BUY CMP (Rs) Target Price (Rs) Potential Upside Sensex Nifty 412 463 12.3% 31,305 9,658 Key Stock data BSE Code NSE Code Bloomberg Shares o/s, Cr (FV 5) Market Cap (Rs Cr) 3M Avg Volume 52 week H/L 500870 CASTROLIND CSTRL:IN 49.5 20,395 7,74,992 495/353 Shareholding Pattern (%) Promoter FII DII Others Sep16 51.0 12.3 17.5 19.2 Dec16 51.0 11.8 18.6 18.6 Mar17 51.0 11.4 18.7 18.9 1 Year relative price performance 140 130 120 110 100 90 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Growth revival to be gradual (CIL) reported muted numbers for Q1CY17 (below our estimates) with a Net revenue and PAT growth of 3.1% & 3.8% YoY respectively. The negative impact of higher base oil prices was offset by INR appreciation (vs USD), product price hikes and improved mix, as EBITDA margins stood flat (YoY) at %. Led by anticipated revival in Auto sector and GDP / IIP cycle, we expect improved performance from CIL in the coming quarters, though at a gradual pace. We maintain a BUY on the stock with revised target price of Rs 463. Q1CY17 Result Update: CIL's net revenue grew by 3.1% YoY to Rs 882.2cr, impacted by lower offtake in the CV segment (~43% of overall sales) on account of lingering effects of demonetization. Overall volume growth was marginal (better than industry volumes, which degrew by 5%), helped by doubledigit volume growth in Industrial segment and 5% YoY volume growth in personal mobility lube sales (with continued growth in power brands). Higher realisations (price hikes undertaken in Dec 2016) kept the overall revenue growth in the positive. EBITDA increased by 3.2% YoY to Rs 263.3cr, while EBITDA margins stood flat (YoY) at %. The negative impact of higher base oil prices was offset by INR gains (vs USD), price hikes and improved mix (higher share of personal mobility), which helped sustain the gross margins (at 54.2%). PAT growth stood marginally better at 3.8%, led by lower tax rate on PBT (141bps YoY). Other key highlights : i) Demand environment is likely to remain challenging over the next two quarters due to the implementation of GST. The management stated that the benefits of lower GST rate on base oil and lubricants (at 18% vs current blended tax rate of 2728%) will be passed on to endconsumers; ii) The company has taken another price hike in May to offset the impact of higher base oil prices; iii) Electric cars are unlikely to be a threat to the lubricants business in the coming decade. Outlook & Valuation: CIL's revenue and PAT are estimated to grow at a CAGR of 6% & 6.3% respectively over CY1618E, led by new launches and sustained brand building efforts. However, the demand revival is likely to be gradual and slower than what we anticipated. Lubricant consumption, especially in the CV space, could be impacted due to implementation of BSIV (w.e.f. April 2017), as the drain interval period might increase due to operational efficiency. Further, GST implementation could result in near term uncertainties in volume offtake. While higher realisations and better mix could continue to provide cushion to margins, volume growth revival is essential for sustainable profit growth in future. We have downgraded our growth projections for CY17E & CY18E by 14%. Despite subdued growth, CIL's premium valuations are likely to sustain on the back of its cash rich and debtfree status, superior return ratios and high and consistent dividend payouts. This should limit the downside in the stock price from current levels. We maintain a BUY on the stock with revised target price of Rs 463. Research Analyst Mehernosh K. Panthaki, CA mehernosh.panthaki@religare.com June 20, 2017 Castrol Ni y Financial Summary Net Revenue EBITDA EBITDAM (%) APAT APATM (%) EPS (Rs) ROE (%) P/E (x) CY14 CY15 CY16 CY17E CY18E 3,392.3 3,298.0 3,370.4 3,548.8 3,792.6 716.7 894.8 1,004.9 1,055.8 1,137.8 21.1 27.1 30.0 474.5 615.2 674.9 711.4 763.5 14.0 18.7 20.0 20.0 20.1 9.6 12.4 13.6 14.4 15.4 76.0 114.7 115.2 119.5 129.2 43.0 33.2 30.2 28.7 26.7
P&L Account Quarterly Q1CY17 Q1CY16 YoY % Q4CY16 QoQ % Net Revenue Raw Material Consumed Stock Adjustment Purchase of Finished Goods Total Material Cost Gross Profit Employee Expenses Other Expenses EBITDA EBITDAM (%) Depreciation EBIT Other Income EBIT (incl. other income) Interest PBT Tax (incl. DT & FBT) Tax Rate (% on PBT) PAT PATM (%) EPS 882.2 364.9 27.2 66.5 404.2 478.0 49.8 164.9 263.3 12.3 251.0 18.5 269.5 0.3 269.2 90.2 33.5 179.0 20.3 3.6 855.7 352.2 7.8 47.5 391.9 463.8 44.1 164.5 255.2 8.6 246.6 18.7 265.3 0.4 264.9 92.5 34.9 172.4 20.1 3.5 3.1 3.6 40.0 3.1 3.1 12.9 0.2 3.2 2 bps 43.0 1.8 1.1 1.6 25.0 1.6 2.5 141 bps 3.8 14 bps 782.2 305.7 57.1 363.6 418.6 40.1 159.0 219.5 28.1 1 208.7 35.8 244.5 0.3 244.2 88.4 36.2 155.8 19.9 12.8 19.4 3.8 3.2 14.9 16.5 11.2 14.2 24.2 3.7 20.0 178 bps 13.9 20.3 48.3 10.2 10.2 2.0 269 bps 14.9 37 bps
P&L Account CY14 CY15 CY16 CY17E CY18E Net Revenue Growth (%) Material Expenses Employee Expenses A&P Expenses Other Operating Expenses EBITDA EBITDAM (%) EBITDA Growth (%) Depreciation EBIT Other Income Interest PBT Tax RPAT RPAT Growth (%) EPS EPS Growth (%) 3,392.3 6.7 1,937.5 161.6 233.3 343.2 716.7 21.1 4.2 36.1 680.6 48.1 2.4 726.3 251.8 474.5 (6.7) 9.6 (3.8) 3,298.0 (2.8) 1,60 176.6 239.7 386.1 894.8 27.1 24.8 39.0 855.8 95.9 950.9 335.7 615.2 29.7 12.4 29.7 3,370.4 2.2 1,531.6 172.6 245.6 415.7 1,004.9 12.3 45.0 959.9 87.3 1,045.7 37 674.9 9.7 13.6 9.7 3,548.8 5.3 1,616.5 191.6 266.2 418.8 1,055.8 5.1 49.2 1,006.6 89.4 1,094.4 383.1 711.4 5.4 14.4 5.4 3,792.6 6.9 1,725.6 201.0 284.4 443.7 1,137.8 30.0 7.8 54.6 1,083.2 92.9 1,174.6 411.1 763.5 7.3 15.4 7.3
Balance sheet SOURCES OF FUNDS Share Capital Reserves Total Shareholders Funds Long Term Debt Short Term Debt Total Debt Net Deferred Taxes Long Term Provisions & Others TOTAL SOURCES OF FUNDS APPLICATION OF FUNDS Net Block CWIP Investments LT Loans & Advances and Others Total NonCurrent Assets Inventories Trade Receivables Cash & Equivalents ST Loans & Advances and Other Current Assets CY14 247.3 249.5 496.8 (61.8) 13.6 448.6 172.1 15.7 85.0 272.8 365.5 27 43 89.0 Total Current Assets 1,157.5 Trade Payables 538.2 Other Current Liabilities & Provisions 443.5 Total Current Liabilities 981.7 Net current Assets 175.8 TOTAL APPLICATION OF FUNDS 448.6 CY15 247.3 328.3 575.6 (49.9) 14.9 540.6 148.8 36.4 93.2 278.4 304.6 236.5 696.5 95.7 1,333.3 549.4 521.7 1,071.1 262.2 540.6 CY16 CY17E CY18E 247.3 247.3 247.3 348.5 347.7 339.6 595.8 595.0 586.9 (67.2) (67.2) (67.2) 14.1 14.7 15.5 542.7 542.4 535.2 147.1 147.9 143.3 37.3 37.3 37.3 94.3 99.0 105.9 278.6 284.2 286.5 343.9 354.9 374.1 255.2 261.6 274.4 821.9 859.3 902.1 120.5 126.5 135.4 1,54 1,602.3 1,685.9 645.6 680.6 727.3 631.8 663.4 709.8 1,277.4 1,344.0 1,437.2 264.1 258.3 248.7 542.7 542.4 535.2
Cash Flow CY14 CY15 CY16 CY17E CY18E Reported PBT 726.3 950.9 1,045.7 1,094.4 1,174.6 Nonoperating & EO items 31.4 62.0 56.3 58.1 60.4 Interest Expenses 2.4 Depreciation 36.1 39.0 45.0 49.2 54.6 Working Capital Change 110.3 178.6 123.5 43.2 52.3 Tax Paid 251.8 335.7 37 383.1 411.1 OPERATING CASH FLOW ( a ) 591.9 771.6 788.6 747.2 81 Capex (23.5) (36.0) (15.0) (50.0) (50.0) Free Cash Flow 568.4 735.6 773.6 697.2 76 Investments Nonoperating income 31.4 62.0 56.3 58.1 60.4 Others 2.6 (8.2) (22.1) (4.7) (6.9) INVESTING CASH FLOW ( b ) 10.6 17.8 19.3 3.4 3.5 Debt Issuance / (Repaid) Interest Expenses (2.4) () () () () FCFE 566.0 734.8 772.1 695.7 760.0 Share Capital Issuance, QIP proceeds (247.3) Dividend (434.0) (534.1) (652.9) (712.2) (771.6) Others (8.5) 13.2 (28.1) 0.6 FINANCING CASH FLOW ( c ) (692.2) (521.7) (682.5) (713.2) (772.2) EO items NET CASH FLOW (a+b+c) (89.7) 267.7 125.4 37.4 42.8 Closing Cash 43 696.5 821.9 859.3 902.1
Key Financial ratios CY14 CY15 CY16 CY17E CY18E PROFITABILITY (%) GPM 42.9 5 54.6 54.5 54.5 EBITDAM 21.1 27.1 30.0 EBITM 20.1 25.9 28.5 28.4 28.6 APATM 14.0 18.7 20.0 20.0 20.1 RoE 76.0 114.7 115.2 119.5 129.2 RoCE 109.1 159.6 163.9 169.1 183.3 EFFICIENCY Tax Rate (%) 34.7 35.3 35.5 35.0 35.0 Fixed Asset Turnover (x) 9.0 8.4 8.3 7.8 7.5 Inventory (days) 39.3 33.7 37.2 36.5 36.0 Debtors (days) 29.3 26.3 27.7 27.0 26.5 Payables (days) 57.9 6 69.9 70.0 70.0 Cash Conversion Cycle (days) 10.7 () (4.9) (6.5) (7.5) Debt/Equity (x) Net Debt/Equity (x) (0.9) (1.2) (1.4) (1.4) () Interest Coverage (x) 283.6 1,069.8 639.9 671.0 722.1 PER SHARE DATA EPS 9.6 12.4 13.6 14.4 15.4 CEPS 10.3 13.2 14.6 15.4 16.5 BV 10.0 11.6 12.0 12.0 11.9 Dividend 7.5 9.0 11.0 12.0 13.0 VALUATION P/E (x) 43.0 33.2 30.2 28.7 26.7 P/BV (x) 41.1 35.4 34.2 34.3 34.8 EV/EBITDA (x) 27.9 22.0 19.5 18.5 17.1 Dividend Yield (%) 1.8 2.2 2.7 2.9 3.2
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