Buy Castrol (India) Ltd for the Target Rs 230 by Motilal Oswal Financial Services Ltd
Healthy volume momentum; near-term margin pressure
* Castrol’s (CSTRL) 2QCY26 EBITDA came 41% above our estimate. EBITDA margin expanded 310bp YoY to 26.4%. Reported PAT came 41% above our estimate at INR3.5b. Other income came above our estimate at INR140m.
* Things we liked about the result:
1) The company implemented low doubledigit price hikes during 1HCY26, including one in 2QCY27, to offset supply chain volatility and input cost inflation. This enabled CSTRL to deliver strong EBITDA margin of 26.4% despite cost pressures;
2) The Industrial segment (15% of total volumes) is growing at a higher pace than the other segments
3) Rural volume growth remained strong, supported by continued expansion in distribution (45,000+ touch points)
4) Management remains focused on brand building, distribution expansion, and new product launches, which we believe should support sustained volume growth and market share gains.
* Key monitorables:
1) Gross margin will be impacted in 3QCY26 by elevated crude, base oil, and packaging costs due to inventory lag
2) Progress in the commercialization of data center cooling lubricants remains in focus
3) Clarity on the timeline for completion of the BP-Stonepeak transaction and the subsequent open offer remains a key monitorable.
* 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 value the stock at 21x Dec’27 EPS to arrive at our TP of INR230. We reiterate our BUY rating.
Valuation and view
* We build in EBITDA margins of 22%/23.3% for CY26/CY27, within the company’s guided range of 21-24%, as we factor in the impact of a sharp rise in crude oil prices and ongoing supply chain disruptions, which are likely to exert near to mid-term pressure on profitability. Further, we build in volumes to clock a 6% CAGR over CY25-27, primarily driven by strong growth in the industrial and rural segment. The stock currently trades at 17.5x CY27 EPS with a 5% dividend yield and ~53% RoE/RoCE in CY27.
* We value the stock at 21x Dec’27 EPS to arrive at our TP of INR230. We reiterate our BUY rating.
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