Castrol India: Volumes disappoint again, margins remain low:: Kotak Securities PDF link

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Castrol India (CSTRL)
Energy
Volumes disappoint again, margins remain low. Castrol reported 1QCY12 net
income of `1.23 bn (-10% yoy), sharply below our estimate of `1.52 bn. The negative
variance reflects (1) lower-than-expected volumes at 52.6 mn liters (-5.9% yoy) versus
our expected 55 mn liters and (2) surprisingly lower EBITDA margins of 20.3%. We
reiterate our SELL rating on the stock, noting (1) expensive valuations at 26.1X
CY2012E EPS and (2) potential downside of 26% to our target price of `400.
Results marred by decline in volumes and lower margins
Castrol reported 1QCY12 net income of `1.23 bn (-10% yoy, +15.1% qoq), sharply below our
expected `1.52 bn. The company reported 12.4% yoy decline in EBITDA to `1.59 bn, led by
(1) 5.9% decline in volumes to 52.6 mn liters and (2) 3.1% lower implied net realizations of
`61.8/liter. We are surprised by a modest 2.9% qoq decline in raw material costs despite 9-11%
decline in base oil prices in the relevant period (see Exhibit 2).  
Weakness in volumes persists
We highlight that Castrol reported weak sales volumes over the past several quarters (see Exhibit
3). This reflects (1) a structural slowdown in the industry and (2) loss of market share due to
significant pricing premium for Castrol products. We have long highlighted that volume growth
will be modest given (1) increase in oil-drain intervals and (2) lower lubricant consumption at the
time of oil-drain. The recent slowdown in the economy will accentuate the problem, given
(1) an expected slowdown in sales of passenger cars and commercial vehicles and (2) likely slower
industrial activity. Potential hike in diesel price will also impact lubes consumption in the near term.  
Retain SELL; valuations expensive despite assumed margin expansion
We maintain our SELL rating on the Castrol stock given 26% potential downside to our
unchanged target price of `400, based on 19X 12-month forward rolling EPS of `21. The stock
trades at 26.1X CY2012E EPS, which is well above its historical P/E band of 14-18X (see Exhibit 4).
We have assumed EBITDA margins will increase to 22.6% in CY2012E and 23.2% in CY2013E
from 20.3% in 1QCY12 and 22.1% in CY2011, led by increase in net realization (gross realization
less raw material cost) to `65.4/liter for CY2012E and `67.8/liter for CY2013E versus `61.8/liter in
1QCY12 and `61.1/liter in CY2011 given our assumption of lower LOBS prices.
Revise earnings
We have revised our CY2012-13 EPS estimates to `20.7 and `21.7 from `21 and `22.3
respectively to reflect (1) CY2011 annual report, (2) 1QCY12 results and (3) minor changes. We
estimate CY2014 EPS of `22.1 assuming (1) 2% volume growth and (2) 23.1% EBITDA margin.