EUR 120.00 For Business Accounts Only

MOSL: CASTROL INDIA (Buy)-There’s A Rub Ahead

Castrol India: There’s A Rub Ahead

(CSTRL IN, Mkt Cap USD2.1b, CMP INR154, TP INR215, 39% Upside, Buy)

 

• We have been interacting with lubricants experts to cognize the future trends and prospects of the lubricants industry.
• The ride ahead for players is likely to remain tough owing to intensifying competition and the challenges in oiling the growth wheel over the longer term.
• We revise our CY20E P/E multiple for CSTRL from 35x to 30x, factoring in the aforementioned challenges. 

India's lubricants market growth to exceed global average

• India is the third largest lubricants market in the world, accounting for ~7% of the global market (39mmt). It imports ~70% of base oil (45% from Korea), which follows crude price with a lag of three months. India's lubricants market is expected to grow at ~4% (half of the GDP growth rate) compared to the global average of 1%.
• India's lubricants market of 2.8mmt comprises 1.5mmt of automotive oil (55%), 0.7mmt of industrial oil and 0.6mmt of process oil. National oil companies (NOCs) command a market share of ~50%, while ~20% of the market is unorganized (over and above 2.8mmt).
• Among the private players, CSTRL has a share of ~8-9% of the organized market and ~22% of the bazaar segment. Many global brands like Exxon, and Valvoline are already doing well, while companies in the Middle East are looking at entering into the Indian market. 

Future trends

• Base oil supply glut is increasing with new capacities coming online. Saudi Aramco and ADNOC added Group-III capacity of 1mmtpa recently.
• Moving from BS-IV to BS-VI would require lube that can perform well on viscosity index, drain interval and fuel efficiency.
• Due to the oligopoly nature of the market (Lubrizol, Infineum, Oronite, Afton), additives prices keep going up.
• With more launches, the premium of synthetic lube is likely to reduce.
• Amazon has launched its own lubes in the US.
• We expect the impact from EVs to be minimal in the near future, as advancement in ICEs is along the path. Forecasts suggest ~15% penetration of EVs by 2040, as the transition to EVs gradually moves from the western countries to Asia.
• Independent workshop stations (IWS) like TVS and Mahindra are likely to grow fast. This combined with large fleet operators is expected to increase bargaining power of the customers.