Strong growth visibility for Castrol, Gulf Oil

Analysts expect volumes to improve and profit margins to remain firm going ahead

Despite note ban, lubricant makers Castrol India and Gulf Oil Lubricants India saw an increase in sales volumes in December quarter, but the percentage increases were pretty different. Importantly, analysts expect the growth trend to improve and operating profit margins to remain firm going ahead.

New launches and expansion of retail network fuelled a nine per cent volume growth in sales (excluding one-offs in year-ago quarter) for Gulf Oil, while Castrol clocked just two per cent on healthy growth in personal mobility segment. Castrol's sales volumes were also aided by price cuts even as Gulf Oil effected small price hikes in November and December. One reason for different pricing strategies could be Castrol's premium prices, hence room to lower prices. Nonetheless, both companies seem open to passing off further increase in input costs through price hikes, to lift their operating profit margins. As cash crunch from note ban continues to ease, volume growth in sales could improve going forward. Rising share of high-margin products in overall sales volumes, coupled with price hikes, will support operating profit margins of both companies. Not surprising then that most analysts are positive on Castrol as well as Gulf Oil. 

While Castrol has maintained its leadership over the years, its high return ratios, healthy dividend payouts and cash generation, as well as large size and high brand recall, are key reasons analysts are positive on the stock. In recent times, Castrol's industrial segment has done better than the category growth seen at peers, given its select focus and continued growth of key brands.

Gulf Oil, on the other hand, has transitioned from business-to-business to a mix of business-to customer and business-to-business segments. Its products are priced lower than those of Castrol, but higher than those of most public sector competitors. Rising presence in the passenger vehicle segment, expansion of distribution network, and further tie-ups with original equipment makers will help expand the company's market share. 

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At current levels, Castrol stock trades at 27 times the company's FY18 estimated net profit and Gulf Oil share trades at a multiple of 24. Bloomberg consensus estimate sees stock gains of 18 per cent in Castrol and 11 per cent in Gulf Oil from current levels.