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India Equity Research Reports, IPO and Stock News
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http://www.kotaksecurities.com/pdf/dmb/MorningInsight09032012.pdf
CASTROL INDIA LTD. (CIL)
PRICE: RS.504 RECOMMENDATION: REDUCE
TARGET PRICE: RS.430 CY13E P/E: 21.9X
q We expect Castrol to report a dismal performance in Q1CY12 mainly on
account of 1). Higher raw material cost (Lube oil) due to rising lube oil
prices and weak rupee, 2). Lower sales volumes, 3). Competition from
OMCs and 4). Seasonally first quarter is not a good quarter.
q In Jan'12, the Company's management has indicated slowdown in demand coupled with higher input cost which had impacted profitability in
Q4CY11. The challenging base oil and additive cost environment and the
general slowdown in the economy impacted both sales and margins.
q We expect rupee to weaken further on account of rising fiscal deficit, inflation, lowering growth and higher crude oil prices. If we look at the
recent INR/$ movement, rupee has depreciated ~4% in last one month
from Rs.48.7 (3rd Feb'12). Castrol imports its raw material, which is denominated in dollar terms, and sells lubricants in the domestic market
which is realized in rupee terms. Hence, weak rupee increases its raw
material cost and negatively impacts margins.
q Similarly, spot Brent crude oil price has increased by 13% in last two
months from $109.88 (20th Jan'12) to $124.41/bbls (6th Mar'12). We are
bullish on crude oil price mainly on account of 1). Increased global liquidity and 2). Supply concern from Iran.
Lube oil prices are dependent
on crude oil prices.
q The Company's management has indicated that Castrol has lost its market share by ~2-3% in Q2CY11 and Q3CY11. This is mainly due to aggressive pricing of its product. This makes us believe that it will difficult for
the Company to hike price in the near future despite cost pressures.
q Double whammy - Hike in petrol and diesel prices can lower lubricant
consumption: High crude oil prices are negatively impacting profitability
of the Company in two ways 1). Higher raw material cost (lubes) impacting operating margins and 2). Lower lube consumption due to expected
hike in diesel and petrol price as freight operators might delay consumption of replacement product such as lubes and tyres. Diesel vehicle engines (trucks, heavy commercial vehicles) contribute ~40% of the total
automobile lubricant sales.
q Organization for Economic Co-operation and Development (OECD) composite leading indicators (CLIs) is pointing slowdown in economy. OECD
composite leading indicator (CLIs) is designed to anticipate turning
points in economic activity relative to trend, which point to an increasing pace of economic activity. Based on this, we believe India is a slowdown phase as the OECD (India) is at 95.6. We believe lower industrial
activity will impact the industrial demand of lubricants in CY12.
q Castrol's board has recommended final dividend of Rs. 8.0/share for the
year ended December 31, 2011 (2010: Final Dividend Rs.8.00 per share).
The Company has indicated that from April 04, 2012 to April 16, 2012
(both days inclusive) will be the record date.
q Our revised earnings estimate with EPS of Rs.19.9 CY12E and 23.0 CY13E.
q On the basis of our estimates, the stock at current market price of Rs.504
is fairly valued at 14.4x EV/EBIDTA, 21.9x P/E and 17.0x P/BV on the basis
of CY13E earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/dmb/MorningInsight09032012.pdf
CASTROL INDIA LTD. (CIL)
PRICE: RS.504 RECOMMENDATION: REDUCE
TARGET PRICE: RS.430 CY13E P/E: 21.9X
q We expect Castrol to report a dismal performance in Q1CY12 mainly on
account of 1). Higher raw material cost (Lube oil) due to rising lube oil
prices and weak rupee, 2). Lower sales volumes, 3). Competition from
OMCs and 4). Seasonally first quarter is not a good quarter.
q In Jan'12, the Company's management has indicated slowdown in demand coupled with higher input cost which had impacted profitability in
Q4CY11. The challenging base oil and additive cost environment and the
general slowdown in the economy impacted both sales and margins.
q We expect rupee to weaken further on account of rising fiscal deficit, inflation, lowering growth and higher crude oil prices. If we look at the
recent INR/$ movement, rupee has depreciated ~4% in last one month
from Rs.48.7 (3rd Feb'12). Castrol imports its raw material, which is denominated in dollar terms, and sells lubricants in the domestic market
which is realized in rupee terms. Hence, weak rupee increases its raw
material cost and negatively impacts margins.
q Similarly, spot Brent crude oil price has increased by 13% in last two
months from $109.88 (20th Jan'12) to $124.41/bbls (6th Mar'12). We are
bullish on crude oil price mainly on account of 1). Increased global liquidity and 2). Supply concern from Iran.
Lube oil prices are dependent
on crude oil prices.
q The Company's management has indicated that Castrol has lost its market share by ~2-3% in Q2CY11 and Q3CY11. This is mainly due to aggressive pricing of its product. This makes us believe that it will difficult for
the Company to hike price in the near future despite cost pressures.
q Double whammy - Hike in petrol and diesel prices can lower lubricant
consumption: High crude oil prices are negatively impacting profitability
of the Company in two ways 1). Higher raw material cost (lubes) impacting operating margins and 2). Lower lube consumption due to expected
hike in diesel and petrol price as freight operators might delay consumption of replacement product such as lubes and tyres. Diesel vehicle engines (trucks, heavy commercial vehicles) contribute ~40% of the total
automobile lubricant sales.
q Organization for Economic Co-operation and Development (OECD) composite leading indicators (CLIs) is pointing slowdown in economy. OECD
composite leading indicator (CLIs) is designed to anticipate turning
points in economic activity relative to trend, which point to an increasing pace of economic activity. Based on this, we believe India is a slowdown phase as the OECD (India) is at 95.6. We believe lower industrial
activity will impact the industrial demand of lubricants in CY12.
q Castrol's board has recommended final dividend of Rs. 8.0/share for the
year ended December 31, 2011 (2010: Final Dividend Rs.8.00 per share).
The Company has indicated that from April 04, 2012 to April 16, 2012
(both days inclusive) will be the record date.
q Our revised earnings estimate with EPS of Rs.19.9 CY12E and 23.0 CY13E.
q On the basis of our estimates, the stock at current market price of Rs.504
is fairly valued at 14.4x EV/EBIDTA, 21.9x P/E and 17.0x P/BV on the basis
of CY13E earnings.
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