castrol india ltd - Myiris.com

RESULT UPDATE
MORNING INSIGHT October 25, 2012
Sumit Pokharna
sumit.pokharna@kotak.com
+91 22 6621 6313
Summary table
(Rs mn) CY11 CY12E CY13E
Sales 29,818 31,383 33,423
Growth (%) 9.0 5.3 6.5
EBITDA 6,747 6,025 6,681
EBITDA Margin 22.6 19.2 20.0
PBT 7,160 6,393 7,068
Net Profit 4,810 4,309 4,813
EPS (Rs.) 9.4 8.7 9.7
Growth (%) (52.3) -7.2 11.7
CEPS 9.9 9.2 10.3
Book Value (Rs/Share) 24.4 13.3 14.5
DPS (Rs.) 15.0 6.5 7.3
ROE (%) 58.5 52.6 53.4
ROCE (%) 58.6 52.7 53.4
Net Debt / (Cash) (5,490) (5,703) (6,522)
NW Capital (Days) 12.6 11.3 11.5
P/E (X) 34.4 37.1 33.2
P/BV (X) 13.2 24.2 22.2
EV/Sales (X) 2.4 2.3 2.2
EV/EBITDA (X) 11.2 12.6 11.3
Source: Company, Kotak Securities - Private
Client Research
CASTROL INDIA LTD (CIL)
PRICE: RS.323 RECOMMENDATION: REDUCE
TARGET PRICE: RS.302 CY13E P/E: 33.2X
� Castrol India Ltd. has shown lower than expected performance in
Q3CY12. CIL has reported a PAT de-growth of 9.9% YoY to Rs.8.57 Bn
mainly on account of 1). Flat volume growth, 2). Higher total expenditure,
3). Higher depreciation cost and 4). Lower other income.
� Despite softening of base oil prices, cost of raw material increased significantly
due to continuing rupee depreciation, putting margin under
pressure. The adverse impact of the Rupee depreciation was Rs. 580 Mn,
in Q3CY12.
� Total volumes were flat versus the same quarter last year. Automotive
volumes grew by 3%, faster than the market, enabled by strong marketing
programs targeted towards consumers, trade and influencers. However,
the increase was offset by decline in the industrial and marine volume
which was impacted by the overall industrial slowdown.
Outlook and valuation:
� Our revised earnings estimate with EPS of Rs.8.7 CY12E and Rs.9.7 CY13E and
cash EPS of Rs.9.2 CY12E and Rs.10.3 CY13E
� On the basis of our estimates, the stock at current market price of Rs.323 is expensively
valued at 11.3x EV/EBIDTA, 33.2x P/E and 22.2x P/BV on the basis of
CY13E earnings.
� Based on our DCF valuation model, the 12-month target price of Castrol is
Rs.302. We believe the current price discounts most of the positives and hence
we maintain REDUCE. Castrol's management has also guided that the next few
quarters are likely to be challenging.
Key developments:
� In Q3CY12, Castrol re-launched its leading brand in the motorcycle segment -
Castrol Activ, with new Actibond technology. Supported by a 360 degree campaign,
the brand continues to grow well ahead of the market and has further
strengthened its position as the leading motorcycle engine oil in India.
� Management has guided that the next few quarters are likely to be challenging.
The Indian Rupee remains volatile and crude prices have strengthened recently.
This will continue to put Castrol's margins under pressure. Additionally, the sluggish
economy, and slow automotive and industrial growth will continue to
dampen lubricant demand growth.
� In Q3CY12, automotive segment has shown growth but Industrial and Building &
Construction lubricant segments have been adversely impacted due to reduced
activity in these sectors and delays in a number of important projects. This has
been further compounded by cost cutting and down stocking in these sectors.
� The company is focusing on driving volume growth through increasing distribution
reach and strengthening advocacy amongst key stakeholders. Wider distribution
network will improve the sales volume of the Company, going forward.
Key risk remains in terms of:
� The Company's management has indicated the lubricant market growth has
been slower due to the economic slowdown and inflationary pressures. This has
been compounded by continuing input cost pressure and rupee depreciation
which have impacted margins.
� Any significant fall in the crude oil price will lower the base-oil price (with a lag
of six months) which can improve its margins.
� Any significant rupee appreciation will impact the raw material cost.
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