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Castrol India (CSTRL)
Energy
Results disappoint with no volume growth and contracting margins. Castrol
reported 4QCY10 net income of `1.06 bn (-9.4% qoq, +7.4% yoy), significantly below
our expected `1.35 bn. The negative variance reflects (1) lower-than-expected volumes
at 53.8 mn liters versus our expected 56.9 mn liters and (2) higher-than-expected
advertising costs and other expenditure. We maintain our SELL rating on Castrol noting
the stock is trading at 20.2X CY2011E EPS and 12% above our revised 12-month target
price of `370 (`390 previously).
Volumes disappoint; margins contract
Castrol reported 4QCY10 net income at `1.06 bn (-9.4% qoq, +7.4% yoy), significantly below our
expected `1.35 bn. The negative variance reflects (1) lower-than-expected volumes at 53.8 mn
liters versus our expected 56.9 mn liters and (2) higher-than-expected advertising costs and other
expenditure. Castrol’s 4QCY10 EBITDA margin was at 22.5% versus 25.3% in 4QCY09 (adjusted
for one-offs). Revenues increased to `7 bn (+14% yoy) led by higher realization at `129.8/liter
versus `114/liter in 4QCY09. Castrol’s volumes remained stable yoy at 53.8 (+0.2% yoy) mn liters
versus 53.7 mn liters in 4QCY09. We highlight that a qoq results comparison is not valid due to
the seasonality factor; 2Q and 4Q in a calendar year are the best quarters.
Current valuations expensive given likely modest volume growth and peak margins
We note that the stock is currently trading at 20.2X CY2011E EPS which is above its historical P/E
band of 14-18X (see Exhibit 2). We find the valuations expensive in light of (1) likely modest
volume growth and (2) peak level of margins. The current valuations reflect a situation of ascribing
an all-time high multiple to the peak level of earnings. We currently assume an EBITDA margin of
25.8% for CY2011E, which is lower than Castrol’s EBITDA margin of 26.7% in CY2010 but much
higher than an average EBITDA margin of 18.3% over CY2001-10.
Watch out for LOBS prices which have rebounded sharply
LOBS prices have increased by US$105-183/ton (across various grades) in the past two months on
account of (1) surge in crude oil prices and (2) tight supplies (see Exhibit 3). Castrol has historically
managed to pass the higher price to consumers. However, we do not rule out downside risks to
Castrol’s earnings from its inability to completely pass through further increase in LOBS prices. We
highlight that Castrol’s earnings are highly leveraged to raw material costs; a US$25/ton increase
in raw material costs will impact Castrol’s EPS by 3% (see Exhibit 5). Thus, any higher-thanexpected
raw material costs could have a material impact on Castrol’s margins and earnings in the
near term.
Revised earnings to reflect lower sales volumes; revised target price to `370
We have fine-tuned our CY2011E and CY2012E EPS estimates to `20.5 and `21.1 from
`21.7 and `22.6 to reflect (1) lower sales volumes (-ve impact), (2) higher LOBS prices (-ve
impact), (3) higher realization (+ve impact), (4) change in exchange rate assumptions and (5)
other changes to reflect 4QCY10 results. We have revised our target price to `370 from
`390 previously based on 18X CY2011E EPS of `20.5. The downward revision in target price
reflects downward revision of earnings.
Automotive segment reports strong revenue growth; margins contract
sharply qoq
Castrol’s 4QCY10 automotive lubes segment’s revenues increased 13.6% yoy to `6 bn led
by higher realization. EBIT increased 29.6% yoy to `1.3 bn. The automotive segment’s EBIT
margin corrected sharply qoq and was at 21.1% in 4QCY10 compared to 25.6% in
3QCY10 and 18.5% in 4QCY09.
Industrial segment reports robust revenue growth
Castrol’s industrial lubes segment reported 17.8% yoy growth in revenues to `965 mn. EBIT
increased 15% yoy to `246 mn. Industrial segment’s EBIT margin was lower at 25.5% in
4QCY10 compared to 26.6% in 3QCY10 and 26.1% in 4QCY09.
Other key details of 4QCY10 results
Flat volumes yoy. Castrol’s volumes remained stable yoy at 53.8 (+0.2% yoy) mn liters
versus 53.7 mn liters in 4QCY09. The management highlighted that the company was
witnessing steady growth in the passenger car and two-wheeler segment. However, there
was a decline in volumes in the commercial vehicle segment on account of (1) higher
lubes prices and (2) structural decline in consumption in the category due to technological
changes.
Higher realization qoq. Castrol’s 4QCY10 gross realization was higher at `129.8/liter
versus `127.6/liter in 3QCY10 and `114/liter in 4QCY09. The qoq increase in realization
reflects the price hike of ~6-7% effected by the company in mid-December 2010.
Modest qoq increase in raw material cost. Castrol reported a modest 1% increase in
unit raw material cost to `67.5/liter versus `66.8/liter in 3QCY10. The modest qoq
increase in raw material cost was in line with a modest increase of ~2-3% in global LOBS
prices.
Higher-than-expected advertising costs. Castrol reported a sharp increase in
advertisement costs to `509 mn (+75.5% qoq, +10.2% yoy) on account of high adspend
outlay towards the ICC Cricket World Cup 2011.
Final dividend of `8. Castrol announced a final dividend of `8, resulting in a total
dividend of `15 for CY2010.
Volumes. We currently model 2% yoy increase in sales volumes in CY2011E. We note
that the company achieved a volume growth of 7.1% yoy in CY2010 due to the base
effect of CY2009. However, the company reported a marginal decline of 0.2% yoy in
volumes for 2HCY10. We model a 1.9% yoy increase in sales volumes in CY2012E.
Lubes prices. We model lube realization to increase by 6% in CY2011E and 1% in
CY2012E.
LOBS prices. We model CY2011E LOBS prices at US$975/ton (+US$125/ton yoy) to
reflect higher crude prices yoy. We model yoy increase of US$20/ton in LOBS prices in
CY2012E.
Exchange rate assumption. We have revised our exchange rate assumptions for
CY2011E and CY2012E to `45.5/US$ and `44/US$ versus `44.5/US$ and `44.5/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Castrol India (CSTRL)
Energy
Results disappoint with no volume growth and contracting margins. Castrol
reported 4QCY10 net income of `1.06 bn (-9.4% qoq, +7.4% yoy), significantly below
our expected `1.35 bn. The negative variance reflects (1) lower-than-expected volumes
at 53.8 mn liters versus our expected 56.9 mn liters and (2) higher-than-expected
advertising costs and other expenditure. We maintain our SELL rating on Castrol noting
the stock is trading at 20.2X CY2011E EPS and 12% above our revised 12-month target
price of `370 (`390 previously).
Volumes disappoint; margins contract
Castrol reported 4QCY10 net income at `1.06 bn (-9.4% qoq, +7.4% yoy), significantly below our
expected `1.35 bn. The negative variance reflects (1) lower-than-expected volumes at 53.8 mn
liters versus our expected 56.9 mn liters and (2) higher-than-expected advertising costs and other
expenditure. Castrol’s 4QCY10 EBITDA margin was at 22.5% versus 25.3% in 4QCY09 (adjusted
for one-offs). Revenues increased to `7 bn (+14% yoy) led by higher realization at `129.8/liter
versus `114/liter in 4QCY09. Castrol’s volumes remained stable yoy at 53.8 (+0.2% yoy) mn liters
versus 53.7 mn liters in 4QCY09. We highlight that a qoq results comparison is not valid due to
the seasonality factor; 2Q and 4Q in a calendar year are the best quarters.
Current valuations expensive given likely modest volume growth and peak margins
We note that the stock is currently trading at 20.2X CY2011E EPS which is above its historical P/E
band of 14-18X (see Exhibit 2). We find the valuations expensive in light of (1) likely modest
volume growth and (2) peak level of margins. The current valuations reflect a situation of ascribing
an all-time high multiple to the peak level of earnings. We currently assume an EBITDA margin of
25.8% for CY2011E, which is lower than Castrol’s EBITDA margin of 26.7% in CY2010 but much
higher than an average EBITDA margin of 18.3% over CY2001-10.
Watch out for LOBS prices which have rebounded sharply
LOBS prices have increased by US$105-183/ton (across various grades) in the past two months on
account of (1) surge in crude oil prices and (2) tight supplies (see Exhibit 3). Castrol has historically
managed to pass the higher price to consumers. However, we do not rule out downside risks to
Castrol’s earnings from its inability to completely pass through further increase in LOBS prices. We
highlight that Castrol’s earnings are highly leveraged to raw material costs; a US$25/ton increase
in raw material costs will impact Castrol’s EPS by 3% (see Exhibit 5). Thus, any higher-thanexpected
raw material costs could have a material impact on Castrol’s margins and earnings in the
near term.
Revised earnings to reflect lower sales volumes; revised target price to `370
We have fine-tuned our CY2011E and CY2012E EPS estimates to `20.5 and `21.1 from
`21.7 and `22.6 to reflect (1) lower sales volumes (-ve impact), (2) higher LOBS prices (-ve
impact), (3) higher realization (+ve impact), (4) change in exchange rate assumptions and (5)
other changes to reflect 4QCY10 results. We have revised our target price to `370 from
`390 previously based on 18X CY2011E EPS of `20.5. The downward revision in target price
reflects downward revision of earnings.
Automotive segment reports strong revenue growth; margins contract
sharply qoq
Castrol’s 4QCY10 automotive lubes segment’s revenues increased 13.6% yoy to `6 bn led
by higher realization. EBIT increased 29.6% yoy to `1.3 bn. The automotive segment’s EBIT
margin corrected sharply qoq and was at 21.1% in 4QCY10 compared to 25.6% in
3QCY10 and 18.5% in 4QCY09.
Industrial segment reports robust revenue growth
Castrol’s industrial lubes segment reported 17.8% yoy growth in revenues to `965 mn. EBIT
increased 15% yoy to `246 mn. Industrial segment’s EBIT margin was lower at 25.5% in
4QCY10 compared to 26.6% in 3QCY10 and 26.1% in 4QCY09.
Other key details of 4QCY10 results
Flat volumes yoy. Castrol’s volumes remained stable yoy at 53.8 (+0.2% yoy) mn liters
versus 53.7 mn liters in 4QCY09. The management highlighted that the company was
witnessing steady growth in the passenger car and two-wheeler segment. However, there
was a decline in volumes in the commercial vehicle segment on account of (1) higher
lubes prices and (2) structural decline in consumption in the category due to technological
changes.
Higher realization qoq. Castrol’s 4QCY10 gross realization was higher at `129.8/liter
versus `127.6/liter in 3QCY10 and `114/liter in 4QCY09. The qoq increase in realization
reflects the price hike of ~6-7% effected by the company in mid-December 2010.
Modest qoq increase in raw material cost. Castrol reported a modest 1% increase in
unit raw material cost to `67.5/liter versus `66.8/liter in 3QCY10. The modest qoq
increase in raw material cost was in line with a modest increase of ~2-3% in global LOBS
prices.
Higher-than-expected advertising costs. Castrol reported a sharp increase in
advertisement costs to `509 mn (+75.5% qoq, +10.2% yoy) on account of high adspend
outlay towards the ICC Cricket World Cup 2011.
Final dividend of `8. Castrol announced a final dividend of `8, resulting in a total
dividend of `15 for CY2010.
Volumes. We currently model 2% yoy increase in sales volumes in CY2011E. We note
that the company achieved a volume growth of 7.1% yoy in CY2010 due to the base
effect of CY2009. However, the company reported a marginal decline of 0.2% yoy in
volumes for 2HCY10. We model a 1.9% yoy increase in sales volumes in CY2012E.
Lubes prices. We model lube realization to increase by 6% in CY2011E and 1% in
CY2012E.
LOBS prices. We model CY2011E LOBS prices at US$975/ton (+US$125/ton yoy) to
reflect higher crude prices yoy. We model yoy increase of US$20/ton in LOBS prices in
CY2012E.
Exchange rate assumption. We have revised our exchange rate assumptions for
CY2011E and CY2012E to `45.5/US$ and `44/US$ versus `44.5/US$ and `44.5/US$.
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