Buy Castrol (India); target of Rs 134: Motilal Oswal

Motilal Oswal is bullish on Castrol (India) recommended buy rating on the stock with a target price of Rs 134 in its research report dated August 02, 2022.

Broker Research

August 04, 2022 / 10:15 PM IST

"India’s specialty chemicals industry is a decadal growth opportunity and it is still not too late to participate in the value creation process. We prefer CRAMS/CSM players Navin Fluorine (Navin) and PI Industries (PI) as they provide long-term earnings visibility. We also like UPL due to robust growth outlook and reducing debt concerns and SRF due to rising contribution from the chemicals business," JM Financial research report.

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Motilal Oswal's research report on Castrol (India)

CSTRL’s EBITDA and PAT missed our estimate, given the volatile market environment, amid rising input costs and modest demand. Realizations improved by 12% YoY and 6% QoQ, led by higher crude prices in 2QCY22. Volume remains modest at 56m liters in 2QCY22, with Personal Mobility/CV volumes contributing 50%/35-40% to overall volumes in 2QCY22 and Industrial volumes constituting the balance. CSTRL has taken another price hike in 2QCY22. It had raised prices in Mar’22 in various segments and product categories. Its market share in the Bazaar segment stood at 21-22%. The management expects demand for lubricants to sustain at least till CY35- 40 as there is huge room for ownership penetration, which won’t be totally fulfilled by EVs (at least in the four-wheeler category). Prices of Base Oil are expected to remain high in the near term, but we expect the same to decline in line with the correction in Brent crude oil prices. Better volumes are expected to pare down operating costs, with a 26-29% improvement in margin for CY22-23. Given rising input cost pressures, we lower our CY22/CY23 EBITDA estimate by 34%/31%. CSTRL has always enjoyed its brand legacy. It will be able to secure its profitability with a better product mix, cost control, and launch of advanced products with better realization. We reiterate our Buy rating.

Outlook

On a one-year forward P/E basis, the stock trades at a discount of ~71% to its long-term P/E average of 25.2x. We value the stock at 13x CY23 EPS to arrive at our TP of INR134. We maintain our Buy rating with a potential upside of 15%.

For all recommendations report, click here