Reduce Castrol India Ltd For Target Rs.124 - ICICI Securities Ltd
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Input cost remaining high a headwind to margin
Castrol India’s (Castrol) Q3CY21 EPS was down 9% YoY despite rise in volumes, hit by steep fall in margins. EPS was up 33% QoQ driven by rise in volumes as offtake improved compared to covid-hit Q2 and margins due to benefit of price hike in Jun’21. High input cost, which the company indicated has almost doubled YoY, does not appear to have been fully passed on. We have cut both CY21- CY22E EPS by 6% each as hit from cut in margin to 25.8-27% (28-29% earlier) exceeded gains from upgrade in volumes by 4%-1%. Cut in CY22E EPS has led to reduction in target price (15x CY22E EPS) by 6% to Rs124 (12% downside). Retain REDUCE on Castrol.
* Q3CY21 EPS down 9% YoY hit by margin fall; up 33% QoQ driven by volumes and margin rise: Q3CY21 EPS was down 9% YoY despite 6% YoY rise in volumes to 50mn-ltrs, hit by 14% YoY fall in EBITDA margin to Rs52.5/ltr. However, Q3 EPS was up 33% QoQ driven by 9% QoQ rise in volumes and 22% QoQ rise in EBITDA margin from Rs42.9/ltr. Margin was down YoY as cost rise of Rs35.6/ltr exceeded realisation rise of Rs26.7/ltr. Q3 EBITDA margin contracted 818bps YoY, but expanded 226bps QoQ to 24.5%.
* Cut CY21E-CY22E EPS and target price by 6%; maintain REDUCE: We have cut our CY21E-CY22E EPS by 6%, which is a net impact of cut in EBITDA margin to 25.8%-27% (28%-29% earlier) and upgrade in volume estimate by 4%-1% to 210-215mn-ltrs. Our CY21E estimate implies volumes of 53.5mn-ltrs (up 3% YoY on a high base) and EBITDA margin of 25.8% (24.5% in Q3CY21) in Q4CY21E. Risk to our revised estimate is third wave of covid that leads to lockdowns and hits volumes. Raw material lube oil base stock (LOBS) prices have almost doubled from Q3CY20 levels of US$500-600/t, which does not appear to have been fully passed on. Any further rise in LOBS prices is a headwind to margins. Cut in CY22E EPS by 6% has led to cut in our target price, which is based on 15x CY22E EPS of Rs8.3/share, by 6% to Rs124/share. Our target price implies 12% downside to current market price. We maintain REDUCE on the stock.
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