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Buy Castrol (India) Ltd For Target Rs. 170

Pent up demand drives earnings in 1QCY21; COVID-19 likely to impact in 2Q

* CSTRL delivered a beat across all fronts, led by higher than estimated volumes of ~61m liters (up 62% YoY and 17% QoQ) – aided by pent up demand in Jan-Feb’21. Commercial and 2W segment performed well during 1QCY21, while demand from agriculture sector remains robust (led by higher Tractor sales). However, the management has guided that such volume growth won’t be sustainable going forward.

* Realization stood in line with our estimate at INR186.7/liter due to price action taken by the company in Jan’21. It has further increased product prices in Apr’21 – in line with an increase in base oil prices.

* Impact from the second COVID-19 wave: The management said additional restrictions/lockdowns are resulting in a market slowdown in various parts of India, thus posing a challenge to its 2QCY21 volume outlook.

* Factoring in the above, we assume a sequential decline in volumes for 2QCY21E, while building in a sequential increase in realization.

* Long-term volumes guidance stands ~4% YoY. The management reiterated that it would continue to focus on its Personal Mobility business. Our CY22E estimate was already aligned with its guidance, and thus remain unchanged.

* We value the stock at 20x CY22E EPS to arrive at a TP of INR170/share.

Beat on volumes led by pent up demand, realization in line

* Net sales stood at INR11.4b (30% higher than our estimate, up 66% YoY) in 1QCY21. EBITDA came in at INR3.4b (+96% YoY), with EBITDA margin at 29.9% (v/s our expectation of 23.5%). PAT rose 95% YoY to INR2.4b, with the tax rate at 26.7%.

* The company generated net cash of INR2.7b during 1QCY21, resulting in a cash generation of 112.5% of PAT on robust working capital management and cost management initiatives.

* Strategic development: CSTRL entered into a strategic collaboration with ki Mobility Solutions to supply lubricant products to its workshops in India and will also be available on goBumpr, their digital platform.

Valuation and view

* Capex guidance for CY21 stands at INR800-1,000m.

* The management said competition remains intense and the industry is likely to grow in lower single-digits. CSTRL has always enjoyed brand equity in the market. It will be able to secure its profitability with better product mix, cost control, and launch of advanced products with better realization.

* Its products are now available in ~1,400 Jio-BP retail outlets (up from 1,350 in 4QCY20). Further expansion of Jio-BP retail outlets (to over 5,500 sites) in the next couple of years would help strengthen its network.

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