Realizations improve; volumes suffer on subdued industrial off-take
QCY19 net sales were down 8% YoY to INR8.5b (~7% miss), owing to 14% YoY decline in volumes. Realizations jumped 6% YoY. EBITDA was up 8% YoY to INR2.4b (in line with est.). PAT was up 25% YoY to INR1.9b. PBT was at INR2.4b (in line with est.); company took one-time tax advantage of the corporate tax cut. Tax for the quarter stood at 20.6% and a full tax rate of 25.17% is expected going forward.
For 9MCY19, Net sales were flat YoY at INR28.65b, while EBITDA was up 8% YoY to INR8.1b with net profit at INR5.6b (+12% YoY).
* Volume decline continues: CSTRL’s total volume stood at 44.2m liters (v/s 51.2m liters in 3QCY18 and 55.4m liters in 2QCY19). Personal mobility continues to be a key driver with an increase of +4% YoY, while commercial vehicle/industrial segment showed declines.
* Decline in quarterly volumes was majorly on account of double- digit YoY decline in the industrial segment, as factories took a shutdown and were running at lower utilization rates.
* PCMO constitutes ~45-50% of volumes and industrial constitutes ~12% while the rest is CVO. 2W continues to constitute ~2/3rd of the PCMO; with contribution of PCMO towards profits being higher.
* Realization for 3QCY19 improved to INR192/liter v/s INR181/liter in 3QCY18 and INR188/liter in 2QCY19.
* Oil drain intervals are expected to rise in commercial segment for BSVI engines, however, BSVI products will be at a premium for improved quality; and will also be backward compatible (i.e. will be usable for even BSIV engines).
* Gross margins were higher than estimated at INR105.4/liter, up from INR88.7/liter in 3QCY18 and INR101.2/liter in 2QCY19, led by company’s continued efforts for improvement in product mix and sourcing.
* Strategic developments:
* CSTRL has signed a strategic partnership with Honda 2Ws India. A new range of Castrol Activ lubricants were launched in the month of Aug’19.
* The company has also enrolled over 1.5lac mechanics and retailers on its Castrol Fast Scan (digital platform), creating avenues for collaboration with similar stakeholders and corporates.
* In light of the possible onslaught of electric vehicles, company is looking at different revenue streams for the future (like deal in 2QCY19 with 3M for diversification into new avenues).
* CSTRL has already launched EV fluids globally (China and Europe) and will soon bring it to India. However, company expects PCMO market to stay for further 10-11 years, before transition to EV pricks demand.
* Silvassa plant expansion is on track, and is expected to commence operations by Apr’20 (expansion from 100m liters to 140m liters). Other plant at Patalganga saw the highest number of bottle fills of Castrol Activ in Sep’19.
Valuation and view :
* CSTRL has guided that they will continue to focus and invest in personal mobility (and while doing so, have seen 7% CAGR over the last decade), as PCMO is more profitable than B2B segments.
* Company expects lubrication industry growth of ~2-4% over the next two-three years (barring CY19 as an outlier), though we believe there are challenges in oiling the growth wheel over the long term due to the intensification of competition.
* Due to the oligopoly nature of the market (Lubrizol, Infineum, Oronite, Afton) prices of additives keeps going up. With more launches, the premium for synthetic lube is likely to reduce.
* Nevertheless, the onslaught on EVs at least in 3Ws and 2Ws is expected to arrive much sooner than anticipated by the company. CSTRL does ~30% of its total volumes in the 2W segment, which can be hugely impacted by EVs.
* To factor in the aforementioned factors, we estimate volumes at 205/203m liters (-4%/-1% YoY) for CY19/20, with realization at INR192/197/liter (+5%/+3% YoY) in CY19/20. This, along with adjusting for lower volumes in 3QCY19, we change our EPS forecast by -9%/+4% for CY19/20.
* The stock trades at 19.4x CY19 EPS of INR8.0 and EV/EBITDA of 12.7x, with EBITDA CAGR of 4% (CY18-20). Current dividend yield is 3.2%.
* We value the stock at 20x (in line with global peers) to arrive at a target price of INR177, implying 15% upside. Maintain Buy.
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