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Base oil costs trend 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

Q2CY22 Results: Q2CY22 earnings were driven by higher volume as well as realisation YoY.

* Revenue was up 39.6% YoY to | 1241.7 crore, driven by higher volume (on a lower base) as well as realisation

* Gross margins were up ~11% YoY to | 109.5/litre, on account of higher realisation. EBITDA/litre was at | 51.1/litre, up ~16% YoY leading to EBITDA of | 2861.1 crore, up 44.9% YoY

* Subsequently, PAT increased 47.3% YoY to | 206.3 crore

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

* We retain HOLD rating on the stock

Target Price and Valuation: We value Castrol India at | 125 i.e.~15x CY23E EPS.

Key triggers for future price performance:

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

* While the company hiked prices in CY22, high base oil prices will affect margins. Hence, we see limited headroom for gross margin growth in near term

* Castrol’s 2-W volume (25% of volume mix) is likely to be impacted by introduction of 2-W EVs

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

* Gail is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

* BUY with a target price of | 180

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