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4QCY10 net profit was below expectations and the recent sharp rise in global oil prices will
be a challenge once again. However, a proactive 9-12% price hike should sustain margins
and company's record of tackling the last oil price spike provides confidence. We maintain
our Buy rating, TP Rs500 (from Rs560).
4QCY10 results below expectations
Castrol reported 4QCY10 net profit of Rs1059m, up 31% yoy, but nearly 20% below our
expectations as sales volumes were flat yoy (as against our expectations of 3% growth) and
ad-spend/sales ratio was 7.3% (expectation of 5%). Final dividend of Rs8/share (total
Rs15/share for CY10) was in line with expectations (including dividend tax, the payout ratio
was 86%). Working capital management has remained impressive with a drop in both
inventory and debtor days.
Ability to ride through oil price spikes
While the quarterly trend may be difficult to predict, management remains confident of
sustainable annual volume growth of 3-4% (our estimates assume 3%). The macro
environment has become more challenging given the sharp rise in crude oil prices, which will
impact input costs (base oil, additives, packaging). Castrol has already taken a proactive 9-
12% price hike in December 2010 which will sustain/improve near-term margins, but a further
price hike may be called for if there is no weakening in input prices. Over time, Castrol has now
demonstrated its ability to raise its profitability to a structurally higher level despite the volatility in
base oil prices. In fact, higher oil prices also provide the opportunity to raise per litre gross profit
margins (up to Rs61.5 in CY10 from Rs35.9 in CY07) by introduction of superior products, which
provide value to customers in terms of fuel savings.
Maintain Buy, TP Rs500
We have cut our EPS estimates 7% for CY11, but raised them 4% for CY12. We value Castrol at
22x CY11F EPS, in line with the Bloomberg consensus valuation of its FMCG peer group. We
maintain our Buy rating, but our TP drops from Rs560 to Rs500 given the cut in CY11 EPS and
the lower valuation the for peer group. Lower-than-forecast volume growth presents the main
downside risk to our target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4QCY10 net profit was below expectations and the recent sharp rise in global oil prices will
be a challenge once again. However, a proactive 9-12% price hike should sustain margins
and company's record of tackling the last oil price spike provides confidence. We maintain
our Buy rating, TP Rs500 (from Rs560).
4QCY10 results below expectations
Castrol reported 4QCY10 net profit of Rs1059m, up 31% yoy, but nearly 20% below our
expectations as sales volumes were flat yoy (as against our expectations of 3% growth) and
ad-spend/sales ratio was 7.3% (expectation of 5%). Final dividend of Rs8/share (total
Rs15/share for CY10) was in line with expectations (including dividend tax, the payout ratio
was 86%). Working capital management has remained impressive with a drop in both
inventory and debtor days.
Ability to ride through oil price spikes
While the quarterly trend may be difficult to predict, management remains confident of
sustainable annual volume growth of 3-4% (our estimates assume 3%). The macro
environment has become more challenging given the sharp rise in crude oil prices, which will
impact input costs (base oil, additives, packaging). Castrol has already taken a proactive 9-
12% price hike in December 2010 which will sustain/improve near-term margins, but a further
price hike may be called for if there is no weakening in input prices. Over time, Castrol has now
demonstrated its ability to raise its profitability to a structurally higher level despite the volatility in
base oil prices. In fact, higher oil prices also provide the opportunity to raise per litre gross profit
margins (up to Rs61.5 in CY10 from Rs35.9 in CY07) by introduction of superior products, which
provide value to customers in terms of fuel savings.
Maintain Buy, TP Rs500
We have cut our EPS estimates 7% for CY11, but raised them 4% for CY12. We value Castrol at
22x CY11F EPS, in line with the Bloomberg consensus valuation of its FMCG peer group. We
maintain our Buy rating, but our TP drops from Rs560 to Rs500 given the cut in CY11 EPS and
the lower valuation the for peer group. Lower-than-forecast volume growth presents the main
downside risk to our target price.
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