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Earnings beat estimate on stronger sales

Our view

The 1QCY22 earnings stood above our and street estimates primarily on a) higher than estimated sales volume at 59mn liters and b) QoQ expansion in EBITDA margins to 25.7% vs an expectation of contraction. Sales volume recorded a strong QoQ growth of 14.6% on a resurgence in demand during the quarter but nevertheless stood 3.3% lower on YoY basis. Going ahead sales is expected to improve as 2Q is typically a seasonally stronger quarter before monsoons impact the sales over 3Q. While CSTRL did face raw material price inflation due to a progressive increase in base oil prices in sync with rising crude, the average per unit costs at Rs 104/ltr nevertheless stood QoQ lower. Nonetheless, CSTRL has taken a price revision of Rs 12-20 across various grades of products to offset/partially offset the increase in raw material costs, as the company intends to maintain Ebitda margins in the 24- 27% range.

Result Highlights

1QCY22 Profitability – Reported EBITDA and PAT stood at Rs 3.17bn (-7% YoY; +19% QoQ) and Rs 2.28bn (-6% YoY; +21% QoQ). The YoY decline in operating profits stemmed from 3.3% YoY lower sales volume and YoY weaker EBITDA margins on account of 21% YoY increase in raw material costs and higher operating expenses. The gross margins at 50.2%, nevertheless improved QoQ despite sequentially lower per unit realization, on QoQ lower per unit raw material costs

Sales Volume – The sales volume stood at 59mn liters, registering a growth 14.6% QoQ, however still stood lower by 3.3% YoY. Sequential improvement in sales was driven by a resurgence in demand, despite the impact of Covid-3 rd wave in Jan’22

Per Unit Metrics – Over 1QCY22, CSTRL experienced raw material price inflation on account of progressive increase in base oil prices in sync with increase in crude oil prices. The per-unit raw material cost at Rs 104/ltr nevertheless stood sequentially lower (4QCY21: Rs 106/ltr). The per unit realization as well stood QoQ lower at Rs 209/ltr (4QFY21: Rs 212/ltr), plausibly on shift in sales mix to cheaper grades. Therefore, while gross margin at Rs 105/ltr was QoQ steady, the EBITDA improved to Rs 54/ltr on QoQ lower per unit operating expense due to sequential growth in sales volume.

Valuation

We find the stock fairly valued as earnings growth prospects for the company are tepid given Lubricants is inherently a low growth industry (2-3% p.a.) and impending EV adoption can further blunt growth prospects. In addition, in terms of margins, CSTRL has industry-leading margins, which could be at risk, should the competitive intensity rise. We also believe that CSTRL might experience margin pressure in the near term, due to increased volatility in raw material costs. As a result, we revise our Ebitda margins estimates to an average of ~ 24-26% (vs 28% earlier). Therefore, our TP stands revised to Rs 120/sh (from Rs 150). At CMP, CSTRL is trading at a P/E of 13.3x Dec23, as against 15x implied by our TP.

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