Castrol India (CASIND)

CMP: | 152 Target: | 140 ( -8%) Target Period: 12 months REDUCE

May 2, 2019

Volumes disappoint...
Castrol India reported its Q1CY19 numbers, which were below our estimates
on account of lower-than-expected volumes, which declined 2.1% YoY to
50.4 million litre, below our estimate of 53.3 million litre. Hence, revenues

Result Update
increased 5.3% YoY to | 976.2 crore, below our estimate of | 1009.7 crore.
However, the quarter witnessed an increase of 5% YoY in gross margins at
| 101.5/litre, above our estimate of | 99.7/litre, mainly due to a better product
Particulars
mix. On account of higher other expenses, EBITDA per litre came in at
| 56.2/litre (up 5.4% YoY), marginally below our estimate of | 57.6/litre. Particular Amount
Market Capitalization (| Cr) 15,034.6
Subsequently, PAT was at | 185 crore, below our estimate of | 201.9 crore.
Total Debt (| Cr) -
Cash and Investments (| Cr) 784.2
Margins remain healthy on account of better product mix EV (| Crore) 14,250.5
52 week H/L 202/135
Castrol’s raw material cost (base oil) are dependent on the movement of Equity capital (| Crore) 247.3
crude oil prices and rupee against US dollar. During the past few months, Face value (|) 5.0
the company took two price hikes, which led to an increase in net
realisations to | 193.7 crore vs. | 180 per litre YoY. As a result, gross margins Key Highlights
increased and came in at | 101.5/litre. However, the recent upward trajectory
in crude oil prices will escalate raw material costs. On account of the same  Weak performance from CV and
and relatively weak product mix, we expect gross margins at | 100.6 per litre industrial segment led to volume
in CY19E and | 96.5 per litre in CY20E. EBITDA is expected at | 54.7 per litre disappointment
(on account of higher than earlier estimated increase in other expenses) and  Gross margins per litre continue to

ICICI Securities – Retail Equity Research

| 49.6 per litre in CY19E and CY20E, respectively. remain healthy on better product mix
in favour of passenger cars and two
Rising competition, slowdown in auto - threat to volumes wheelers

Castrol witnessed a decline in volumes of 2.1% YoY to 50.4 million litre. The  Volume outlook challenge in medium
slowdown in auto volumes, especially CV sales, had an impact on volumes. term due to weak automotive sales
Industrial volumes also continued to remain weak during the year. Castrol’s
volume portfolio includes commercial volumes, personal mobility, which  Recommend REDUCE on stock with
contribute majority of volumes. In the long run, higher drain intervals due to target price of | 140/share
improvement in technology and development of electric vehicle space
poses a risk to Castrol’s volume outlook. We expect volumes at 217 million
litre in CY19E and 224.2 million litre in CY20E.

Valuation & Outlook

Although Castrol was successful in signing OEM contract and strategic Research Analyst
alliances with automotive giants, its strategy to defend potential disruptions
like higher drain interval, BS VI, electric cars will be the key decider, going Mayur Matani
mayur.matani@icicisecurities.com
ahead. The focus on maintaining balance between margins & volumes along
with growth in the personal mobility segment will be key factors directing
the company ahead. However, structural low volume growth in industry
volumes along with increasing competition would continue to remain a
challenge for Castrol, going ahead. Hence, we value Castrol India at 19x
CY20E EPS of | 7.4 to arrive at a target price of | 140 with a REDUCE rating.

Key Financial Summary

s s

(Year-end December) CY16 CY17 CY18 CY19E CY20E CAGR (CY18-20E)

Revenues (| crore) 3,370.4 3,584.3 3,904.6 4,197.1 4,393.1 6.1
EBITDA (| crore) 1,004.9 1,033.0 1,070.8 1,186.3 1,112.4 1.9
Net Profit (| crore) 674.9 691.7 708.3 779.3 733.5 1.8
EPS (|) 6.8 7.0 7.2 7.9 7.4
P/E (x) 22.3 21.7 21.2 19.3 20.5
Price / Book (x) 15.3 14.7 13.1 12.2 12.4
EV/EBITDA (x) 14.1 13.8 13.4 11.8 12.6
RoCE (%) 97.8 96.8 88.3 91.0 86.1
RoE (%) 68.8 67.8 61.6 63.1 60.3
Source: Company, ICICI Direct Research
 Result Update | Castrol India ICICI Direct Research

Exhibit 1: Variance Analysis

Q1CY19 Q1CY19 Q1CY18 YoY (%) Q4CY18 QoQ (%) Comments
Total Revenues 976.2 1,009.7 927.1 5.3 1,033.4 -5.5
Raw materials costs 456.7 478.3 429.4 6.4 486.7 -6.2
Employees Cost 50.1 49.7 46.9 6.8 55.9 -10.4
Other Expenses 186.4 174.7 176.5 5.6 173.4 7.5 Other expenses above estimates
Total Expenditure 693.2 702.7 652.8 6.2 716.0 -3.2
EBITDA came in below our estimate on account of lower
EBITDA 283.0 307.0 274.3 3.2 317.4 -10.8
volumes
EBITDA margins (%) 0.3 0.3 29.6 -2930 bps 30.7 -3042 bps
Depreciation 16.2 15.7 14.3 13.3 14.6 11.0
EBIT 266.8 291.3 260.0 2.6 302.8 -11.9
Interest 0.3 0.3 0.7 -57.1 0.3 0.0
Other Income 21.1 22.0 22.8 -7.5 25.6 -17.6
Extra Ordinary Item 0.0 0.0 0.0 NA 0.0 NA
PBT 287.6 313.0 282.1 1.9 328.1 -12.3
Total Tax 102.6 111.1 100.3 2.3 116.2 -11.7
PAT 185.0 201.9 181.8 1.8 211.9 -12.7 Lower volumes contribute to subdued growth in profit YoY

Key Metrics
Exchange rate (|/$) 70.5 70.5 64.5 9.3 72.1 -2.2
Volumes lower than estimates mainly on account of lower
Volumes (mn litre) 50.4 53.3 51.5 -2.1 54.0 -6.7
CV and industrial volumes
Net Realisation (|/litre) 193.7 189.4 180.0 7.6 191.4 1.2
Gross margins per unit increase due to price hikes and
Gross Margins (|/litre) 101.5 99.7 96.6 5.0 98.4 3.1
better product mix
Higher other expenses led to lower EBITDA per unit than
EBITDA (|/litre) 56.2 57.6 53.3 5.4 58.8 -4.5
estimates
Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates

CY19E CY20E
(| Crore) Old New % Change Old New % Change Comments
Revenue 4,200.2 4,197.1 -0.1 4389.3 4,393.1 0.1
EBITDA 1,253.3 1,186.3 -5.6 1,124.2 1,112.4 -1.1 Lower volume gowth impacts EBITDA estimates
EBITDA Margin (%) 29.8 28.3 -5.6 25.6 25.3 -1.1
PAT 823.8 779.3 -5.7 741.1 733.5 -1.0
EPS (|) 8.3 7.9 -5.7 7.5 7.4 -1.0
Source: Company, ICICI Direct Research

Exhibit 3: Assumptions
Current Earlier
Comments
CY17 CY18E CY19E CY20E CY19E CY20E
Exchange rate (|/$) 65.1 68.4 70.6 71.0 70.9 71.0
Lower volume estimates marginally due to weak CV and
Volumes (mn litre) 204.6 213.7 217.0 224.2 221.1 228.5
industrial sales volume
Net Realisation (|/litre) 175.5 182.8 193.5 196.0 190.0 192.1
Revise estimates upwards for CY20E due to better product
Gross Margins (|/litre) 94.0 93.6 100.6 96.5 101.3 95.1
mix
EBITDA (|/litre) 50.7 50.2 54.7 49.6 56.7 49.2
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2

 Result Update | Castrol India ICICI Direct Research

Story in charts
Exhibit 4: Volume trajectory

60
57.0
56
54.0

51.5 51.2
million litres

52 50.4

48

44

40
Q1CY18 Q2CY18 Q3CY18 Q3CY18 Q1CY19

Source: Company, ICICI Direct Research

Exhibit 5: Steady and stable financial parameters

191.4 193.7
200 180.0 178.5 181.2

160

120 98.4
| per litre

87.9 88.4
96.6 101.5
80

40 83.4 90.8 92.5 92.5 92.5

0
Q1CY18 Q2CY18 Q3CY18 Q4CY18 Q1CY19

Net Realisation Raw Material Costs Gross Margins

Source: Company, ICICI Direct Research

Exhibit 6: EBITDA margins trend

1500 35
29.8
1200 28.8 28.3 30
27.4

25.3
| crore

900 25
%

918.6
1033.0 1070.8 1112.4
1004.9
600 20

300 15
CY16 CY17 CY18E CY19E CY20E
EBITDA EBITDA Margins

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 3

 Result Update | Castrol India ICICI Direct Research

Exhibit 7: Return ratios trend

97.8 96.8
100 91.0
88.3 86.1
90

80

70
%

60 68.8 67.8
61.6 63.1
60.3
50

40
CY16 CY17 CY18E CY19E CY20E

ROE ROCE

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4

 Result Update | Castrol India ICICI Direct Research

Exhibit 8: Recommendation History vs. Consensus

300 100.0
90.0
250 80.0
200 70.0
60.0
(|)

(%)
150 50.0
40.0
100 30.0
50 20.0
10.0
0 0.0
May-16 Sep-16 Feb-17 Jun-17 Nov-17 Mar-18 Jul-18 Dec-18 Apr-19
Price Idirect target Consensus Target Mean % Consensus with Buy
Source: Bloomberg, Company, ICICI Direct Research

Exhibit 9: Top 10 Shareholders

Rank Investor Name Latest Filing Date % O/S Position Change (m)
1 Castrol, Ltd. 31-Mar-19 51.0 504.5 0.0
2 Life Insurance Corporation of India 31/Mar/19 10.3 102.0 0.0
3 Aberdeen Standard Investments (Asia) Limited 31-Mar-19 1.6 15.8 1.1
4 The Vanguard Group, Inc. 31/Mar/19 1.5 15.2 6.1
5 Aditya Birla Sun Life AMC Limited 31-Mar-19 1.5 14.9 -0.1
6 UTI Asset Management Co. Ltd. 31/Mar/19 1.5 14.4 0.1
7 JPMorgan Asset Management U.K. Limited 31-Mar-19 1.2 11.7 -0.5
8 J.P. Morgan Asset Management (Hong Kong) Ltd. 31/Mar/19 0.7 7.3 0.0
9 Aberdeen Asset Managers Ltd. 31-Mar-19 0.7 6.9 5.6
10 Matthews International Capital Management, L.L.C. 31/Dec/18 0.7 6.7 0.0
Source: Reuters, ICICI Direct Research

Exhibit 10: Recent Activity

BUYS SELLS
Investor name Value (m) Shares (m) Investor name Value (m) Shares (m)
The Vanguard Group, Inc. 14.74 6.13 Reliance Nippon Life Asset Management Limited -30.39 -12.63
Aberdeen Asset Managers Ltd. 13.48 5.60 HSBC Global Asset Management (Hong Kong) Limited -2.58 -1.19
Norges Bank Investment Management (NBIM) 7.91 3.64 Kotak Mahindra Asset Management Company Ltd. -1.95 -0.81
Aberdeen Standard Investments (Asia) Limited 2.54 1.06 Goldman Sachs Asset Management International -1.32 -0.67
IDFC Asset Management Company Private Limited 0.84 0.35 JPMorgan Asset Management U.K. Limited -1.20 -0.50
Source: Reuters, ICICI Direct Research

Exhibit 11: Shareholding Pattern

(in %) Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
Promoter 51.0 51.0 51.0 51.0 51.0
FII 10.7 9.2 8.6 9.0 11.2
DII 17.9 18.6 18.6 18.5 17.3
Others 20.4 21.3 21.8 21.5 20.6
Source: Company, ICICI Direct Research

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 Result Update | Castrol India ICICI Direct Research

Financial summary

Exhibit 12: Profit and loss statement | crore Exhibit 13: Cash flow statement | crore
(Year-end December) CY17 CY18E CY19E CY20E (Year-end December) CY17 CY18E CY19E CY20E
Revenue 3584.3 3904.6 4197.1 4393.1 Profit after Tax 691.7 708.3 779.3 733.5
Growth (%) 6.3 8.9 7.5 4.7 Add: Depreciation 45.5 55.6 63.3 66.0
(Inc.)/(Dec.) in stock in trade -5.4 -64.6 -3.0 0.0 Add: Others 0.0 0.0 0.0 0.0
Raw material Costs 1474.7 1757.9 1827.2 2043.3 Cash Profit -60.9 185.2 148.1 47.2
Purchase of Products 196.7 213.3 191.5 186.9 Increase/(Decrease) in CL 48.6 77.0 98.1 47.7
Employee Costs 195.6 203.4 216.0 228.9 (Increase)/Decrease in CA -126.3 -250.6 76.2 -45.4
Other Expenditure 689.7 723.8 779.0 821.5 CF from Operating Activities 671.6 590.3 1016.9 801.8
Op. Expenditure 2,551.3 2,833.8 3,010.8 3,280.6 Purchase of Fixed Assets 56.3 57.3 52.5 90.0
EBITDA 1033.0 1070.8 1186.3 1112.4 (Inc)/Dec in Investments 0.0 0.0 0.0 0.0
Growth (%) 2.8 3.7 10.8 -6.2 Others 0.0 0.0 0.0 0.0
Depreciation 45.5 55.6 63.3 66.0 CF from Investing Activities -56.3 -57.3 -52.5 -90.0
EBIT 987.5 1015.2 1123.0 1046.4 Dividend Paid 810.2 578.7 694.4 752.3
Interest 1.2 1.1 1.2 1.2 Inc/(Dec) in Loan Funds 0.0 0.0 0.0 0.0
Other Income 83.7 84.3 87.1 92.0 Inc/(Dec) in Sh. Cap. & Res. 157.1 0.0 0.0 0.0
PBT 1070.0 1098.4 1208.9 1137.2 Others 0.0 0.0 0.0 0.0
Growth (%) 2.3 2.7 10.1 -5.9 CF from financing activities -653.1 -578.7 -694.4 -752.3
Tax 378.3 390.1 429.7 403.7 Change in cash Eq. -37.8 -45.7 269.9 -40.5
Reported PAT 691.7 708.3 779.3 733.5 Op. Cash and cash Eq. 821.9 784.2 738.5 1,008.5
Growth (%) 2.5 2.4 10.0 -5.9 Cl. Cash and cash Eq. 784.2 738.5 1,008.5 967.9
EPS 7.0 7.2 7.9 7.4 Source: Company, ICICI Direct Research
Source: Company, ICICI Direct Research

Exhibit 14: Balance sheet | crore Exhibit 15: Key ratios | crore
(Year-end December) CY17 CY18E CY19E CY20E (Year-end December) CY17 CY18E CY19E CY20E
Source of Funds Per share data (|)
Equity Capital 494.6 494.6 494.6 494.6 Book Value 10.3 11.6 12.5 12.3
Preference capital 0.0 0.0 0.0 0.0 Cash per share 7.9 7.5 10.2 9.8
Reserves & Surplus 525.6 655.2 740.1 721.3 EPS 7.0 7.2 7.9 7.4
Shareholder's Fund 1,020.2 1,149.8 1,234.7 1,215.9 Cash EPS 7.5 7.7 8.5 8.1
Loan Funds 0.0 0.0 0.0 0.0 DPS 7.0 5.0 6.0 6.5
Deferred Tax Liability -55.2 -55.2 -55.2 -55.2 Profitability & Operating Ratios
Minority Interest 0.0 0.0 0.0 0.0 EBITDA Margin (%) 28.8 27.4 28.3 25.3
Source of Funds 965.0 1094.7 1179.5 1160.7 PAT Margin (%) 19.3 18.1 18.6 16.7
Fixed Asset Turnover (x) 18.3 19.7 22.4 20.8
Application of Funds Inventory Turnover (Days) 32.5 42.5 39.0 39.0
Gross Block 220.9 285.9 300.9 450.9 Debtor (Days) 29.0 36.5 27.0 27.0
Less: Acc. Depreciation 81.8 125.0 175.8 241.8 Current Liabilities (Days) 85.7 74.0 74.0 74.0
Net Block 139.1 160.8 125.0 209.0 Return Ratios (%)
Capital WIP 57.3 37.3 62.3 2.3 RoE 67.8 61.6 63.1 60.3
Total Fixed Assets 196.3 198.1 187.3 211.3 RoCE 96.8 88.3 91.0 86.1
Investments 0.0 0.0 0.0 0.0 RoIC NA NA NA NA
Inventories 319.6 454.6 448.5 469.4 Valuation Ratios (x)
Debtor 285.0 390.5 310.5 325.0 PE 21.7 21.2 19.3 20.5
Cash 784.2 738.5 1,008.5 967.9 Price to Book Value 14.7 13.1 12.2 12.4
Loan & Advance, Other CA 336.8 346.8 356.8 366.8 EV/EBITDA 13.8 13.4 11.8 12.6
Total Current assets 1725.5 1930.4 2124.2 2129.1 EV/Sales 4.0 3.7 3.3 3.2
Current Liabilities 841.9 791.6 850.9 890.6 Leverage & Solvency Ratios
Provisions 114.9 242.2 281.0 289.0 Debt to equity (x) 0.0 0.0 0.0 0.0
Total CL and Provisions 956.8 1033.8 1131.9 1179.6 Interest Coverage (x) 822.9 922.9 935.9 872.0
Net Working Capital 768.7 896.6 992.2 949.4 Debt to EBITDA (x) 0.0 0.0 0.0 0.0
Miscellaneous expense 0.0 0.0 0.0 0.0 Current Ratio 1.8 1.9 1.9 1.8
Application of Funds 965.0 1094.7 1179.5 1160.7 Quick ratio 1.5 1.4 1.5 1.4
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6

 Result Update | Castrol India ICICI Direct Research

Exhibit 16: ICICI Direct Coverage Universe (Oil & Gas)

CMP TP M Cap EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%)
Sector / Company Rating
(|) (|) (| Cr) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E
BPCL (BHAPET) 334 320 Hold 72,453 40.3 26.8 34.5 8.3 12.4 9.7 7.6 9.5 7.1 15.7 10.3 13.3 23.2 15.7 18.9
Castrol India (CASIND) 152 140 Reduce 15,035 7.2 7.9 7.4 21.2 19.3 20.5 13.4 11.8 12.6 88.3 91.0 86.1 61.6 63.1 60.3
GAIL (India) (GAIL) 333 390 Buy 75,092 15.5 20.5 27.9 21.4 16.3 11.9 12.2 9.8 7.5 11.7 14.7 18.1 9.2 11.5 14.2
Gujarat Gas (GUJGA) 125 145 Buy 8,605 4.2 6.1 6.9 29.5 20.4 18.1 11.9 10.4 9.0 15.3 17.3 19.9 15.8 19.8 19.4
Gujarat State Petro (GSPL) 166 180 Hold 9,351 11.9 14.9 13.5 14.0 11.1 12.3 11.0 7.6 8.2 11.6 16.5 14.0 13.2 14.7 12.0
Gulf Oil Lubricants (GULO) 886 850 Hold 4,392 31.9 36.3 42.5 27.8 24.4 20.8 18.4 14.9 12.9 31.5 36.6 35.0 33.9 31.2 29.9
HPCL (HINPET) 230 225 Hold 35,088 13.6 13.9 8.5 5.7 5.5 9.1 5.3 5.2 7.3 19.3 17.5 10.5 30.5 26.5 15.5
Indraprastha Gas (INDGAS) 303 300 Hold 21,210 8.2 9.6 10.8 37.1 31.6 28.1 21.4 18.5 16.5 27.2 26.5 25.6 19.5 19.1 18.6
Mahanagar Gas (MAHGAS) 912 1010 Buy 9,009 48.4 56.5 59.4 18.9 16.1 15.3 11.4 9.3 8.6 31.9 32.7 30.3 22.8 23.4 21.7
Mangalore Refinery (MRPL)65 75 Buy 11,392 12.8 0.8 7.5 5.1 82.2 8.7 3.5 10.5 4.9 23.2 3.7 13.5 20.4 1.2 11.4
ONGC (ONGC) 142 153 Hold 182,233 16.9 24.9 22.0 8.4 5.7 6.5 5.1 3.4 3.5 7.9 13.8 11.9 9.4 12.4 10.5
Petronet LNG (PETLNG) 210 225 Hold 31,500 13.9 15.1 16.6 15.2 13.9 12.7 9.7 8.9 7.7 25.9 28.7 29.8 21.4 22.2 21.4
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 7

 Result Update | Castrol India ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock

Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

ICICI Securities | Retail Research 8

 Result Update | Castrol India ICICI Direct Research

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