Lubricant-maker Castrol India has zoomed more than 70 per cent on the bourses since our ‘buy’ recommendation last April. Three factors helped.

One, there was the positive sentiment in favour of cyclical stocks last year on hopes of an economic pick-up.

Next, the auto segment, Castrol’s main market, showed signs of revival after the sharp slowdown in the prior two years.

Finally, the rout of crude oil prices since mid-June helped the company as its main raw material, base oil, is a derivative.

These positives still hold; things could, in fact, get better for the company.

Smooth ride ahead The auto sector, which accounts for 90 per cent of Castrol’s revenue and profit, should gather momentum despite withdrawal of excise duty cuts. Vehicle sales have been increasing in both the personal mobility and commercial vehicles segments, especially the former on which Castrol has been focusing more.

This bodes well for Castrol’s bread-and-butter automotive lubricants business.

In a fragmented market, the company has been able to sustain its position as the market leader with a share of about a fifth despite premium pricing of 20-30 per cent vis-à-vis the competition.

This is thanks to its strong brand power, wide distribution reach, technological prowess and premium products, such as synthetic lubricants. It helps that 75-80 per cent of the company’s automotive volumes come from the resilient replacement (after-sales) market. Volumes in Castrol’s non-automotive industrial lubricants business, accounting for about a tenth of its revenue and profit, should also see a pick-up with economic growth. Besides, the relief on the raw material front should continue and may improve.

Raw material relief Crude oil prices, having dipped from $115 a barrel last year to below $50 now, is under severe stress and may not recoup soon. There is a lag of two to three months between the change in crude oil prices and base oil cost.

The combination of improved demand and reduced cost should translate into higher margins for Castrol, even if some of the cost benefits are passed on to customers in response to moves from competitors.

After the pressure on financials due to high crude oil prices in the first half of the last calendar, the company’s operating margin in the September quarter increased to almost 21 per cent from 19.7 per cent in the year-ago period.

Net profit during the quarter grew about 13 per cent year-on-year to ₹118 crore. Growth in both profit and margins should be healthy in the coming quarters.

While shareholders can stay invested, further exposure to the stock can be avoided currently. At ₹510, the stock quotes at about 54 times its trailing 12-month earnings.

This is much higher than the 30-35 times it has traded at in the past, and seems to be factoring in the positives in store for the company. Market-related dips in the stock, though, may provide a good entry point.

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