Castrol India: Well oiled to grow, but valuations may limit sharp upside

The BP-Stonepeak transaction has brought Castrol India into focus, but while margins, cash flows and brand strength remain robust, expensive valuations may restrain near-term gains

BP’s sale of 65 per cent in Castrol Group Holding (CGHL), which owns 51 per cent in Castrol India, to Stonepeak, an alternate investment firm, has led to traders focusing on Castrol India. BP intends to use cash proceeds from this transaction to reduce its overall debt levels. 

As part of the transaction, the entire 100 per cent of CGHL will be transferred to a JV of Stonepeak and BP, with BP holding a minority 35 per cent stake. As required by Sebi, the acquirer has made an open offer for 26 per cent public shareholding in Castrol India at ₹194 per share. The stock has already traded up to the offer price. 

This transaction should not have any short-term or medium-term impact on the operational performance of Castrol India. Castrol India’s performance for the September quarter of CY25 saw Ebitda margin rising 150 bps year-on-year (Y-o-Y) and 30 bps quarter-on-quarter (Q-o-Q). Castrol India’s accounting year is from January to December. Volumes at 59 million litres were up 7 per cent Y-o-Y and met consensus. Management said it would continue brand building, deepening and widening distribution, and launching new products.

 

The company has excellent brand recognition, and it has a strong balance sheet and good cash-flow generation. An improved product mix should drive volume and margins. The Q3CY25 revenue was ₹1,360 crore, up 6 per cent Y-o-Y. Ebitda was at ₹320 crore, up 13 per cent with margin expansion delivered positive surprise. PAT or profit after tax was held at ₹230 crore and also beat consensus. 

The company expanded the network to 150,000 outlets across India, including nearly 40,000 rural outlets and 500 rural express points. About 25-30 per cent of the B2C volume comes from the rural outlets. 

The service network includes over 750 Castrol Auto Service centres, around 33,000 independent bike workshops, and about 11,500 multi-brand workshops. The full Auto Care product range is also available via e-commerce platforms, modern trade channels, and over 67,000 physical outlets. In Q3, it signed an MoU with VinFast Auto India to provide after-sales support for EV (electric vehicle) customers through select workshops. 

Volumes stood at 59 million litres, (up 7 per cent Q-o-Q) with growth driven by Personal mobility (volumes up 6 per cent Y-o-Y), Commercial Vehicles or CVs (up 8 per cent) and Industrial segment (low double-digit per cent). Personal mobility contributes nearly 50 per cent of volumes with CV contributing 38-40 per cent and the rest from the Industrial segment. 

About 50-55 per cent of the base oil is imported, while the rest is sourced domestically. Lower crude costs equate to lower raw material costs and better gross margins but these have been balanced to some extent by a weaker rupee. The Ebitda guidance is for a margin of 22-25 per cent. 

Raw material expenses and costs of goods sold rose 2-3 per cent in Q3CY25 due to optimising raw material sourcing, formulation, and costs incurred in manufacturing. Base oil prices have reduced 3.5 per cent Y-o-Y for year-to-date (YTD) period. The new launch includes Castrol All-in-One Helmet Cleaner – foam spray solution addressing helmet hygiene. 

Castrol is the largest private lubricant player with 220 million litres installed capacity and 20 per cent market share in automotives. Its MNC parentage is backed by BP, and it has global expertise to create advanced formulations to sustain market leadership. The company is looking to diversify revenue streams through AutoCare and Chemical Management Services (CMS) including investments in EV fluids (“Castrol ON”) and cooling solutions for data centres. 

Apart from excellent margins and return ratios, it has a debt-free balance sheet with ₹1,353 crore in cash reserves, and strong dividend payout record. Strong free cash flow generation, minimal capex requirements, high return on equity (RoE) and dividend make Castrol India an attractive investment. However, it has very high valuations compared to peers like Gulf Oil and of course, it is exposed to price volatility in global crude markets as well as rupee weakness. According to Bloomberg, three of the five analysts polled in December have a buy/add rating, while the remaining two have hold. Their average one-year target price is ₹232.4 for the stock, which closed 2.11 per cent higher at ₹193.60 on the BSE on Friday.