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Demand to revive as economy opens up

Castrol India (CSTRL)’s CY20 performance remained largely unhindered by declining IIP levels and muted customer off-take, with the company delivering a resilient performance for the year. Here are the key insights from CSTRL’s CY20 Annual Report:

* CSTRL’s gross profit declined 19% in CY20 (v/s CY19) due to lower volumes, weighed by disruptions caused by the pandemic and economic slowdown.

* Operating and other expenses fell by INR600m in CY20, driven by the company’s judicious cost management and efficiency programs – which led to robust working capital management.

* In CY20, CSTRL reported PAT decline of ~30% YoY amid the pandemic (against PAT CAGR of ~8% over CY10-19). Building on its positive long-term outlook, the company continues to drive growth in the personal mobility segment on the back of its wide distribution reach and strong brand building. We reiterate buy and value the stock at 20x CY22E EPS to arrive at a TP of INR170/share.

Continued efforts to expand product portfolio in CY20

* The company continued to introduce BS VI ready products across categories in CY20. It also launched BS VI compliant products for new next-generation cars in the OEM space.

* The focus was on manufacturing Castrol GTX SUV and the POWER1 Ultimate range, among other products, that find use in various applications across India. It also introduced new products such as Ilocut 1945, Iloform BWN 320, Techniclean HP, and Rustilo DW 310 in the Industrial and HD spaces.

* The company pursued growth opportunities and launched new products in Cruiser Bikes (Castrol Activ Cruise) in CY20 as well as introduced a fully synthetic performance oil range (Castrol POWER1 Ultimate) in the Premium segment in 2Ws to expand its product portfolio.

Strong opportunity in Lubricants/Non-Lubricants

* In CY20, the company focused on the CI4+ segment within Trucks (improved portfolio and sustained brand-building efforts) as this is the fastest growing segment in the Commercial Vehicles category.

* CSTRL became the first company to have BS VI compliant products across categories of automotive lubricants – as it looks to take advantage of further enhanced technologies within this space.

* In the newly launched Jio-BP retail network, the company’s lubricants were available across over 1,350 Jio-BP sites within just six months of the alliance (and at ~1,400 Jio-BP sites at the end of 1QCY21). The products saw good uptake, which has ensured a much wider reach.

* The company entered into a strategic collaboration with 3M Ltd in CY20 for a range of quality vehicle-care products for the automotive aftermarket – it seeks to diversify into categories outside of Lubricants for further growth opportunities.

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