Castrol India- ICICI Securities Fundamental Top Picks for 2015

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Castrol India (CASIND) Target Price: | 611 (22% upside)
• Castrol India, a 71% subsidiary of British Petroleum plc, is one of the
leading players in the domestic lubricants business. The company
operates three manufacturing plants in India and has the largest
distribution network of 380 distributors, servicing over 105,000 retail sites.
The main focus of Castrol is on the lucrative automotive lubricant
segment where it commands a market share of ~22% in value terms. The
company derives ~90% of its revenues from the automotive segment
and ~10% in industrial segment. Castrol reported revenues of | 3179.6
crore and PAT of | 508.6 crore in CY13
• Castrol’s volume had remained subdued over the past few years due to
the slowdown in the Indian economy. The prospects of the lubricant
industry are highly dependent on growth in the automotive sector. We
expect the automobile sector to post sales growth at 13.2% CAGR over
FY14-17E to 314 lakh units in FY17E. Hence, Castrol's total volume is
expected to increase at 3.8% CAGR over CY13-16E from 196.8 million
litre in CY13 to 220 million litre in CY16E on the back of an improvement
in auto sales and industrial growth
• Castrol is the price maker in the automotive lubricant industry. With the
sharp decline in crude oil prices over the past few months, raw materials
costs (base oil prices) for Castrol are expected to come down, aiding the
improvement in margins. We expect gross margins to increase by | 29.1
per litre over CY13-16E from | 70.7 per litre in CY13 to | 99.8 per litre in
CY6E. Subsequently, we expect EBITDA to increase from | 34.9 per litre
in CY13 to | 60.4 per litre in CY16E
• Castrol’s strong brand positioning and superior distribution network
allows it to command higher pricing power and premium for its products
over its competitors. The company’s focus on the personal mobility
segment will remain the key driver for the automotive lubricant business
and create value for shareholders, going forward. We expect revenues
and profits to grow at a CAGR of 7.1% and 20.5% over CY13-16E to
| 3910.9 crore and | 889.1 crore, respectively. We value Castrol India at
34x CY16E EPS of | 18 to arrive at a target price of | 611 in 12-18 months