Market volatility has seen the stock of lubricant maker Castrol India slip about 6 per cent since our ‘hold’ call in January. This is despite the company’s profit growing 46-48 per cent year-on-year in the recent March and June quarters. In January, the stock’s valuation was quite high but the company’s prospects seemed promising. So, market-related dips were suggested as good entry points. It now seems a good time to buy the stock. Its trailing 12-month price-to-earnings ratio has moderated from about 54 times in January to 40 times now.

While still above its three-year average historical valuation of 37 times, the valuation does not seem expensive given the company’s improving growth prospects.

Lower costs One, lower raw material cost — the chief driver of Castrol’s higher profits in the past two quarters — should continue. After a brief rise between May and June, crude oil prices have again tanked; it now trades at under $50 a barrel.

The oversupply in the oil markets is likely to worsen with expected addition from Iran over the next year. Also, demand remains lacklustre with the global economy not in the best of health. So, base oil, a crude oil derivative and Castrol’s main raw material, should continue to be available cheap and result in high profitability.

The company’s operating margin has already increased sharply from 21 per cent in the September 2014 quarter to 29 per cent in the recent June quarter. Next, even though the company’s overall sales growth at just about 1 per cent year-on-year remained lacklustre in the June quarter, the break-up shows a mixed bag with some encouraging signs.

Unlike in the March quarter when revenue declined 2.4 per cent, this time there was growth, even if only marginal.

The June quarter revenue at ₹920 crore was the highest in at least two years. Sales of automotive lubricants (which form 90 per cent of the company’s revenue) grew about 2 per cent, but this was offset to a large extent by the 6 per cent sales decline in non-automotive (industrial) lubricants.

Within automotive lubricants, personal mobility volumes (two-wheeler and passenger car oils) grew at a healthy pace, thanks to the ongoing recovery in the auto segment.

But weak volume growth in commercial vehicle oils chipped into this benefit. Also, with the company passing on some cost benefit to customers, there was little help on price realisations. Good growth in the premium products portfolio though helped contain the impact.

Volumes to improve Sales growth should get better in the coming quarters. The momentum in personal mobility vehicles, on which Castrol has been increasing focus, is expected to continue; this should keep the revenue growth ticking. Also, as economic growth gathers pace, volumes in commercial and industrial lubricants should improve.

Castrol’s market leader position, brand power, distribution reach, and premium products position it well to make the most of a recovery in the sector’s volume growth.

A solid balance sheet with zero debt is another positive. A sharp weakness in the rupee, which could increase raw material costs, is a risk though.

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