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2QFY11 revenue was below our expectations as a sharp rise in Castrol's price premium over
peers led to disappointment on volumes. We cut our EPS forecasts 3-8% on lower volumes, but a
roll-forward leaves our target price unchanged at Rs500. We downgrade to Hold, given the recent
outperformance.
Net profit marginally exceeds our expectations…
At Rs1.43bn (down 5% yoy), 2QFY11 net profit was 3% above our expectation. Revenues, and,
hence, the absolute amount of gross margins, were lower than our expectations, with lower ad
spend resulting in overall EBITDA of Rs1.96bn (down 13% yoy), just 2% below our expectation.
The bottom line was supported by higher investment income due to hardening interest rates.
Castrol declared an interim dividend of Rs7/share (unchanged from FY10)
…but revenue below expectations
At Rs7.9bn (up 6% yoy), revenue was 10% below our expectation. Castrol hiked prices in
December 2010 and March 2011 – moves that were not immediately followed by its competitors.
Hence, Castrol’s price premiums shot up from 20-25% to 35-40%, resulting in lower-thananticipated
volumes. Competitors recently sharply raised their prices, and the premiums are now
back to earlier levels, which should boost volume growth. The lag in price hikes is unusual. It may
have been due to differing views on input costs and does not reflect a weakening of the business
model, in our view. We forecast 3% yoy growth, but, given the performance to date, we cut our
absolute volume forecasts by 3% across FY11-13F (ie, zero growth in FY11).
We downgrade to Hold, with an unchanged target price of Rs500
Given lower volume, we cut our EPS forecasts 3-8% over FY11-14. Despite this cut, we leave our
target price unchanged due to roll-forward, now valuing the company at 20x FY12F EPS. This
places the stock at a 24% valuation discount to its peer group, and we believe there is scope for
this discount to narrow if Castrol provides some upside on the volume front. From an earnings
perspective, the big driver is any potential decline in oil prices or refining margins for base oil (we
factored the latter into our estimates).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2QFY11 revenue was below our expectations as a sharp rise in Castrol's price premium over
peers led to disappointment on volumes. We cut our EPS forecasts 3-8% on lower volumes, but a
roll-forward leaves our target price unchanged at Rs500. We downgrade to Hold, given the recent
outperformance.
Net profit marginally exceeds our expectations…
At Rs1.43bn (down 5% yoy), 2QFY11 net profit was 3% above our expectation. Revenues, and,
hence, the absolute amount of gross margins, were lower than our expectations, with lower ad
spend resulting in overall EBITDA of Rs1.96bn (down 13% yoy), just 2% below our expectation.
The bottom line was supported by higher investment income due to hardening interest rates.
Castrol declared an interim dividend of Rs7/share (unchanged from FY10)
…but revenue below expectations
At Rs7.9bn (up 6% yoy), revenue was 10% below our expectation. Castrol hiked prices in
December 2010 and March 2011 – moves that were not immediately followed by its competitors.
Hence, Castrol’s price premiums shot up from 20-25% to 35-40%, resulting in lower-thananticipated
volumes. Competitors recently sharply raised their prices, and the premiums are now
back to earlier levels, which should boost volume growth. The lag in price hikes is unusual. It may
have been due to differing views on input costs and does not reflect a weakening of the business
model, in our view. We forecast 3% yoy growth, but, given the performance to date, we cut our
absolute volume forecasts by 3% across FY11-13F (ie, zero growth in FY11).
We downgrade to Hold, with an unchanged target price of Rs500
Given lower volume, we cut our EPS forecasts 3-8% over FY11-14. Despite this cut, we leave our
target price unchanged due to roll-forward, now valuing the company at 20x FY12F EPS. This
places the stock at a 24% valuation discount to its peer group, and we believe there is scope for
this discount to narrow if Castrol provides some upside on the volume front. From an earnings
perspective, the big driver is any potential decline in oil prices or refining margins for base oil (we
factored the latter into our estimates).
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