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Sales and margin recover sequentially  

Our view

The 3QCY21 operating profit at Rs 2.6bn stood ahead of our (YES: Rs 2.4bn) and street estimates (Rs 2.2bn). The beat on our estimates stemmed from higher than estimated sales volume of 50mn liters, as the demand rebounded strongly after the impact of Covid‐2nd wave in the previous quarter.  CSTRL is a dominant lubricant player with a strategic focus on the personal mobility segment, which continues to be earnings driver for the company with a 60‐65% revenue contribution. While CSTRL has a strong profitability and brand equity, but lubricant is inherently a competitive and low growth market and carries the overhang of impending EV adoption, especially in 2‐wheeler segment. We therefore find the stock fairly valued and maintain ADD rating with a TP of Rs 150/sh

Result Highlights

* 3QCY21 Profitability:  Reported EBITDA and PAT stood at Rs 2.62bn (‐9% YoY; +33% QoQ) and Rs 2.2bn (+10% YoY; +61% QoQ). The YoY decline in operating profits stemmed from higher raw material (base oil) cost impacting margins. The base oil prices have increased by ~45% YoY, while CSTRL did take three consecutive price revisions to offset the same in Jan, Apr and Jun’21, the Ebitda margins still stood weaker at 24.4% (3QCY20: 32%).

* Sales volume: The sales volume stood at 50mn liters, registering a growth of 6% YoY, and 11% QoQ, on a strong recovery in demand as localized lockdowns in wake of Covid ‐2nd wave eased during the 3QCY21.

* Per unit metrics: Over 3QCY21, CSTRL also experienced a 10% increase in raw material (RM) cost as a) crude oil price averaged YoY & QoQ higher at USD 73/bbl   (2Q: USD 69/bbl) and b) INR depreciated against USD to Rs 74.1 (from Rs 73.7 in 2Q). The gross margin and Ebitda margin per unit though weaker on YoY basis, improved sequentially, on account of price interventions and stood   at Rs 106/liter (2Q: Rs 99) and Rs 53/liter (2Q: Rs 44/liter). 

Valuation

CSTRL is trading at a P/E of 14x Dec23, as against 15x implied by our TP. We find the stock fairly valued as earnings growth prospects for the company are tepid given a) Lubricants is inherently low growth industry (2‐3% p.a.) and b) impending EV adoption can significantly disrupt lubricants market. In addition, in terms of margins, CSTRL has industry leading margins, which could be at risk should the competitive intensity rise. Therefore we believe that there is limited scope of a P/E re‐rating.

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