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Growth momentum slows with Covid‐2nd wave

Result Highlights:

* 2QCY22 Profitability:  Reported EBITDA and PAT stood at Rs 1.97bn (+107% YoY; ‐42% QoQ) and Rs 1.4bn (+114% YoY;  ‐43% QoQ). The 1HCY20 was severely impacted by Covid‐ 1st wave, when sales declined by 37% YoY, as a result the YoY growth continued in 2QCY21 on weak base quarter, albeit the growth momentum slowed sequentially as Covid ‐2nd wave unfolded.

* Sales volume: The sales volume stood at 45mn liters, registering a growth of 55% YoY, but a decline of 26% QoQ, after a strong Jan‐Mar’21 quarter when sales stood at 61mn liters (+62% YoY) on continued recovery in sales observed in 2HCY20. The recovery was however halted by Covid ‐2nd wave over Apr‐Jun’21 as vehicular movement and industrial activity was impacted by localized lockdowns.

* Per unit metrics: Over 2QCY22, CSTRL also experienced a 15% increase in raw material (RM) cost as a) crude oil price averaged QoQ higher at USD 69/bbl  (1Q: USD 61/bbl), b) INR depreciated against USD to Rs 73.7 (from Rs 72.9) and c) refinery outages impacted base oil availability thereby resulting in higher prices. To offset the increase in RM cost, CSTRL undertook price intervention in Apr’21 and Jun’21, after one already undertaken in Jan’21. Nevertheless, the gross margin and ebitda margin per unit stood weaker on QoQ basis at Rs 99/liter (1Q: Rs 101) and Rs 44/liter (1Q: Rs 56/liter) as higher RM costs were compounded by 14% QoQ higher operating expense.

View & Valuation

The 2QCY22 earnings missed our and street estimates, primarily on a) sharper than expected QoQ decline in sales and b) higher RM and operating expenses, leading to weaker than expected margins. However, margins and sales are expected to improve in 2HCY21, as impact of Covid‐II wave wanes, base oil prices ease on improved availability and price interventions taken over 2Q bear fruit.  

CSTRL is a dominant lubricant player in the country and has improved its market share to 22% (from 20‐21%) over past few quarters. CSTRL has strategic focus on the personal mobility segment, which continues to be earnings driver for the company with a 60‐65% revenue contribution and ~40‐45% volume contribution. Personal mobility segment is well aligned with branding and up‐trading opportunities, where CSTRL strongly believes in higher adoption of high value synthetic products going ahead (current: ~10% of sales).

While CSTRL has a strong profitability and brand equity, but lubricants is inherently a competitive and low growth market and carries the overhang of impending EV adoption, especially in 2‐wheeler segment. We therefore find the stock fairly valued and maintain ADD rating with a revised TP of Rs 150/sh (from Rs 135/sh) as we roll estimates to Dec’23.  

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