Buy Castrol India, target price Rs 185: Motilal Oswal

Motilal Oswal has given a buy rating to Castrol India with a target price of Rs 185. The share price moved up by 1.34 per cent from its previous close of Rs 126.45. The stock’s last traded price is Rs 128.15.

Castrol India’s CY19 annual report highlights the company’s efforts to improve product mix, control costs and debottlenecking. A challenging environment with 14 per cent decline in total vehicle sales resulted in Castrol clocking 4 per cent lower volume in CY19 as against industry growth of less than 1 per cent. However, strong support in the passenger cars and motorcycle oils (PCMO) segment resulted in 11 per cent growth in gross margin per liter to Rs 104.4 in 2019. Since CY03, Castrol has registered year on year PAT growth except for four (in CY04, CY11, CY12 and CY14) years. In CY19, CSTRL logged in PAT growth of 16.8 per cent aided by improved product mix, robust cost control and debottlenecking.

Investment Rationale

Castrol paid a dividend of Rs 5.5/share in CY19 (a payout of 78.9 per cent of CY19 PAT). The company has already launched BS-VI lubricants and has entered into an agreement with MG Hector and Tata Motors for supply of EV fluids.

Although competition remains intense and the industry is likely to grow in lower singledigits, the brokerage believes Castrol will be able to secure its profitability with better product mix, cost controls and launch of advanced products with a better realisation. The stock is trading at 13.6 times CY21 EPS of Rs 9.2, 29 per cent below 10-year average. The brokerage values the stock at 20 times CY21. It reiterates a buy with a target price of Rs 185.

Quarterly Results

Financials

For the quarter ended March 31, 2020, the company reported standalone sales of Rs 688 crore, down -32 per cent from last quarter sales of Rs 1011.80 crore and down -29.52 per cent from last year's same quarter sales of Rs 976.20 crore. The company reported net profit after tax of Rs 125.20 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 51 per cent stake in the company as of March 31, 2020, while FIIs held 11.83 per cent, DIIs 18.34 per cent and public and other 18.83 per cent.