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Kotak Securities
Castrol (Accumulate)
CMP: ₹418.05
Target: ₹473
Castrol’s performance is better than our expectation. The company has reported a PAT growth of 15 per cent q-o-q and 4 per cent y-o-y basis to ₹179 crore mainly on account of better realisation. Overall operating margin remained flat at 26 per cent (product mix improved) in Q1CY17 despite raw material price pressure and higher employee cost. As against industry wide declining volumes, Castrol has reported marginal volume growth. In Q1CY17, the company has improved its market share in lubricant industry.
We are introducing CY18E earnings. We expect the company to report an EPS of ₹15.4 for CY2017 and Cash EPS of ₹16.4 and an EPS of ₹16.3 for CY2018 and Cash EPS of ₹17.4. We value the stock at 29x CY18E EPS and arrive at a target price of ₹473/share (earlier ₹470/share) and we maintain Accumulate rating on the stock. We value the stock at 29x CY18E EPS. Key trigger in the medium-long term is upcoming GST implementation resulting in increased vehicle sales, lower GST rate on lubricants (18 per cent) and increased freight movement.
Key risks: a) Any significant rise in the crude oil price will increase the base-oil price (with a lag of six months) which can negatively impact its margins; b) Any significant rupee depreciation will increase raw material cost; c) Lower industrial activity can impact volume growth.
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