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MOSL: CASTROL INDIA (Buy)-Cost rationalization enhances margins

Castrol India: Cost rationalization enhances margins

(CSTRL IN, Mkt Cap USD1.9b, CMP INR139, TP INR186, 33% Upside, Buy)

 

• Total volumes for CY19 were 4% lower YoY to 204m liters, while realization was 4% higher YoY to INR190/liter (highest ever).
• Gross margin was 11% higher YoY to 104.4/liter, led by reported record-high gross margins of INR108/liter (+7% YoY) in 4QCY19.
• The improvement in realization and gross margin for full-year CY19 was aided by improved product mix and robust cost control, led by process efficiencies and debottlenecking in 3QCY19.
• The company will continue to focus on personal mobility as it will drive volume growth with better price realizations in the tepid manufacturing growth environment.
• CSTRL has been increasing its dividend since the last three years and has recommended total dividend of INR5.5/share for CY19. At current levels, dividend yield remains attractive at ~3.7%, maintain Buy. 

Ahead of estimates led by better product mix and cost control

• 4QCY19 reported net sales were ~5% below estimate at INR10.1b (-2% YoY), owing to lower realization at INR187/liter (-3% est., -2% YoY). Sales volume came in line at 54m (flat YoY).
• However, EBITDA was 10% above est. at INR3.4b (EBITDA/liter at INR63.2), owing to cost rationalization.
• Lower-than-expected effective tax rate of 19.9% resulted in PAT of INR2.7b, 18% above est. (+28% YoY).
• For full-year CY19, net sales were flat YoY at INR10.6b; EBITDA was 8% higher YoY at INR11.5b. PBT grew 4% YoY due to higher depreciation and lower other income. PAT increased 17% YoY to INR8.3b, owing to the company adopting lower tax rate of 27.9% (v/s 35.5% in CY18).