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Raw material price volatility impacts earnings

Our view

The 3QCY22 operating earnings at Rs 2.57bn (-2% YoY; -10% QoQ) stood below our and street estimates primarily on a) weaker than estimated sales volume at 47-48mn liters and b) higher than estimated raw material (RM) expense; the same was partially offset by 10% YoY & 28% QoQ lower operating expense, driven by aggressive cost control measures. Seasonally weaker demand from Agri and Rural segments, impacted sales during the quarter. In addition, extreme volatility in forex and base oil prices, led to contraction in gross margins during the quarter. CSTRL undertook three price revisions over 9MCY22, to offset the increase in raw material prices. Going ahead, the volatility in raw material prices is most likely to continue for few quarters. Personal mobility continues to be a focus area for CSTRL with growth expected in the segment till 2035 and beyond, irrespective of EV adoption. Besides, CSTRL is actively exploring opportunities in the new age mobility as well. Maintain ADD with a TP of Rs 130/sh.

Result Highlights

* Profitability – Reported EBITDA and PAT stood at Rs 2.57bn (-2% YoY; -10% QoQ) and Rs 1.87bn (+1% YoY; -9% QoQ). The operating margin at 22.9%, stood weaker on YoY (152bps) and QoQ basis (11bps), primarily on weakness in gross margins at Rs 5.09bn (-4% YoY; -17% QoQ), even as operating expense stood lower at 1.9bn (-10% YoY; -28% QoQ). Extreme volatility in forex and raw material prices led to contraction in gross margins, despite higher per unit realizations.

* Sales Volume – The sales volume stood at 47-48mn liters, registering a de-growth of 5% YoY and 15.2% QoQ. The 9MCY22 volume therefore stood 4.2% YoY higher at 162-163mn liters. The volume was impacted on account of seasonal factors, as demand from Agri and CV segments was rather tepid, however the PCMO segments reported a healthy growth. During the quarter, almost ~85% of the sales can be attributed to automotive segments and rest to industrial segment.

* Per Unit Metrics – Led by three price revisions undertaken in 9MCY22, the realizations stood 10% YoY and 6% QoQ higher at Rs 236/liter. Higher base oil prices along with depreciation in INR, fueled the raw material inflation, leading to raw material costs being 19% YoY and 15% QoQ higher at Rs 129/liter. The operating costs however declined during the quarter to Rs 40/liter (-5% YoY; -15% QoQ) on account of lower sales and aggressive cost control. As a result, the Ebitda stood YoY and QoQ higher at Rs 54/liter (2QCY22: Rs 51/ltr; 3QCY22: Rs 53/ltr)

Valuation

We maintain our ADD rating on CSTRL, with a revised Dec’23 TP of Rs 130/sh, as we roll estimates forward and introduce CY24e. We value CSTRL at a P/E of 15x CY24e, as against 13.9x the stock is currently trading at.

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