BSE Sensex S&P CNX 19,152 5,797 Bloomberg CSTRL IN Equity Shares (m) 494.6 M.Cap. (INR b)/(usd b) 158/2.9 52-Week Range (INR) 338/223 1,6,12 Rel. Perf. (%) 12/-3/26 Financials & Valuation (INR b) Y/E March 2012E 2013E 2014E Sales 31.2 34.0 37.1 EBITDA 6.2 7.7 8.7 Adj NP 4.5 5.5 6.2 EPS (INR) 9.0 11.1 12.5 EPS Gr. (%) -7 23 12 BV/Sh (INR) 13.1 14.3 15.7 RoE (%) 83.8 71.5 81.1 RoCE (%) 109.1 94.3 109.9 Payout (%) 90.2 89.2 88.8 Valuations P/E (x) 35.3 28.7 25.6 P/BV (x) 24.4 22.3 20.3 EV/EBITDA (x) 24.6 19.5 17.3 Div Yield (%) 2.2 2.7 3.0 28 February 2013 4QCY12 Results Update Sector: Consumer Castrol India CMP: INR319 TP: INR316 Neutral Castrol's (CSTRL) 4QCY12 results are in line, with net sales at INR7.6b, down 1.1% YoY (est of INR8b) and EBITDA at INR1.7b, up 10.7% YoY (est of INR1.7b). EBITDA margin stood at 22.3% (up 238bp YoY and 542bp QoQ), while PAT increased 10% YoY to INR1.2b (in-line). For CY12, revenues were up by 6.1% YoY to INR31.6b, EBITDA was down 6.3% YoY to INR6.2b, while PAT was down 7% YoY to INR4.5b. 4QCY12 witnessed the full impact of successive price hikes taken by CSTRL over CY12 and offset the negative volume pressure from the industrial and auto segments. Auto segment reported flat value growth, while industrial and marine value declined 9%. Non auto segment accounts for ~12% of CSTRL's total sales. During CY12, company's total payout ratio (dividend + dividend tax) stood at 90% from 89% in CY11. Total dividend for CY12 stood at INR7/share (post split impact). Over CY02-11, CSTRL generated FCF of INR27b, with total reinvestment of negative INR3b. Cumulative net capex (capex - depreciation) over the period was a negative INR408m, while cumulative net working capital (net of cash) was a negative INR2.5b. Company paid 87% of its FCF as dividend. We believe this reflects the asset light nature and robustness of its business model. Valuation and view We expect Castrol to post earnings CAGR of 17% and FCF CAGR of 11% over CY12-14. CSTRL enjoys tremendous pricing power, with most of its products commanding 10-25% premium. CSTRL trades at 28.7x /25.6x its CY13/ CY14 EPS. Our DCF based price target for CSTRL is INR316. Though we continue to remain positive on the long-term prospects of CSRTL, given CSTRL's rich valuations we have a Neutral rating. Siddharth Bothra (Siddharth.Bothra@MotilalOswal.com); +91 22 3029 5127 1 Investors are advised to refer through disclosures made at the end of the Research Report.
Segmental Analysis: Drop in non auto segment volumes offsets auto segment gains Automotive sales were flat, while non-automotive segment de-grew 9% YoY. Non Auto segment accounts for ~12% of CSTRL's total sales. Auto EBIT stood at INR1.6b up 22% YoY, while non auto EBIT stood at INR108m down 54% YoY to INR108m. Management attributed the sharp improvement in margins to a combination of premium product mix and better realization, which successfully negated volume pressure across both the automobile and industrial lube vertical. Segmental analysis: Non-Automotive segment still under pressure(inr m) CY11 CY12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenues Automotive 6,507 6,729 5,652 6,653 6,744 7,515 6,248 6,662 Non-Automotive 1,000 1,171 1,064 1,041 1,073 998 947 947 Total Segment Revenue 7,507 7,900 6,716 7,694 7,817 8,513 7,195 7,609 EBIT Automotive 1,646 1,645 1,042 1,283 1,461 1,499 1,036 1,562 Non-Automotive 266 292 257 233 243 186 149 108 Total 1,912 1,937 1,299 1,516 1,704 1,685 1,185 1,670 Capital Employed Automotive 2,233 1,997 2,445 1,277 2,595 2,122 2,046 1,231 Non-Automotive 1,017 1,138 1,174 1,020 1,164 1,021 1,042 878 Unallocated Net Assets/ Liabilities 3,651 3,179 3,653 3,745 3,513 3,325 4,238 4,382 Total Capital Employed 6,901 6,314 7,272 6,042 7,272 6,468 7,326 6,491 EBIT (%) Automotive 25.3 24.4 18.4 19.3 21.7 19.9 16.6 23.4 Non-Automotive 26.6 24.9 24.2 22.4 22.6 18.6 15.7 11.4 Total 25.5 24.5 19.3 19.7 21.8 19.8 16.5 21.9 Source: Company, MOSL Margin/unit to sustain, though volume growth to be muted Over CY01-11, Castrol's sales volumes have de-grown, not only due to increasing drain interval, but also because it has deliberately vacated the price-sensitive volume-driven market. Castrol depends on technology innovation and path breaking new product launches to drive growth and ability to organically generate growth through internal initiatives is the most sustainable source of growth. We model Castrol's net sales growth over CY12-21 at 9%. Concerns on account of increasing drain intervals are largely unfounded, as Castrol has historically maintained its margin/unit, which we believe it can sustain. We estimate 2.4% CAGR in Castrol's volumes over CY12-14. However, revenue would grow at a CAGR of 9%, driven by 6% CAGR in realizations. We expect EBIT margin to expand from 19.5% in CY11 to 22.2% in CY14 and estimate net profit CAGR at 17% over CY12-14. We have estimated volume growth of 1.5% in CY12 and 2.4% in CY13. Almost ~80% of Castrol's demand in volume terms is from replacement market, while the OEM market accounts for only ~20%. Since the profitability in the OEM 28 February 2013 2
segment is very low, the share of OEM market in operating profit is consequently even lower. Hence, we believe Castrol is unlikely to be much impacted from the current growth slowdown in few automobile segments such as HCV and 2wheelers. Management growth outlook for key segments The management has guided for auto lube volume growth of 2-2.5% over the next 3-5 years. Castrol's auto lube sales break-up: diesel engine oils (mostly CVs) 40%, 2-wheelers 20%, passenger cars 15% and OEM/ Construction/ Brake oil, etc 25%. Its key focus area is the premium personal mobility automobile segment, which is relatively insulated from economic cycles, unlike the freight and OE market. The management expects the 2-wheeler segment to double in volume terms in the next 3-4 years, while the other segments will likely post marginal growth rates. The management expects growth in the industrial segment to be marginally stronger than in the auto segment. Management growth outlook Automobiles: Segment-wise sales break-up Castrol auto volume Company growth outlook over break-up % CY12-15 Diesel Engine Oils 40 Expects very low to marginal growth 2-Wheelers 20 Expects volumes to double in 3-4 years Passenger Cars 15 Expects 1% odd growth OE/ Const/ Others 25 Marginal growth Total 100 2-2.5% growth Source: Conference Call post 3QCY11 results Source: Company, MOSL Automotive industry break-up Castrol's automobile lubricant break-up Almost 75% of the lube demand is derived from CVs and tractors, largely dominated by diesel engines. 2/ 3 wheelers account for another ~13% of the market, while 4 wheelers/ MUVs account for ~5% of the market Source: Industry, MOSL 28 February 2013 3
Valuation and view We believe, CSTRL provides a vehicle to invest in a company with multiple and rare moats, huge free cash flows, high governance standards. CSTRL's primary market is premium personal mobility automobiles, where it is able to leverage its trusted brand, product track record and unique service attributes. Unlike its competitors that have been making low to negligible investments in their brands, Castrol has consistently been investing 6-7% of its sales (INR2.2b in CY11) in brandbuilding. We expect Castrol to post earnings CAGR of 17% and FCF CAGR of 11% over CY12-14. CSTRL enjoys tremendous pricing power, with most of its products commanding 10-25% premium. It has been focusing on improving its product mix through adept market segmentation and innovative products. How effectively Castrol is able to continuously improve its product mix by consistently expanding the premium end of the market and through paradigm breaking new product concepts is a key factor to watch. CSTRL trades at 28.7x /25.6x its CY13/ CY14 EPS. Though we continue to remain positive on the long-term prospects of CSRTL, given CSTRL's rich valuations we have a Neutral rating. 28 February 2013 4
Castrol India: an investment profile Company description Castrol India Limited, a 71% subsidiary of BP, is a leading lubricants player in India, with ~20% market share of the domestic automotive lubricants industry. It manufactures and markets a range of automotive and industrial lubricants. It markets its automotive lubricants under two brands - Castrol and BP. The company enjoys leadership in most of the segments it operates in, including tractor oils, car engine oils, two-wheeler 4- stroke oils, and multi-grade diesel engine oils. Key investment arguments Castrol India, a 71% subsidiary of British Petroleum Group (BP), is a leading lubricants player in India, with ~19% market share in the auto lube bazzar segment. Castrol provides a vehicle to invest in a company with multiple and rare moats, huge free cash flows, high governance standards and reasonable valuations. Its key focus area is the premium personal mobility automobile segment, which is relatively insulated from economic cycles, unlike the freight and OE market. Key investment risk Longer oil drain intervals Volatile raw material prices Aggressive foray by oil PSUs into bazzar trade OEMs introducing own brands Exchange rate volatility Recent developments Re-launch of our leading brand in the motorcycle segment - Castrol Activ, with new Actibond technology. Undertook 3-4% price increase across brands during 4QCY12 to mitigate increasing raw material cost. Valuation and view CSTRL trades at 28.7x /25.6x its CY13/ CY14 EPS. Our DCF based price target for CSTRL is INR316. Though we continue to remain positive on the long-term prospects of CSRTL, given CSTRL's rich valuations we have a Neutral rating. Sector view Competition intensity in the industry remains high, with ~15 players. Nonetheless, CSTRL has been able to sustain its performance given its niche segmentation within the premium personal mobility segment. Lube industry enjoys high ROCE, given low reinvestment requirements. EPS: MOSL forecast v/s Consensus (INR) MOSL Consensus Variation Forecast Forecast (%) CY13 11.1 10.7 4.1 CY14 12.5 11.8 5.9 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 319 316-0.9 Neutral Stock performance (1 year) Shareholding Pattern (%) Dec-12 Sep-12 Dec-11 Promoter 71.0 71.0 71.0 Domestic Inst 6.2 6.5 7.2 Foreign 8.1 8.1 7.4 Others 14.6 14.4 14.4 28 February 2013 5
Financials and Valuation 28 February 2013 6
N O T E S 28 February 2013 7
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