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Our Take:

Castrol India is an automotive and industrial lubricant manufacturing company. The company owns around 20% market share in the overall Indian lubricants market. Castrol’s market share improved 2% across all segments in Q2CY21. As per Nielsen, Castrol’s market share in the bazaar segment stands at 22-23%, while the second closest player stands at 7%. In 2W, 4Ws and CVs, Castrol had 26-27%, ~35% and ~18% market share respectively. Given the rapid pace of industrialization and good growth in automobile sales, we are comfortable about the slow but sure growth prospects for lubricants market and business growth of Castrol over the medium term to long term.

Lubrication industry is likely to grow by ~4-5% over the next 2-3 years although there are challenges due to demand disruption on account of COVID-19 pandemic, intensifying competition, slowdown in global/domestic macro-economic factors and rising popularity of Electric vehicles(EVs). However, Castrol is in a strong position to withstand these challenges on account of its strong brands, technology and enduring relationships with key stakeholders. Despite weak demand due to lockdown, Castrol reported realization at Rs197.7/ltr in Q2CY21 vs. Rs 186.7/ltr in Q1CY21. Castrol has taken three price hikes since January; as base oil prices doubled in last one year.

Castrol has high pricing power and commands premium for its products. On 06 Aug, 2020, we had initiated coverage on Castrol India Ltd and recommended and buy at LTP of Rs 116.7 & add on dips to Rs 106-108 band for base case target of Rs 128 and bull case target of Rs 136. The stock achieved its both targets before expiry of call. Given healthy growth outlook and strong profitability numbers in Q2CY21, we have now revised earnings and increased target price for the stock.

Valuation & Recommendation:

In light of the possible onslaught by EVs, the company is looking at different revenue streams for the future. The deal with 3M is a reflection of the company's diversification into new avenues. This deal signed in May 2019 will bring a range of market leading vehicle care products to the automotive after-market.

A range of 3M-Castrol branded bike and car care products including shampoo, glass cleaner, cream wax, dashboard and tyre dressers will be available across India. In July 2020, Castrol signed a deal with Jio-BP that will enable Castrol lubricants to enhance reach and visibility at 1,400 Jio-BP retail sites across the country, and sites are planned to expand to 5,500 sites in the next five years.

Company is confident about prospects of its business in India over the long term and has decided to continue making investments in India unabated by recent slow growth. Overall the company faces challenges on volume growth front but the current valuation adequately discounts that. Dividend yield of __% is an added attraction. Easing of Covid restrictions will drive a healthy recovery in demand across segments over the next few quarters.

We feel investors could buy the stock in the Rs 135-138 band and add on dips to Rs 119.5 –122.5 band (14.0xCY22E EPS). Base case fair value of the stock is Rs 151 (17.5xCY22E EPS) and the bull case fair value of the stock is Rs 169 (19.5xCY22E EPS) over the next 2 quarters. At the CMP of Rs 136.45 the stock trades at 15.8x CY22E EPS.

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