility in crude oil saw its price nearly double from under $30 a barrel in January to almost $50 by early June.

This along with relatively slower growth compared with competitors such as Gulf Oil Lubricants seems to have dampened the Castrol India stock.

On a strong footing

But this presents a good buying opportunity for investors with a long-term perspective. One, the valuation is attractive. At ₹430, the stock trades at about 33 times its trailing 12-month earnings, less than the average of nearly 37 times over the past three years. Next, the company’s prospects seem quite bright, thanks to favourable business conditions and its market leadership position.

With auto sales in the midst of an upturn and continuing to grow at a brisk pace, Castrol’s automotive lubricant business, which contributes almost 90 per cent of the company’s revenue and profit, remains on a strong footing.

The double-digit volume growth in the personal mobility segment, the company’s strong suit, should continue, with demand from new vehicles and also replacement demand, a key driver. Expectations of a good monsoon and the Seventh Pay Commission award should help passenger vehicle sales across segments. Also, with light commercial vehicles joining the growth bandwagon of medium and heavy commercial vehicles, overall automotive lubricant sales growth should stay healthy.

Despite increasing competition, Castrol India remains the market leader in a fragmented market despite its premium pricing. With a strong brand, wide distribution network, technological muscle, premium products such as synthetic lubricants and regular launches, the company should be able to sustain healthy growth even if some market share is ceded.

Revival in volume growth

The industrial lubricants business, which was weak last year, has shown signs of revival in the half-year ended June 2016. What also lends comfort is the revival in overall volume growth in recent times, in contrast to the dip for a good part of last year.

With the Goods and Services Tax (GST) now closer to fruition, industrial growth should get a leg-up in the coming years. This should help Castrol’s industrial lubricant sales.

On the cost front, the rally in crude oil has not sustained and the price has retreated to about $43 a barrel now. With oversupply conditions continuing in the global market, crude oil should stay subdued, though it is unlikely to go back to levels seen in January. This should keep the price of base oil, Castrol’s key raw material, under check, and help the company sustain margins.

Castrol India has a robust balance sheet with zero debt and cash balance of ₹815 crore as of June 2016.

The return on equity for the half-year ended June 2016 was a robust 120 per cent. The company is also a regular dividend payer; the current dividend yield based on payouts last year is more than 2 per cent.

Published on August 07, 2016

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