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Margin stability key to earnings...

Castrol India’s operating revenue for Q4CY20 declined 7.6% YoY to | 935.2 crore. Volumes were at 52 million litre, down ~4% YoY. Gross margins dipped 1.2% YoY to | 106.8/litre due to lower realisation. Subsequently, EBITDA/ litre was at | 49.5/litre, down 21.6% YoY. EBITDA came in at | 257.6 crore, down 24.5% YoY. PAT was at | 187.7 crore, down 30.8% YoY.

Lower realisation affect margins

Castrol’s raw materials cost (base oil) are dependent on the movement of crude oil prices and rupee against US dollar. While rupee has weakened, crude oil prices have fallen sharply compared to Q4CY19, which led to drop in base oil costs YoY. Due to lower oil prices, we subsequently saw a decline in raw material costs. However, the company reduced its prices for CV segment leading to fall of | 7.6/litre in realisation. As a result, gross margins posted a minor fall of | 1.3/litre YoY to | 106.8/litre. On account of increase in crude oil prices over past few months, the company has taken a price hike across segments in January. Hence, we expect gross margins to remain at healthy levels of | 102.8/litre in CY21E and | 107.9/litre in CY22E. EBITDA is expected at | 52/litre and | 55.6/litre in CY21E and CY22E, respectively.

Volume to improve, albeit on lower base

Castrol volumes in Q4CY20 dipped ~4% YoY to 52 million litre. On QoQ basis, volumes saw an uptick of 10.6%. While auto volumes are below preCovid level, industrial volume has grown YoY. Castrol witnessed strong volume growth on CV segment front on account of price cuts. In medium term, due to recovery in personal mobility volumes and increased CV lubricants sales, we expect volume growth over the next two years. Castrol’s tie-up with an OMC retail network also provides volume growth opportunities. However, in the long run, higher drain intervals due to improvement in technology and development of electric vehicle space pose a risk to Castrol’s volume outlook. We expect Castrol’s volume at 210.6 million litre in CY21E and 216.9 million litre in CY22E.

Valuation & Outlook

Although Castrol has been successful in signing agreements with many automobile and oil & gas players in the industry, its strategy to defend potential disruptions like higher drain interval, electric cars will be the key monitorable for long term volume growth, going ahead. In the near term, Castrol will report strong volume growth YoY in CY21E mainly due to low base effect. The focus on maintaining balance between margins & volumes along with growth in the personal mobility segment (~45% of total volume) will be a key factor directing the company ahead. We maintain HOLD rating on the stock. We value Castrol India at 15x CY22E EPS of | 8.6 to arrive at a target price of | 130 (vs. previous TP: | 115).

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