Castrol India Limited 05th February 2010

BUY- CMP: Rs. 635

Castrol India Limited

CMP:Rs. 635 Stock Data
Bloomberg Reuters BSE Code NSE Symbol BSE Group CSTRL IN CAST.BO 500870 CASTROL A

Initial Coverage-BUY

Company Back Ground

Castrol India Limited is the subsidiary of Castrol Ltd., UK based British Petroleum Group Company. From a minor oil company, with a share of about 6% in 1991, Castrol India has grown to become the second largest lubricant company in India with a market share of around 22%. Castrol India manufactures and markets a range of automotive and industrial lubricants. It markets its automotive lubricants under two brands Castrol and BP.

Stock Codes
Benchmarks 52 WK High 52 WK Low M.Cap FV NIFTY 678.7 287 7994.56 10

Business Detail
The automotive segment constitutes 85 % of total revenues while the remaining is contributed by non - automotive division under which the company sells industrial lubricants. The company is a market leader in the retail automotive lubricant segment. It is also the third largest company in Indian lube oils and lubricants industry. The company has leadership positions in most of the segments in which it operates including passenger car engine oils, premium 2-stroke and 4-stroke oils and multigrade diesel engine oils. It has four manufacturing plants across India at Paharpur (West Bengal), Patalganga (Maharashtra), Silvassa (Dadra & Nagar Haveli) and Tondiarpet (Tamil Nadu) with a total installed capacity of 146.7 million litres of lubricating oils and industrial greases.

Sh.Holding Pattern (As on Dec 2009)

Promoters 71.03% Institution 7.90% Foreign Corporate Public & Other 5.28% 2.3% 13.49%

Stock Returns
1mths 3mths 6mths

Castrol 9.03% 24.87% 38.51% Nifty

-7.39% 2.86% 3.52%

Industry Outlook

The lubricant sector in India is broadly divided into 3 major markets sectors: Automotive, Industrial and Marine & Energy applications. The industry is led by four major players, (IOC, BPCL, HPCL and Castrol India Ltd) who contribute to over 70 % to the market, the rest 30% is shared by several players including global majors, leading to an extremely competitive market scenario. The year 2008 has proved challenging one in terms of demand and profit outlook as rising crude prices caused severe Base oil supply imbalances. It was an excellent start to the year but shortage of raw material severely impacted it which in turn caused most lubricant players to take multiple price increases. The new generation, high technology truck segment expanded in 2008 & 2009. Further, Indian car makers predict continued growth, particularly through customer migration from two to fourwheeler vehicles. Two-wheeler segment is also predicted to grow in 2009; Growing personal disposable incomes and double income households are expected to drive demand for cars and two-wheelers despite the effects of the economic slowdown. The introduction of the Tata Nano also give a shot in the arm for passenger car sales. It is also expected that the rural growth of 4-stroke motorcycles will continue to outstrip urban demand in the foreseeable future. All such factors supports the future prospects on Indian lubricants industry, thus we are positive on this sector with Castrol India Ltd as preferred stock.

Investment Rationales

Bear Market Pick

A high dividend yield, sound business model and stable financials make Castrol India Limited (CIL) an attractive long term investment. Even amidst a slump in the automobile sector, the company's lubricants will still have a large potential market to tap.

Huge Brand Loyalty

Strong brand equity of its products is enabling CIL to churn out good cash flows year after year. This has enabled the company to sustain high inflationary regime, rising input costs and the recent increase in crude prices. CIL has been able to achieve good numbers due to high volumes and improved price realizations.

Building on Profitability

Castrol has gained market share in a declining lubricants market. The entry of new original equipment manufacturers (OEMs) offering new technology vehicles will provide additional opportunities for the company's products. Lube consumption is projected to grow strongly in cars, four-stroke bikes, as well as building and construction equipment segments. Gradual growth in personal mobility, as well as corresponding growth in demand for automotive services, are positive factors for the company in the long run.

Product Overview

Share Holding Pattern as on December 2009

Promoters 72% 13% Foreign

Institution

Public and Others

5% 8% 2%

Corporate

Positives Bubbling in the Sky

Strong Growth Momentum
Castrol has gained market share in a declining lubricants market. The entry of new original equipment manufacturers (OEMs) offering new technology vehicles will provide additional opportunities for the company's products. Lube consumption is projected to grow strongly in cars, four-stroke bikes, as well as building and construction equipment segments. Gradual growth in personal mobility, as well as corresponding growth in demand for automotive services, are positive factors for the company in the long run. Rather than a broad volume strategy, the company is looking at building on profitability.

Market leader in the diesel oil segment

CIL has been able to survive and deliver consistent growth in the diesel engine oil segment. It has been one of the distinguished names for the past 75 years. Its flagship brand Castrol CRB had completed 75 years in India in 2007. It has 4 sub brands with the names CRB Plus CRB Turbo, CRB Prima and CRB Prima Plus and has been able to sustain its name in the diesel engine oil market. The brand image created by CIL has been so strong that it has been able to garner many loyal and regular customers, which has made it the undisputed leader in the multigrade diesel engine oil segment. The brand name and tag line IT'S MORE THAN JUST OIL. IT'S LIQUID ENGINEERING has been the most powerful asset for CIL and has worked wonders for CIL to maintain its leadership position and to be among the best. The BP brand, which it has taken over in 2000, took a complete makeover and underwent a relaunch to make it look more contemporary. The revamp comprised formulation up gradation and a new packaging giving it a rich vibrant look and feel.

Higher realization from diesel oil business and rising share of automotive lubricants in its revenue
There has been a constant reduction in the share of the diesel business to the % of sales, mainly due to increase in sales of the 2-wheeler and 4-wheeler lubricants. The diesel business contributes to about 80-85% of the sales. This share has been constantly reducing mainly due to the fact that a large chunk of the old trucks use diesel engine oil. But due to the introduction of new trucks, which are more powerful and technologically advanced, engine oil change happens almost after 4 times of that oil changed by the old trucks. This has led to a decline in the diesel oil sales. CIL however has managed to compensate loss in volume of diesel oil sales by increasing realization due to increase in sales of advanced lubricants for technologically advanced trucks. There has also been an increase in the 2-wheeler and passenger cars segment as the production of these vehicles have been increasing. The share of 2-wheeler, which is currently at 17-18% of sales and that of passenger sales which is currently 12-13% of sales of CIL, is expected to increase to about 24% and 17% respectively over the next 3-5 years.

A push towards Industrial & Marine business

The industrial and marine business has been a growth driver for CIL and has performed well over the last 1-2 years. CIL plans to increase the sale volume and value in this business, as the margins are high. CIL is able to enjoy better margins in this segment as compared to the automotive business due to its own exclusive facility for manufacturing oil for industrial business.

The industrial business offers comprehensive lubricant solutions to its customers. Leveraging the wide range of CIL's products and application expertise, the business was able to deliver value to its customers throughout the manufacturing value chain. It also introduced and installed a real time automated monitoring system for metal working fluids Castrol System RT tool for the first time in India. This would help in proactive fluid management for large centralised coolant tanks. Some of its esteemed customers in the industrial segment are Siemens, BHEL, SKF, Suzlon and other power companies. CIL has also deliberately cut down on non/low profitable sales over CY06 and CY07 resulting in low volume growth in these years. Increased shipping activities at the India port and an increase in the offshore platforms off the coast, has given a boost to CIL's Marine & Energy lubricant business. In 2007, the marine business consolidated its existing customer base and focused on select growth opportunities like Fishing and Shipyard sectors while Energy lubricants focused more on offshore business to gain market share. As this is a high margin business, the focus on this business stream is expected to remain high in future as well.

Efficient capital management

CIL is one of the most efficient users of capital in the industry. The main reason for the use of capital in the most effective manner is due to high Sales to Fixed Asset ratio, which is currently at 10.07 times. It also enjoys one of the lowest working capital cycle, wherein the debtors' turnover and inventory turnover ratios are very low and it is set off by a high creditors turnover ratio. The debtors' turnover ratio for CY08 was at 22 days and the inventory turnover ratio at 28 days and a high creditor turnover ratio of 66 days, accounting the working capital cycle to just 16 day. It also benefits from outsourcing part of its output (close to 20%). CIL is able to maintain such a monopolistic position in the private sector, as there are no large private sector players to challenge CIL in the lubricants space. But this position may be in jeopardy with the advent of large international private players.

Down Side of Investment Risk Factors

CIL is losing its sheen in diesel oil due to change in oil change intervals. New trucks are replacing old trucks and oil change happens after longer intervals. The replacement of old to new trucks and change from 2 stroke to 4 stroke engines is slowly eroding the share of CIL's diesel oil business. In the industrial sector, CIL could face price pressure by small regional and local competitors and tendency of PSU players to absorb the high raw materials cost to gain competitive advantage may put pressure on CIL's market share and margins. Volumes growth has been sluggish for CIL, but the breather for CIL is that it has been able to maintain its profitability and revenue growth in terms of value. Lubricant growth is linked to growth in road transportation, which is driven by overall growth in GDP. A slowdown in GDP growth could impact lubricant volumes. There has been a decline in the auto sales over the last year, especially in 2wheelers mainly due to interest rate regime. CIL has an exposure to imports (CY07 imports of raw materials Rs.610.87 Crores). The boost to OPMs in CY08 was partially contributed by appreciation in the Rupee. This situation may not continue going forward. Lubricant after-market demand shrinkage due to current economic scenario and reduced vehicular movement

Company has put together a plan to address the impact of the risks identified and has put in place necessary risk mitigation actions.

Results Analysis 9Mths Ended September 2009

CY-08 Net Sales PBIDT PAT EPS Equity PBIDTM(%) PBDTM(%) PATM(%) 2262.37 441.41 262.37 18.67 123.6 17.05 16.91 10.13

9 months 200909 1708.7 480.5 300.3 24.3 123.6 28.12 28 17.57

9 months 200809 1669.8 359.8 215.3 17.42 123.6 21.55 21.39 12.89

VAR [%] 9 Months 2.3 33.5 39.5 39.5

Fabulous show Q-o-Q and 9 months ended September 2009. Extremely satisfactory show as far as bottom line is concern but bit disappoint for top line. Bottom-line for the 9 months ended September 2009, is well above full year results and surpass with good number. But due to some competitive pressure and lower sales in the diesel oil due to change in oil change intervals. To sum up company is very well perform in the first 9 months of the calendar year and we expect that the same kind of performance will sustain in the future.

Valuation & Outlook

CIL, which is a leading player in the lubricants business, is poised to deliver steady growth in terms of turnover and profitability over the next few years, looking at the strong presence in its current business and foray into new revenue verticals like bike servicing. Growing personal disposable incomes and double income households are expected to drive demand for cars and 2 wheelers despite hardening of interest rates. Due to a strong presence in these segments, CIL could capitalize on these opportunities and generate higher turnover. As business in these segments is driven by workshop channel where superior service proposition is coupled by strong brand, this could improve CIL's business substantially. The increasing demand for the passenger cars and 2-wheeler segment could add the much needed strength to the automotive business. CIL's turnover could be negatively impacted due to the advent of new trucks as it takes a longer duration to change the oil as compared to old trucks. This could pull the volumes down, but this would be set off by the growth in 2wheeler and 4-wheeler engine oils. The Bikezone which is a new concept recently launched by Company could prove to be a growing revenue stream, especially with the increase in the number of outlets increasing in future. The industrial and marine business being a high margin business as compared to automotive sector could boost turnover. Although, there are no major capex plans, CIL seems to be placed quite comfortably in the lubricant space. At CMP of Rs. 635/- Castrol India Limited is currently trading at 20.5x CY09E earnings of Rs. 31.This is fairly in line with the 14% CAGR growth in profits over the last 5 years. We thus initiate coverage with a BUY recommendation.

We believe the 6-7% price hike already announced in January 2010 will help boost margins. Adding to that stable LOBS prices and strengthening rupee will lead to margin expansion .We expect that the hike is price is expected to implement in the second week of February. Our new earnings estimates reflect a 6-7% price hike. Year End Net Sales Op.Profit Net Profit EPS PE 200612 1802.54 254.2 154.49 11.23 17.97 200712 1966.03 364.25 218.43 15.14 23.82 200812 2262.37 441.41 262.37 18.67 20.29 200912 2556.48 201012 2888.82

639.12 722.2051 383.47 31.03 20.47 433.323 35.06 18.11

Reserves- (in Crores)

400 350 300 250 200 150 100 50 0 200212 200312 200412 200512 200612 200712 200812 202.14 224.44 236.43 351.93 266.42 294.02 306.54

Ever increasing reserves of the company and completion of 100 years of Companys Indian operation, We expect that company may announce Bonus to their share holders, if this will happen this share definitely in limelight for next 1-2 month. We initiate coverage with a Accumulate rating on the Company with a target price of Rs.912 for CY10.(based on 26x its CY10E EPS of Rs. 35).

Technical Outlook For Castrol India Ltd

One the weekly charts the stock is certainly looking overbought. Its charts are very strong however one cannot enter at current levels. This counter had broken out long before and the break out target has been achieved. The stock has shown a tendency to rise in the overbought zone and it is already on a 52 week high so where would it stop is difficult to predict. SHORT-MEDIUM TERM INVESTORS should accumulate this stock on every correction of Rs30-Rs50 and hold it till 2-3 months. LONG TERM INVESTORS are recommended an entry level of 500-460 and below 561 one should enter on dips with a capital investing ratio of 20-40-40 at levels of 561-500-470 respectively.

Registered Office:

Monarch Project & Finmarkets Limited is established in the Stock Market since 15 Years the Registered Office of which is at Mumbai and the corporate office at Ahmedabad. The Company was incorporated with the promise to serve the investors in the best possible manner and with the help of the employees and technology, company is able to fulfill this promise till today and the same will continue for the coming days. We engaged in Equity/Commodity/Online trading, looking to cater you as per your requirement. Monarch ProContact No. : +91-22-66211800 ject & Finmarkets Limited is registered member of NSE & NSDL Whereas, Monarch ReEmail:research@monarchproject.c search & Brokerage Private Limited, a Business Associate, is the member ofBSE. Moreover, om Monarch Commodities Private Limited is the Member of MCX & NCDEX, NMCE, DGCX.
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