Buy Castrol (India) Ltd For Target Rs.260 by Motilal Oswal Financial Services Ltd
Beat fueled by strong margin performance
* Castrol’s 4QCY24 EBITDA was a beat on our estimate, as the EBITDA margin came in at 27.8% (our est: 21.7%). The 4Q volumes were in line at 59m lit.
* Management highlighted that it remains focused on brand building, widening the distribution network, and launching new products, all of which we believe will contribute to volume growth and market share expansion.
* Management maintains a bullish outlook on India as a market and expects robust demand for lubricants to remain until the late CY30s and early CY40s, largely attributed to the low penetration of cars in the country. While the threat from EVs is real, EV adoption is expected to be gradual.
* CSTRL maintained its guidance of growing higher than the industry’s average growth rate of 4-5% while aiming for a 22-25% EBITDA margin for CY25. We estimate ~23% EBITDA margin in both CY25 & CY26.
* CSTRL has always enjoyed a strong brand legacy, and we are confident in its ability to maintain profitability through an improved product mix, stringent cost-control measures, and the launch of advanced products that command better realization. We reiterate our BUY rating with a TP of INR260.
Beat on EBITDA driven by robust margin performance
* Castrol’s 4QCY24 revenue stood at ~INR13.5b (+7%/+5% YoY/QoQ), in line with our estimate.
* EBITDA stood 25% above our estimates, at INR3.8b (up 14%/31% YoY/QoQ).
* Beat was driven by a higher-than-estimated EBITDA margin of 27.8% (vs. 22.2% in 3QCY24).
* Gross margin improved QoQ, while employee expenses declined QoQ.
* PAT was 18% above our est. at INR2.7b (+12%/+31% YoY/QoQ).
* The Board has recommended a final dividend of INR9.5/share (including a special dividend of INR4.5/share, FV: INR5/share).
* Other key highlights of CY24
* Castrol launched new EDGE variants for SUVs, hybrids, and European cars, plus CRB TURBOMAX+ CK4 premium truck lubricant. Four new rustpreventive solutions (Rustilo DW 800/806/809/812) were also introduced.
* Castrol opened a new technology center in Patalganga with blending and testing capabilities and future EV/data center testing plans. New filling lines were installed at the Paharpur and Silvassa plants.
* Castrol expanded its rural presence to over 36k locations. Nationally, they now reach ~143k outlets, including 600 Castrol centers, ~29.5k independent workshops, and 10k multi-brand car workshops.
* Castrol's marketing efforts included Shah Rukh Khan's "Stay Ahead" campaign for EDGE, reaching digital, TV, and outdoor audiences. The CRB TURBOMAX campaign engaged 70k truckers, and the POWER1 initiative promoted motorcycling talent with MotoGP training.
* Castrol increased recycled plastic in its bottles to 50%, trained 45k drivers and mechanics (500k+ cumulatively), and implemented green energy projects at its Silvassa plant, cutting CO2 emissions by 45%.
Valuation and view
* Our EBITDA margin assumptions are already within the company’s guided range of 22-25%.
* We also maintain our valuation multiple of 26x (average: 22.4x and mean + 1 S.D.: 29.6x) and arrive at our TP of INR260. We reiterate our BUY rating.
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