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Highlights from the Quarter (Q1 CY21):

Building on the lower base of Q1 CY20 on account of onset of Covid-19 pandemic, the top-line showcased a robust growth of 65.5% YoY to Rs.1,138.7 cr during Q1 CY21. The volumes jumped 60.5% YoY to 6.1 cr liters and the realization per liter improved ~3.1% YoY to Rs.186.7. The volumes and realizations were better than previous quarter. During Q4 CY20, the company had sold 5.2 cr liters of lubricants and the realization per liter was at Rs.179.9.

The rebound in volumes inclusive of the pent-up demand positively impacted the profitability of the company; EBITDA margin expanded 472 bps from 25.1% in Q1 CY20 to 29.9% in Q1 CY21 primarily due to decline in staff costs and other expenses, partially offset by rise in raw material expenses, as a percentage of revenue. During Q1 CY21, the Personal Mobility share stood at ~40-45% while Industrial and Commercial Vehicle consisted the remaining ~55-60%.

The market share in the automotive segment stood at 20%; the company has taken two price hikes – one in January and another in April; further, the collaboration with Reliance Jio-BP mobility continues to grow with current supply reaches to 1,400 sites of the targeted 5,000+. The scope in synthetic oils is immense; currently, just 10% of the portfolio is synthetic-based oils. At the net level, the company reported a profit of Rs.243.6 cr as against profit of Rs.125.2 cr in the corresponding quarter of previous fiscal.

Castrol reported an EPS of Rs.2.46 as against Rs.1.27 in Q1 CY20 and Rs.1.90 in Q4 CY20. The Management stated that focused investments, interventions and actions taken in H2 CY20 towards brand building with increased marketing and advertising spends, new product introductions as well as corrective pricing yielded a positive impact on overall top-line growth. Further, this growth was also aided by improving demand trends especially in tractor and SUV sales in Q1 CY21.

The Management further stated that the second wave of the Covid-19 pandemic in India is resulting in a market slowdown in various parts of the country. In addition, supply disruptions on account of base oil and raw materials availability, logistics challenges and rupee depreciation are likely to adversely impact demand and supply. The management is keeping a close watch on the situation and responding with appropriate actions as needed.

OUTLOOK AND VALUATION

Castrol India reported healthy top-line growth driven by strong rebound in volumes. The results were above our revenue and profit estimates. Accordingly, we have moderately raised our estimates, however, we would be cautiously watching the numbers over the next couple of quarters which may be challenging in light of second wave of Covid-19. Nevertheless, 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.

The company is expanding capacities and the Management is confident of stable and steady growth over the next few years. During Q1 CY21, the company reported robust volumes and healthy realizations. We expect company to deliver an EPS of Rs.9.4 in CY22; assigning a target multiple of 16.5x (moderately reduced to factor in cautious approach because of ongoing second wave of Covid-19), which is below its median P/E of last 3 Years and 5 Years, we maintain our target price of Rs.155 with an investment horizon of 12-18 months.

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