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EBITDA ahead of est. led by strong volume growth and higher margins
* Castrol India’s net operating income stood at INR9.3b (est. INR9.0b, +8% YoY, - 9% QoQ) led by higher-than-expected volume and utilization. EBITDA came in at INR2.3b (est. INR2.0b, -10% YoY/QoQ). PAT stood ahead of estimates at INR1.5b (est. 1.4b, -16% YoY, -9% QoQ).
* Realization up 3% YoY and 2% QoQ: Realization stood at INR181.2/lit v/s INR175.3/lit in 3QCY17 and INR178.5/lit in 2QCY18. Gross margin stood at INR88.7/lit v/s INR95.2/lit in 3QCY17 and INR87.7/lit in 2QCY18.
* Volumes up 4% YoY to 51.2m liters: CSTRL’s total volumes grew 4% YoY (-10% QoQ). Personal mobility has been a key driver whereas CVs and industrial segments have also shown improvement. Volume growth for 9MCY18 stands at 6%, higher than the industry growth. ~90% of the volume growth has been contributed by new products introduced in the last twelve months. The company has also made a new OEM alliance with Mahindra Tractors.
* Valuation and view
* CSTRL’s >80% payout policy, RoE/RoCE of >50% and FCF to PAT conversion at >80% reflect its superior balance sheet and high-quality cash flows, which warrant higher valuation multiples, in our view.
* The stock is trading at 22.6x CY19E EPS of INR6.5. Our fair value stands at INR226 (35x CY19E EPS), implying 55% upside. Maintain Buy.
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