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Base oil prices trend to be key monitorable…

About the stock: Castrol India, a subsidiary of BP, operates in the lubricants business and caters to automotive and industrial segments.

Automotive segment volumes contribute 80-85% of total sales volume

Castrol has high pricing power and commands premium for its products

Q4CY21 Results: Q4CY21 earnings were impacted by higher base oil costs.

Revenue was up 16.6% YoY to | 1090.6 crore, driven by higher realisation

Gross margins declined ~1% YoY to | 105.4/litre, on account of higher base oil costs. EBITDA/litre was at | 51.6/litre, up ~4% YoY

EBITDA was at | 265.9 crore, up by 3.2% YoY. PAT was at | 188.6 crore, flat on a YoY basis

What should investors do? Higher base oil prices remain a concern in the near term. Potential disruptions like higher drain interval, EVs will be key monitorables for long-term volume growth.

Post correction in stock price, we upgrade our rating from REDUCE to HOLD on the stock

Target Price and Valuation: We roll over valuation to CY23E and value Castrol India at | 120 i.e.15x CY23E EPS.

Key triggers for future price performance:

Although Castrol will report volume growth YoY in CY22E, lack of sustainable volume growth in future will limit overall growth

While the company hiked retail prices in CY21, high base oil prices will affect margins. With margins already at higher levels, we see limited headroom for gross margin growth from here on

Castrol’s 2-W volume (26% of volume mix) are likely to be impacted by an introduction of 2-W EVs

Alternate Stock Idea: Besides Castrol, in our oil & gas coverage we also like IGL

Indraprastha Gas (IGL) is one of India’s leading CGD companies, which primarily operates in NCT of Delhi and will benefit from stricter environmental regulations in Delhi. Continued capex, newer areas and CNG conversion of vehicles will support further volume growth

BUY with a target price of | 475

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