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CY21 Annual Report analysis – A perfect value play!

In CY21, as the world began to come to terms with the first wave of COVID, the second wave hit the economy and Castrol (CSTRL) as a company faced several challenges and disruptions. To add to its woes, raw material prices were at an all-time high for CSTRL. Despite this, the company managed to deliver a resilient performance during the year. We highlight below the key insights from its CY21 Annual Report.

Higher volume and realization lead to sustained financial performance

* CSTRL’s gross profit grew 23% YoY in CY21 led by higher volume and strategic price interventions by the company. In effect, realization improved 12% YoY to INR202/liter in CY21 from INR181/liter in CY20.

* Operating and other expenses increased 20% YoY in CY21 mainly due to the supply chain disruptions led by rising input costs. Availability of raw materials was also an issue with the highest adverse impact visible in the APAC region.

* In CY21, CSTRL reported 30% YoY PAT growth, after it recorded a 30% YoY decline in PAT in CY20. However, gross margin contracted in CY21 to 51% from 58% in CY20. Likewise, EBITDAM contracted 200bp in CY21 to 25%. We maintain our BUY rating on the stock with a target price of INR146.

Expansion of product portfolio through brand leverage continues in CY21

* CSTRL launched products with BS-VI ready technology for both passenger cars and commercial vehicles. The company expanded its Castrol Auto Service (CAS) network to 116 multi-brand passenger car workshops in 50+ cities across India.

* CSTRL launched Castrol GTX SUV oils for sports utility vehicles to drive synthetic products across its mass and premium segments. It constantly engages with mechanics across the country by running a digital brand campaign for Castrol MAGNATEC SUV.

* The company pursued growth opportunities and launched: a) new products for cruiser bikes (Castrol Activ Cruise) too and b) full synthetic performance oils in the premium segment for two wheelers (Castrol POWER1 ULTIMATE), to expand its product portfolio

Growth drivers remain strong for CSTRL

* The growing demand for vehicles along with their increased usage is fueling demand for automotive lubricants. Technological advancement in automotive hardware design is also leading to improved demand for more efficient and premium lubricants.

* The Government of India also introduced a vehicle scrappage policy in its Union Budget 2021 that aims to phase out cars and CVs older than 15-20 years, to slash urban pollution levels and stimulate automobile sales.

* This policy would also accelerate demand for OEMs and reduce pollution (emanated from vehicles) and oil import costs by encouraging demand for fuelefficient, environment-friendly vehicles.

A perfect value play with superior returns and high dividend payout

* CSTRL’s capex guidance for CY22 stands at ~INR1b and it would remain around similar levels in future as well. CSTRL is venturing into new areas such as CAS and the tie-ups with Jio-BP (which would require capex) will help the company gain market share. CSTRL is also looking to improve the yields through its cash on books of ~INR13b at present.

* CSTRL is the perfect candidate of a value play with a return ratio of 47-50% and dividend payout policy of >70% (translating into a dividend yield of ~7%).

* On a one-year forward P/E basis, the stock trades at a ~55% discount to its LT P/E average of 25.9x. We value the stock at 15x CY23E EPS to arrive at our TP of INR146. Maintain BUY with 36% potential upside.

* Downside risks to our call: a) general slowdown of the economy, b) continued volatility in input costs, and c) foreign exchange issues that could hamper the company’s margins.

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