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Castrol India (Castrol)’s scrip, which had been lagging the BSE Sensex in the past year, has been on a steady uptrend since May, rising about 50 per cent to scale its all-time intra-day high of Rs 451.50 on September 17. Pick-up in commercial vehicle (CV) sales, which accounts for about 30 per cent of its revenues, likely gains on the macro growth (benefiting industrial segment, which forms about 10 per cent of its revenues) and weak base oil prices (main raw material) are some reasons for this up-move.
The brokerage has raised earnings estimates for the company by 13 per cent each in CY15 and CY16 and expects demand in automobile lubricants’ (about 90 per cent of Castrol's revenues) to improve on the back of a rebound in auto sales. Castrol has witnessed pressure on its overall growth in recent times, given the subdued automobile lubricants’ volume growth. The company posted a negative 3.5 per cent compounded annual growth rate (CAGR) in its total volumes over CY10-13. Analysts see this trend reversing and expect Castrol to register two to three per cent CAGR in volumes over CY14-16.
The company's profitability is also set to improve. Castrol plans to focus on the high-margin personal mobility market and increase revenue from high-margin semi-synthetic and synthetic lubricants. Subdued crude oil prices will also keep base oil prices under check. These factors should lead to strong margin expansion over the next two years. Even as analysts expect the CY14 Ebitda (earnings before interest, tax, depreciation and amortisation) margin to be stable at around 21.5 per cent, they are factoring in strong gains of 460 basis points and 290 basis points in the Ebitda margin, to 26.1 per cent and 29 per cent in CY15 and CY16, respectively. Consequently, net profit growth is expected to improve sharply.
Strong parentage (BP) enables Castrol to gain from exclusive tie-ups with equipment manufacturers, apart from capital and technological support, giving it an advantage over competition. Slower than anticipated recovery in the Indian economy or a rebound in crude oil price, though are key risks.
The scrip, however, seems to be factoring in the positives. At Rs 425, the stock trades at 34 times estimated CY15 earnings. Long-term investors should wait for a correction before considering the stock.
