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Castrol India Ltd. recently announced its performance for the quarter ended March 31, 2022. Following are the key highlights.

Highlights from the Quarter (Q1 CY22):

• The top-line showcased a growth of 8.5% YoY to Rs.1,235.7 cr during Q1 CY22. The volumes during the quarter stood at 5.9 cr liters (-3.3%, YoY) and the realization per liter increased ~12.2% YoY to Rs.209.4. During Q4 CY21, the company had sold 5.2 cr liters of lubricants and the realization/liter was at Rs.211.8.

• The cost of goods sold continued to be challenging due to sharp rise in input costs. Further, the Management stated that the inflationary pressure is likely to continue during 2022 amidst geo-political issues. The EBITDA margin fell 420 bps from 29.9% in Q1 CY21 to 25.7% in Q1 CY22 primarily due to significant increase in raw material costs; it jumped from 46.1% in Q1 CY21 to 49.8% in Q1 CY22.

• At the net level, the company reported a profit of Rs.228.4 cr against profit of Rs.243.6 cr in the corresponding quarter of previous year. Castrol reported an EPS of Rs.2.31 as against Rs.2.46 in Q1 CY21 and Rs.1.91 in Q4 CY21.

• The break-up stood as follows: Personal Mobility (43-45%), CVO (40%) and Industrials (15-17%).

• Going forward, the Management expects the base oil prices to continue to rise while EBITDA margin to be in the range of 24-27%.

• Further, Castrol Auto Service network expanded to 116 multi-brand passenger car workshops in more than 50 cities across the country.

• Expanded presence of Castrol Express Oil Change outlets in Jio-BP mobility stations across India, bringing the total count to 38. These outlets offer 2W consumers swift & reliable oil change on the go.

• Furthermore, BYD India approved the use of Castrol fluid for its first all-electric MPV in India.

• The Management stated that "Continuing our growth momentum from Q4 CY21, Castrol India delivered a strong performance in Q1 CY22, achieving double-digit growth in volumes, revenues, gross profit and profit before tax, marking a significant growth over the previous quarter. Despite a brief impact from the third wave of Covid-19 in January, business operations resumed normalcy and Q1 CY22 witnessed a good resurgence in demand. While inflationary and supply side pressures continued to be high, Castrol India was able to serve its customers' needs by leveraging its strong distribution network and supplier relationships”

OUTLOOK AND VALUATION

Castrol India reported healthy top-line growth for the year driven by rebound in volumes & realizations. The gross margins took a hit amidst rising raw material prices and the COGS is likely to remain under pressure in the upcoming quarters. We continue to believe that the leadership position of Castrol India, robust back-up by the parent, strong fundamentals and consistent technological advancements keeps the company best placed to benefit from the opportunity in lubricants space, personal mobility in particular. We have introduced CY23 and we expect profit margins to remain under pressure over the next couple of years considering inflationary stress. Nevertheless, robust balance sheet and attractive dividend yield makes it a good investment candidate with long term horizon. Thus, we maintain our BUY rating for the stock. We expect company to deliver an EPS of Rs.9.1 in CY23; maintaining our previous target multiple of 16.5x, we derive our target price of Rs.150 with an investment horizon of 18-24 months, which is an upside of ~40% from current levels

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