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Castrol India (CSTRL)
Energy
Good results but valuations are expensive. Castrol reported 1QCY11 net income at
`1.37 bn (+29% qoq, +16.6% yoy), above our expected `1.1 bn. The positive variance
reflects (1) lower-than-expected raw material cost at `70.9/liter versus our expected
`76.3/liter, (2) higher-than-expected volumes at 55.9 mn liters versus our expected 55.1
mn liters and (3) higher-than-expected other income at `278 mn. We maintain SELL
rating on Castrol noting the stock is trading at 22.6X CY2012E EPS and 25% above our
revised 12-month target price of `385 (`370 previously).
Good results boosted by (1) lower-than-expected raw material cost and (2) one-offs
Castrol reported 1QCY11 net income at `1.37 bn (+29% qoq, +16.6% yoy), above our expected
`1.1 bn. The positive variance reflects (1) lower-than-expected raw material cost at `70.9/liter
versus our expected `76.3/liter, (2) higher-than-expected volumes at 55.9 mn liters versus our
expected 55.1 mn liters and (3) higher-than-expected other income at `278 mn versus our
expected `80 mn. Revenues increased to `7.5 bn (+14.8% yoy) led by higher realization at
`134.7/liter versus `120.1/liter in 1QCY10. Castrol’s volumes increased 2.4% yoy to 55.9 mn liters
versus 54.6 mn liters in 1QCY10. We highlight that qoq results comparison is not valid due to
seasonality; 2Q and 4Q in a calendar year are the best quarters.
Current valuations expensive given likely modest volume growth and peak margins
We maintain our SELL rating on the stock given 20% potential downside to our revised target
price of `385 (`370 previously) based on 18X CY2012E EPS of `21.3. The upward revision in
target price reflects roll-over to CY2012E estimates. We note that the stock is currently trading at
22.6X CY2012E 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 peak level of earnings.
We currently assume a net realization (gross realization less raw material cost) of `66.2/liter for
CY2011E and `67.4/liter for CY2012E versus `63.4 in CY2010.
Price hike of 10% effected in March 2011 given sharp rise in LOBS prices
We note that Castrol has effected a price hike of ~10% in end-March 2011 to mitigate the impact
of sharp rise in LOBS prices. We note that LOBS prices have risen by over US$250/ton versus
average LOBS price in 1QCY11. We discuss the impact of rise in LOBS in detail later in the note.
Revised earnings for 1QCY11 results
We have fine-tuned our CY2011E and CY2012E EPS estimates to `20.7 and `21.3 from `20.0 and
`21.1 to reflect (1) 1QCY11 results, (2) higher LOBS prices, (3) higher realizations for the price hike
effected in March 2011 and (4) other minor changes.
Other key details of 1QCY11 results
Modest increase in volumes yoy. Castrol’s volumes increased 2.4% yoy to 55.9 mn
liters versus 54.6 mn liters in 1QCY10. The management highlighted that the company
was witnessing steady growth in passenger cars and two-wheeler segment. However,
there was a decline in volumes in the commercial vehicle segment. The volumes for
automotive segment increased 2.6% yoy to 47.9 mn liters. The volumes for industrial
segment were flat yoy at 8 mn liters.
Higher realization qoq. Castrol’s 1QCY11 gross realization was higher at `134.7 liter
versus `129.8/liter in 4QCY10 and `120.1/liter in 1QCY10. The qoq increase in realization
reflects the price hike of ~6-7% effected by the company in mid-December 2010. We
note that the qoq increase in realization is lower versus the price hike effected in
December 2010 as the negotiations with B2B customers takes effect with a lag of 1-2
months.
Modest qoq increase in raw material cost. Castrol reported a modest 5% increase in
unit raw material cost to `70.9/liter versus `67.5/liter in 4QCY10. The modest qoq
increase in raw material cost is surprising given ~9-14% hike in global LOBS prices. The
management attributed this to their ability to source cheaper cargoes.
Advertisement costs remain high. Castrol reported advertisement costs at `508 mn (-
0.2% qoq, +9.5% yoy) on account of high advertisement outlay towards the ICC Cricket
World Cup 2011.
Higher other income includes reversal of `130 mn provision. Castrol’s other income
stands at `278 mn (+220% qoq, +243% yoy). However, this includes a reversal of `130
mn on account of an earlier provision made for its BikeZone initiative.
Automotive segment reports strong growth in revenues yoy
Castrol’s 1QCY11 automotive lubes segment’s revenues increased 14.9% yoy to `6.5 bn led
by (1) higher realization and (2) higher volumes. EBIT increased 9.3% yoy to `1.6 bn. The
automotive segment’s EBIT margin declined to 25.3% in 1QCY11 compared to 26.6% in
1QCY10.
Industrial segment reports solid revenue growth but margins contract yoy
Castrol’s industrial lubes segment reported 14.2% yoy growth in revenues to `1 bn. EBIT
increased 3.9% yoy to `266 mn. Industrial segment’s EBIT margin was lower at 26.6% in
1QCY11 compared to 29.2% in 1QCY10.
Watch out for LOBS prices which have increased sharply
LOBS prices have increased by US$250-280/ton (across various grades) versus average prices
of 1QCY11 on account of (1) surge in crude oil prices and (2) tight supplies (see Exhibit 3).
We highlight that price hike of 10% effected by the company in March 2011 will only
partially mitigate the impact of surge in LOBS prices over the past two months.
We note that 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
without a commensurate increase in lubes prices will impact Castrol’s EPS by 3% (see Exhibit
4). Thus, any higher-than-expected raw material costs could have material impact on
Castrol’s margins and earnings in the near term.
Volumes. We currently model 2.4% yoy increase in sales volumes in CY2011E. We note
that the company achieved a volume growth of 7.1% yoy in CY2010 due to base effect
of CY2009. However, the company reported an increase of 2.4% yoy in volumes in
1QCY11 and 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 19.5% in CY2011E and decline
by 1% in CY2012E.
LOBS prices. We model CY2011E LOBS prices at US$1,265/ton (+US$325/ton yoy) to
reflect sharply higher crude prices yoy. We model yoy decline of US$35/ton in LOBS prices
in CY2012E to reflect our assumption of lower crude oil prices.
Exchange rate assumption. We assume exchange rate for CY2011E and CY2012E at
`45.5/US$ and `44/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Castrol India (CSTRL)
Energy
Good results but valuations are expensive. Castrol reported 1QCY11 net income at
`1.37 bn (+29% qoq, +16.6% yoy), above our expected `1.1 bn. The positive variance
reflects (1) lower-than-expected raw material cost at `70.9/liter versus our expected
`76.3/liter, (2) higher-than-expected volumes at 55.9 mn liters versus our expected 55.1
mn liters and (3) higher-than-expected other income at `278 mn. We maintain SELL
rating on Castrol noting the stock is trading at 22.6X CY2012E EPS and 25% above our
revised 12-month target price of `385 (`370 previously).
Good results boosted by (1) lower-than-expected raw material cost and (2) one-offs
Castrol reported 1QCY11 net income at `1.37 bn (+29% qoq, +16.6% yoy), above our expected
`1.1 bn. The positive variance reflects (1) lower-than-expected raw material cost at `70.9/liter
versus our expected `76.3/liter, (2) higher-than-expected volumes at 55.9 mn liters versus our
expected 55.1 mn liters and (3) higher-than-expected other income at `278 mn versus our
expected `80 mn. Revenues increased to `7.5 bn (+14.8% yoy) led by higher realization at
`134.7/liter versus `120.1/liter in 1QCY10. Castrol’s volumes increased 2.4% yoy to 55.9 mn liters
versus 54.6 mn liters in 1QCY10. We highlight that qoq results comparison is not valid due to
seasonality; 2Q and 4Q in a calendar year are the best quarters.
Current valuations expensive given likely modest volume growth and peak margins
We maintain our SELL rating on the stock given 20% potential downside to our revised target
price of `385 (`370 previously) based on 18X CY2012E EPS of `21.3. The upward revision in
target price reflects roll-over to CY2012E estimates. We note that the stock is currently trading at
22.6X CY2012E 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 peak level of earnings.
We currently assume a net realization (gross realization less raw material cost) of `66.2/liter for
CY2011E and `67.4/liter for CY2012E versus `63.4 in CY2010.
Price hike of 10% effected in March 2011 given sharp rise in LOBS prices
We note that Castrol has effected a price hike of ~10% in end-March 2011 to mitigate the impact
of sharp rise in LOBS prices. We note that LOBS prices have risen by over US$250/ton versus
average LOBS price in 1QCY11. We discuss the impact of rise in LOBS in detail later in the note.
Revised earnings for 1QCY11 results
We have fine-tuned our CY2011E and CY2012E EPS estimates to `20.7 and `21.3 from `20.0 and
`21.1 to reflect (1) 1QCY11 results, (2) higher LOBS prices, (3) higher realizations for the price hike
effected in March 2011 and (4) other minor changes.
Other key details of 1QCY11 results
Modest increase in volumes yoy. Castrol’s volumes increased 2.4% yoy to 55.9 mn
liters versus 54.6 mn liters in 1QCY10. The management highlighted that the company
was witnessing steady growth in passenger cars and two-wheeler segment. However,
there was a decline in volumes in the commercial vehicle segment. The volumes for
automotive segment increased 2.6% yoy to 47.9 mn liters. The volumes for industrial
segment were flat yoy at 8 mn liters.
Higher realization qoq. Castrol’s 1QCY11 gross realization was higher at `134.7 liter
versus `129.8/liter in 4QCY10 and `120.1/liter in 1QCY10. The qoq increase in realization
reflects the price hike of ~6-7% effected by the company in mid-December 2010. We
note that the qoq increase in realization is lower versus the price hike effected in
December 2010 as the negotiations with B2B customers takes effect with a lag of 1-2
months.
Modest qoq increase in raw material cost. Castrol reported a modest 5% increase in
unit raw material cost to `70.9/liter versus `67.5/liter in 4QCY10. The modest qoq
increase in raw material cost is surprising given ~9-14% hike in global LOBS prices. The
management attributed this to their ability to source cheaper cargoes.
Advertisement costs remain high. Castrol reported advertisement costs at `508 mn (-
0.2% qoq, +9.5% yoy) on account of high advertisement outlay towards the ICC Cricket
World Cup 2011.
Higher other income includes reversal of `130 mn provision. Castrol’s other income
stands at `278 mn (+220% qoq, +243% yoy). However, this includes a reversal of `130
mn on account of an earlier provision made for its BikeZone initiative.
Automotive segment reports strong growth in revenues yoy
Castrol’s 1QCY11 automotive lubes segment’s revenues increased 14.9% yoy to `6.5 bn led
by (1) higher realization and (2) higher volumes. EBIT increased 9.3% yoy to `1.6 bn. The
automotive segment’s EBIT margin declined to 25.3% in 1QCY11 compared to 26.6% in
1QCY10.
Industrial segment reports solid revenue growth but margins contract yoy
Castrol’s industrial lubes segment reported 14.2% yoy growth in revenues to `1 bn. EBIT
increased 3.9% yoy to `266 mn. Industrial segment’s EBIT margin was lower at 26.6% in
1QCY11 compared to 29.2% in 1QCY10.
Watch out for LOBS prices which have increased sharply
LOBS prices have increased by US$250-280/ton (across various grades) versus average prices
of 1QCY11 on account of (1) surge in crude oil prices and (2) tight supplies (see Exhibit 3).
We highlight that price hike of 10% effected by the company in March 2011 will only
partially mitigate the impact of surge in LOBS prices over the past two months.
We note that 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
without a commensurate increase in lubes prices will impact Castrol’s EPS by 3% (see Exhibit
4). Thus, any higher-than-expected raw material costs could have material impact on
Castrol’s margins and earnings in the near term.
Volumes. We currently model 2.4% yoy increase in sales volumes in CY2011E. We note
that the company achieved a volume growth of 7.1% yoy in CY2010 due to base effect
of CY2009. However, the company reported an increase of 2.4% yoy in volumes in
1QCY11 and 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 19.5% in CY2011E and decline
by 1% in CY2012E.
LOBS prices. We model CY2011E LOBS prices at US$1,265/ton (+US$325/ton yoy) to
reflect sharply higher crude prices yoy. We model yoy decline of US$35/ton in LOBS prices
in CY2012E to reflect our assumption of lower crude oil prices.
Exchange rate assumption. We assume exchange rate for CY2011E and CY2012E at
`45.5/US$ and `44/US$.
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