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MOSL: CASTROL (INDIA) (Buy)-Raw material price inflation to keep margins in check

CASTROL (INDIA): Raw material price inflation to keep margins in check

(CSTRL IN, Mkt Cap USD1.9b, CMP INR140, TP INR170, 22% Upside, Buy)

 

• Castrol India (CSTRL) missed our estimates due to lower-than-estimated volumes of 45m liters (-8% est.; +55% YoY / -26% QoQ) - as the quarter was challenged by localized lockdowns and muted demand.
• The management guided that demand momentum has picked up since June'21 and is expected to continue (although a potential third wave may be a critical development).
• The company took pricing action twice in 2QCY21 (in Apr and June, along with a price hike in Jan'21 as well) to mitigate the surge in input cost. This resulted in realization of INR197.7/lit (in-line / +6% QoQ), with the EBITDA margin at 22%.
• That said, the management has guided for the EBITDA margin to be 25-26% going forward in light of an increase in base oil prices. Factoring in the same, we revise down our CY21E/CY22E EBITDA by 11%/5%.
• The company continues to invest in its brand to reinforce higher brand recall among customers (the Bazaar segment market share stands at 22-23% - it has gained 2% YoY; the next player's share stands at 7%).
• CSTRL has always enjoyed its brand equity heritage, and we believe it would be able to secure its profitability with a better product mix, cost control, and the launch of advanced products with better realization. We value the stock at 20x June'23E EPS to arrive at TP of INR170. Maintain Buy.

 

Lower-than-estimated volumes lead to miss

• Revenue was 6% below estimate at INR8.9b (+81% YoY / -22% QoQ), primarily weighed by a miss in volumes (due to the second COVID wave).
• EBITDA stood at INR2b (+107% YoY / -42% QoQ). CSTRL spent INR350-400m in advertising expenses (doubled YoY) in 2QCY21. The gross margin stood at INR98.8/lit (in-line / -2% QoQ).
• PAT stood at INR1.4b (+114% YoY / -43% QoQ).
• 1HCY21 revenue was up 72% YoY to INR20.3b, with EBITDA at INR5.4b (doubled YoY). Similarly, PAT doubled YoY to INR3.8b