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Castrol India (CSTRL)
Energy
Prices high but volumes dry. Castrol reported 2QCY11 EBITDA at `2 bn (-12.2% yoy
and +9.3% qoq) versus our estimate of `2.2 bn. The sharp yoy dip in earnings was led
by slump in volumes at 54.1 mn liters (-10.1% yoy, -3.2% qoq); our expected was 61.4
mn liters. We continue to have our concerns on (1) volumes growth and (2) ability to
expand margins significantly from the existing high levels. We maintain SELL rating as
the stock is trading at 24.2X CY2012E EPS and 27% above our target price of `425
(`420 previously).
Results marred by sharp decline in volumes; other income and expenditure save the day
Castrol reported 2QCY11 net income at `1.43 bn (-5.2% yoy, +4.3% qoq), 4% below our
expected `1.49 bn. The company reported 12.2% yoy decline in EBITDA to `2 bn despite higher
net realizations reflecting 10.1% decline in volumes to 54.1 mn liters. We note that the results
could have been worse but for (1) lower other expenditure at `522 mn (-29.5% yoy) and (2)
higher other income at `194 mn (+166% yoy).
Slump in volumes reflects price elasticity of demand and competitive intensity of the market
Castrol’s volumes for automotive segment declined 12.9% yoy and 5.4% qoq to 45.3 mn liters.
The volumes were lower qoq despite 2Q typically being the best quarter in the year for Castrol.
The management attributed sharp decline in volumes to delay in price hikes taken by
followers/challengers, which resulted in huge price premium between products of Castrol and its
competitors. This possibly reflects lower brand loyalty at high prices due to absence of product
differentiation and absence of switching costs for end-users. We believe that either volume growth
or pricing power has to be compromised by the market leader in light of increased competition
from private players as well as PSUs.
Current valuations expensive given likely volume de-growth and peak margins
We maintain our SELL rating on the stock given 21% potential downside to our revised target
price of `425 (`420 previously) based on 19X CY2012E EPS of `22.3. We note that the stock is
currently trading at 24.2X 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 volume de-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 `66.8/liter for CY2011E and `68.2/liter for CY2012E versus `63.4 in CY2010.
Revised earnings for 2QCY11 results
We have fine-tuned our CY2011E and CY2012E EPS estimates to `21.9 and `22.3 from `22.4 and
`23.2 to reflect (1) lower volumes, (2) higher LOBS prices, (3) higher realizations for the price hike
effected in March 2011 and (4) other minor changes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Castrol India (CSTRL)
Energy
Prices high but volumes dry. Castrol reported 2QCY11 EBITDA at `2 bn (-12.2% yoy
and +9.3% qoq) versus our estimate of `2.2 bn. The sharp yoy dip in earnings was led
by slump in volumes at 54.1 mn liters (-10.1% yoy, -3.2% qoq); our expected was 61.4
mn liters. We continue to have our concerns on (1) volumes growth and (2) ability to
expand margins significantly from the existing high levels. We maintain SELL rating as
the stock is trading at 24.2X CY2012E EPS and 27% above our target price of `425
(`420 previously).
Results marred by sharp decline in volumes; other income and expenditure save the day
Castrol reported 2QCY11 net income at `1.43 bn (-5.2% yoy, +4.3% qoq), 4% below our
expected `1.49 bn. The company reported 12.2% yoy decline in EBITDA to `2 bn despite higher
net realizations reflecting 10.1% decline in volumes to 54.1 mn liters. We note that the results
could have been worse but for (1) lower other expenditure at `522 mn (-29.5% yoy) and (2)
higher other income at `194 mn (+166% yoy).
Slump in volumes reflects price elasticity of demand and competitive intensity of the market
Castrol’s volumes for automotive segment declined 12.9% yoy and 5.4% qoq to 45.3 mn liters.
The volumes were lower qoq despite 2Q typically being the best quarter in the year for Castrol.
The management attributed sharp decline in volumes to delay in price hikes taken by
followers/challengers, which resulted in huge price premium between products of Castrol and its
competitors. This possibly reflects lower brand loyalty at high prices due to absence of product
differentiation and absence of switching costs for end-users. We believe that either volume growth
or pricing power has to be compromised by the market leader in light of increased competition
from private players as well as PSUs.
Current valuations expensive given likely volume de-growth and peak margins
We maintain our SELL rating on the stock given 21% potential downside to our revised target
price of `425 (`420 previously) based on 19X CY2012E EPS of `22.3. We note that the stock is
currently trading at 24.2X 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 volume de-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 `66.8/liter for CY2011E and `68.2/liter for CY2012E versus `63.4 in CY2010.
Revised earnings for 2QCY11 results
We have fine-tuned our CY2011E and CY2012E EPS estimates to `21.9 and `22.3 from `22.4 and
`23.2 to reflect (1) lower volumes, (2) higher LOBS prices, (3) higher realizations for the price hike
effected in March 2011 and (4) other minor changes.
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