Low crude oil prices positive… • Castrol India ::ICICI Securities,

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Low crude oil prices positive… • Castrol India reported a 6.2% YoY increase in revenue to | 859.3 crore in Q4CY14, marginally below our estimate of | 872 crore on account of lower than estimated automotive volumes. However, the industrial segment continued to show improvement in volumes YoY • EBITDA at | 207 crore came in marginally above our estimate of | 205.2 crore in spite of lower than estimated volumes of 48.2 million litre vs. expectation of 49.7 million litre. Increase in EBITDA to | 42.9/litre vs. | 36 per litre YoY led to better operational performance. Reported EBITDA margin was at 24.1%, up 282 bps YoY • Subsequently, PAT during the quarter increased 4.6% YoY to | 132 crore Revival in Indian economy to fuel volume growth Castrol’s volume had remained subdued over the past few years due to the slowdown in the Indian economy. Passenger vehicles, two wheelers and four wheelers, which contribute majority of Castrol’s sales volume, are expected to witness a recovery on account of improved economic sentiment and pent-up demand due to subdued sales over the past few years. With the revival expected in automobile sales and industrial growth, we believe Castrol’s volume will increase at 5.1% CAGR in CY14- 16E from 195.9 million litre in CY14 to 216.3 million litre in CY16E. Sharp decline in crude oil prices to boost margins Majority of Castrol’s raw material costs like base oil and additives are crude oil derivatives. With the sharp decline in crude oil prices over the past few months, raw materials costs (base oil prices) have come down, which would lead to an improvement in margins. The impact of lower base oil prices will be reflected in the raw material costs from the current quarter. The net realisation is expected to increase from | 172.6/litre in CY14 to | 177/litre in CY16E while raw material cost is expected to decline from | 98.9/litre in CY14 to | 76.9/litre in CY16E. Hence, we expect the EBITDA to increase from | 36.6/litre in CY14 to | 61/litre in CY16E. However, sharp volatility in crude oil prices along with foreign exchange volatility (~50% of raw materials are imported) is a key risk to our recommendation. Bet on largest private player with strong pricing power Castrol’s strong brand positioning and superior distribution network allow it to command higher pricing power and premium for its products over its competitors in spite of decline in base oil prices. We believe Castrol, which is the price maker in the Indian automotive lubricant market, will maintain stable realisations, going forward. With respect to the industrial lubricant market, we expect Castrol to pass on the benefits of lower base oil prices to the consumers. Going forward, we expect an improved performance from Castrol on account of a sharp decline in crude oil prices and a revival in automobile sales and industrial growth. The company’s focus on the personal mobility segment will remain the key driver for the automotive lubricant business and create value for shareholders. We value Castrol India at 34x CY16E EPS of | 17.9 to arrive at a target price of | 611 with a BUY rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_Castrol_Q3FY15.pdf