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Sales beats estimates; margins in?line  

Our view

The 2QCY22 operating earnings at Rs 2.86bn (+45% YoY; ?10% QoQ) stood above our and street estimates primarily on a) higher than estimated sales volume at 56mn liters and b) better realizations led by two price interventions during 1HCY22; the same was partially offset by 70% YoY& 12% QoQ higher operating expense, on account of cost inflation across heads. The strong 24% YoY growth during the quarter was on account of weak base quarter impacted by COVID?2nd wave. Going ahead, while sales is expected to grow; albeit at a rather normalized pace. Base oil prices increased during the quarter, with further increase expected in 3QCY22, before they cool off by the end of CY22. CSTRL therefore intends to undertake a balanced approach with focus on both volume and profitability. Personal mobility continues to be a focus area for CSTRL with growth expected in the segment till 2035 and beyond, irrespective of EV adoption. Maintain ADD with a TP of Rs 125/sh. 

Result Highlights

* Profitability – Reported EBITDA and PAT stood at Rs 2.86bn (+45% YoY;  ?10% QoQ) and Rs 2.06bn (+47% YoY; ?10% QoQ). The operating margin at 23%, as well, improved on YoY basis(84bps) but stood lower sequentially (262bps). While the YoY growth in operating profits was led by improvement in sales and pricing over a weak base quarter, impacted by COVID, the sequential decline was on account of an increase in raw material cost (base oil) and other operating expenses (freight, insurance, travel etc).

* Sales Volume – The sales volume stood at 56mn liters, registering a growth 24.4% YoY, however still stood lower by 5.1% QoQ. The 1HCY22 volume as a result stood 8.5% YoY higher at 115mn liters. While the growth is expected to continue in 2HCY22 as well, but rate of growth could be lower as the first half growth benefited from a weaker base, impacted by COVID.

* Per Unit Metrics – Led by two price revisions undertaken in 1HCY22, the realizations stood 12% YoY and 6% QoQ higher at Rs 222/liter. Higher base oil prices fueled the raw material inflation, leading to raw material costs being 14% YoY and 8% QoQ higher at Rs 112/liter. The operating costs also increased during the quarter to Rs 47/liter (+11% YoY; +18% QoQ) on account of higher freight, insurance, travel and other expenses. As a result, the Ebitda stood QoQ lower at Rs 51/liter (1QCY22: Rs 54/liter), but still higher on a YoY basis (2QCY21: Rs 44/liter).    

Valuation

We maintain our ADD rating on CSTRL, with a revised TP of Rs 125/sh, as we find the stock fairly valued,given an estimated earnings CAGR of ~3% (CY21?23e) premised upon a volume CAGR of 4.5% (CY21?23e). We value CSTRL at a P/E of 15x CY23e, as against 13.x the stock is currently trading at. 

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