Castrol India Ltd RETAIL RESEARCH. Stock Update Nov

Transcription

1 Stock Update Nov Castrol India Ltd Industry CMP Recommendation Target Time Horizon Redflag level * Lubricants Rs Target price revised quarters 142 HDFC Scrip Code CASINDEQNR BSE Code NSE Code Bloomberg CASTROLIND CSTRL IN CMP June Rs Equity Capital (Rs crs) Face Value (Rs) 5.0 Equity Share O/S (crs) 98.9 Market Cap (Rs crs) Book Value (Rs) Avg. 52 Wk Volumes Week High Week Low Shareholding Pattern % (Sept 30, 18) Promoters 51.0 Institutions 27.2 Non Institutions 21.8 Total Fundamental Research Analyst Abdul Karim abdul.karim@hdfcsec.com *Investors may also maintain Rs.142 as Redflag level below which investment position needs to be reviewed, including the possibility to exit We had issued a Stock Update (Click here) on Dec 14, 2017 (when its CMP was Rs 171) with a recommendation to Fresh investors can buy at the CMP and add on dips to Rs band for sequential targets of Rs 193 and Rs 213. Company profile Castrol India Ltd is the second largest player in Indian lubricant industry mainly catering to the automotive and industrial segments. The company has a market share (in value terms) of 20%+ in the domestic lubricants market. Parent Company Castrol Ltd (a British Petroleum (BP) group company) owns 51% stake in CIL and CIL gets advantage from exclusive tie-ups with original equipment manufacturers (OEM) due to global tie-ups of automobile companies with BP. Castrol has one of the largest manufacturing and marketing networks amongst the lubricant companies in India. It has manufacturing plants located at Silvassa, Patalganga and Paharpur. Q3CY18 Results review Castrol reported inline set of numbers in Q3CY18, revenue grew by 7.6% (YoY) to Rs 926.9cr led by 4.2% (YoY) volume growth. Sales volumes stood at 51.2mn ltrs led by volume growth in the Personal Mobility. Volume growth for 9MCY18 stands at 6%, higher than the industry growth. The new products, launched over the last one year has contributed 90% of volume. Realization improved 3.3% (YoY) to Rs181.2/ltr on price hikes. This is despite three price hikes undertaken in the past year, suggesting adverse product mix in Q3CY18. YoY numbers may not be comparable as the base quarter benefited from post-gst restocking. Though base oil prices have remained in a range/fell marginally since March 2018 (despite crude oil prices rising), Castrol seems to have got hit by Rupee depreciation (~13% vs the USD). EBITDA margin contracted 490bps (YoY) to 24.5% (lowest in 5 quarters) due to rupee depreciation and higher prices of key inputs. PAT de-grew 15.6% (YoY) to Rs 150.4cr and PAT margin contracted 450 bps (YoY) to 16.2% in Q3CY18. Financial Summary Particulars (Rs cr) Q3CY18 Q3CY17 YoY-% Q2CY18 QoQ-% CY16 CY17 CY18E CY19E Income from Operations % % EBITDA % % APAT % % Diluted EPS (Rs) % % P/E (x) P/BV (x) RoE-% 97.4% 85.8% 92.9% 86.1% P a g e 1

2 Quarterly Financials Particulars (Rs cr) Q3CY18 Q3CY17 YoY-% Q2CY18 QoQ-% 9MCY18 9MCY17 YoY-% Total Income from Operations % % % Changes in inventories % % % Cost of materials consumed % % % Purchase of Stock in trade % % % Employee Expenses % % % Other Expenses % % % Total Expenditure % % % EBITDA % % % Depreciation % % % EBIT % % % Other Income % % % Interest % % % PBT % % % Tax (including DT & FBT) % % % Reported Profit After Tax % % % Adjusted PAT % % % EPS (Rs.) % % % Key drivers-physical Metrics P a g e 2

3 Key developments: Despite intense competition in the lubricants industry in the last decade, Castrol has been able to successfully create value through skilled market segmentation. Its primary market is the premium personal mobility automobile segment, where it is able to leverage its trusted brand, product performance track record and unique service attributes. Castrol has increased its presence to 150,000 retail outlets from 105,000 in CY17, management believes there is great opportunity to penetrate rural areas. Management is confident of recording 5-7% volume growth in years to come as against 2-4% industry growth. Mahindra & Mahindra (a part of the USD 20.7bn Mahindra Group) and Castrol India, the leading automotive and industrial lubricant manufacturing company in the country, announced in Oct 2018 the signing of a new strategic partnership agreement between the two companies. Under this agreement, Mahindra will endorse a range of Castrol products which include aftermarket engine oils and transmission fluids for Mahindra tractors under the brand, Mileage Ka Master (MKM). Partnering with Castrol and benefitting from their strong reputation, high quality products and widespread pan India distribution network through Castrol s over one lakh strong retail outlets could bring the opportunity of volume growth going forward. The rupee has depreciated by ~13% against the US dollar (before correcting), which could impact the base oil imports landed costs. The packaging and logistics costs could also add to the overall costs. Company has taken three price hikes in the past nine months till Sept 18, an overall 3.5% price hike across segments and 5% hike in the B2B segment alone. Company doesn t rule out future price hikes but will ensure that volumes are not impacted Company could look at maximising the gross profit pool rather than increasing the gross unit margin going ahead. Castrol continues to look at the mix of products and relevant capacity additions. Company normally expands the capacity by 15%-20% (YoY). Company is getting more and more into personal mobility with higher blending cycles and more valueadded packs. However, the focus on the commercial segment could continue. Every year, company invests around Rs 100cr to Rs 150cr not just on plant capacities but other capital expenditure as well. Castrol has been paying out 80-85% of its EPS by way of dividends (including tax thereon). Assuming an EPS of Rs.7.1 in CY18, a dividend yield of ~3% is likely at the current CMP. Concerns Competition in the lubricants market is intense and most international players have identified India as a focus market. There is also a trend of some OEMs introducing lubricants under their own brand name, further impacting the competitive landscape. The country's largest passenger carmaker Maruti Suzuki India (MSIL) launched Ecstar, Suzuki s global brand of lubricants, coolant and car care products in the country. Almost half of the base oil is imported, half is bought locally and there is an impact of crude prices on base oil and base oil also has its supply and demand dynamics. Last year, for example, crude was lower but base oil was higher because there was supply disruption; refiners were down, there were fires. Now, additive prices are also increasing. Significant rupee depreciation could impact the growth of the company as the raw material is priced based on import parity in local Rupees. Recent INR depreciation against the USD could be a concern for the company in near future. Strict government s emission norms to meet global norms has sent the automobile and lubricant industry into a spin and it could impact its investments of billions of dollars over the next few years. P a g e 3

4 View and Valuation Castrol India is the largest manufacturer of automotive and industrial lubricants in the Indian lubricant market and owns around ~20% market share in the overall Indian lubricant market. Castrol s volumes have been stagnant or growing meagerly for the past several years. Volume growth in Q3CY18 came in 4.2% after strong growth of 12% in Q2CY18. EBITDA declined 10.3% (YoY) and PAT was down 15.6% (YoY) in Q3CY18, impacted by higher input cost. Concerns about disruption from electric vehicles will also weigh on the stock price. Despite Castrol s high dividend payout policy, very high return ratios, high FCF to PAT conversion and superior balance sheet, its forward P/E has deteriorated from >40x in end 2014 to ~20x now due to uninspiring performance on volumes/margins combination and low growth in profits. However a sharp fall in base oil prices may drive earnings upgrade. We are revising our estimates and revise the target price to Rs (21.5xCY19E EPS). Physical Metrics Particulars (Rs cr) Q3CY18 Q2CY18 Q1CY18 Q4CY17 Q3CY17 Q2CY17 Q1CY17 Q4CY16 Volume (mn ltrs) Volume Growth-% 4.2% 12.0% 2.6% 15.3% 7.4% -9.9% 0.2% 2.0% Realization per ltr Cost per ltr Contribution EBITDA Per Ltr P a g e 4

5 Financials: Income Statement Cash Flow Particulars (Rs cr) CY15 CY16 CY17 CY18E CY19E Particulars (Rs cr) CY15 CY16E CY17 CY18E CY18E Net Sales EBT Other Operating Income Depreciation and Amort Total Operating Income Interest /Dividend paid Changes in inventories Other Adjustment Cost of materials cons (Inc)/Dec in work- Capital Purchase of Stock in trade Tax Paid Employee Benefits Exp CF from Op- Activities Adv & Sales Promotion Capital expenditure Carriage, Ins- and Freight (Purchase)/Sale of Invest Other Expenditure Others Total Operating Expenses CF from Investing Activities EBITDA Inc/(Dec) in Share capital Depreciation & Amort Inc/(Dec) in Debt EBITA Dividend and Interest Paid Interest CF from Financing Activities Other Income Net Cash Flow Profit Before Tax Opening Balance Total Tax Closing Balance Reported Profit Adjusted PAT EPS Balance Sheet Key Ratios Particulars (Rs cr) CY15 CY16 CY17 CY18E CY19E Particulars CY15 CY16 CY17 CY18E CY19E Equity & Liabilities No of Equity Shares-cr Share Capital Enterprise Value-cr Reserves & Surplus Shareholders Funds EPS Other Long Term Liabilities Cash EPS (PAT + Depr) Long Term Provisions Book Value/Share(Rs.) Non-Current Liabilities Trade Payables PE(x) Other Current Liabilities P/BV (x) Short Term Provisions MCap/Sales(x) Current Liabilities EV/EBITDA P a g e 5

6 Total Equity & Liabilities Assets EBITDAM (%) 27.3% 29.8% 28.9% 28.4% 28.4% Fixed Assets EBITM (%) 26.1% 28.4% 27.7% 27.1% 27.2% Net Block PATM (%) 18.8% 20.0% 19.4% 18.9% 19.0% Deferred Tax Asset (Net) Long -term Loans and Adv ROCE (%) 109.2% 106.1% 105.0% 102.0% 99.4% Non-Current Assets RONW (%) 70.6% 68.3% 67.8% 65.7% 64.5% Inventories Payout-% 86.7% 97.4% 85.8% 92.9% 86.1% Trade Receivables Cash & Cash Equivalents Current Ratio Short Term Loans & Adv Quick Ratio Other Current Assets Current Assets Debt-Equity Total Assets One Year Daily Closing Prices P a g e 6

7 Fundamental Research Analyst: Abdul Karim HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai Phone: (022) Fax: (022) Compliance Officer: Binkle R. Oza complianceofficer@hdfcsec.com Phone: (022) SEBI Registration No.: INZ (NSE, BSE, MSEI, MCX) NSE Trading Member Code: BSE Clearing Number: 393 MSEI Trading Member Code: MCX Member Code: AMFI Reg No. ARN , PFRDA Reg. No - POP , IRDA Corporate Agent Licence No.-HDF /HDF C , Research Analyst Reg. No. INH , CIN-U67120MH2000PLC Disclosure: I, (Abdul Karim, MBA), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate does not have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation.the information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HSL or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HSL. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related infor mation and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. This report is intended for non-institutional Clients only. The views and opinions expressed in this report may at times be contrary to or not in consonance with those of Institutional Rese arch or PCG Research teams of HDFC Securities Ltd. and/or may have different time horizons. Disclaimer : HDFC securities Ltd is a financial services intermediary and is engaged as a distributor of financial products & services like Corporate FDs & Bonds, Insurance, MF, NPS, Real Estate services, Loans, NCDs & IPOs in strategic distribution partnerships. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Customers need to check products &features before investing since the contours of the product rates may change from time to time. HDFC securities Ltd is not liable for any loss or damage of any kind arising out of investments in these products. Investments in Equity, Currency, Futures & Options are subject to market risk. Clients should read the Risk Disclosure Document issued by SEBI & relevant exchanges & the T&C on before investing. Equity SIP is not an approved product of Exchange and any dispute related to this will not be dealt at Exchange platform. P a g e 7