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Company report

Castrol India Ltd.

CMP Target Price Rs 459.55 Rs 560.00

17th August 2009

BUY

Company Snapshot
Castrol India Ltd has announced results for the Quarter ended June 30, 2009. The company being one of the leaders in the automotive and non automotive lubricants space has witnessed constant growth across all the business segments.

BSE Code NSE Code Market Cap (Rs Mn) 52 Week High/Low Industry Face Value Shares O/S

500870 CASTROL 56818.80 492.50/261.00 Lube Oil & Lubricant Rs 10.00 12,36,40,298

Quarterly Financial Highlights

Rs Million
Particulars Revenues Expenditures Operating Profit Net Profit OPM% NPM % EPS CEPS Q2CY08 6238.00 4949.00 1289.00 828.00 20.66 13.27 6.70 7.25 Q3CY08 5581.00 4664.00 917.00 596.00 16.43 10.68 4.82 5.32 Q4CY09 5396.00 4652.00 744.00 470.00 13.79 8.71 3.80 4.34 Q1CY09 5087.00 3936.00 1151.00 763.00 22.63 15.00 6.17 6.70 Q2CY10 6402.00 4419.00 1983.00 1284.00 30.97 20.06 10.39 10.93

EPS CEPS Book Value P/E P/B

21.22 23.30 38.46 21.65 11.94

Shareholding Pattern

5%

11%

13% 71%
Promoter owned FIIs owned Public owned Others owned

The company has registered good set of numbers for the quarter ended June 2009. Net sales stood at Rs. 6375.00, million marginally up from corresponding quarter last fiscal. The operating profits witnessed a sharp rise of 54 percent as compared from same quarter previous year which was on account of favorable cost of materials. The company has also worked aggressively on cost efficiency and cost effectiveness programmes. Expenditure came down by almost 11 percent in the current quarter from last year same quarter. Net profits advanced 55 percent at Rs.1284 million from Rs.828 million in Q2CY08. On the margins front, operating profit margins expanded 1031 bps to stay at 30.97% while net profit margins increased 679 bps at 20.06% in the latest quarter. The margin improvement has been achieved through a combination of premium product mix and higher unit realization. Similarly EPS for the quarter ended June 2009 stood at Rs.10.39, up by 55 percent from the quarter June 2008. TTM (Trailing twelve months) EPS stood at Rs.25.19.

Yearly Financial Performance

The company has registered whooping sales of Rs.22057 million in CY08 indicating a growth of 16.81% over last year on consolidated basis, translating in operating income of Rs.3997.20 million which has grown by 21.29% from last fiscal. Similarly, on a consolidated basis, the net profits advanced to Rs.2623.70 million, up by 20.12% from previous year. EPS for financial year ended December 2008 stood at Rs.21.22.
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Business Details
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. 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. The company sells its products mainly through the retail network called Bazaar trade. It has a wide distribution network of 270 distributors and over 70,000 retail outlets.

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 Baseoil 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 and this trend is expected to continue in 2009. Further, Indian car makers predict continued growth, particularly through customer migration from two to four-wheeler 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 in the second quarter of the year is expected to 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.

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Investment Rationale
Strong segmental performance
Segmental Growth 6000 5000 Revenue 4000 3000 2000 1000 0 Q2CY08 Q3CY08 Q4CY08 Quarters Q1CY09 Q2CY09 auto non auto

The company has registered stellar segmental performance in the half year ended June 30, 2009. There has been a sharp surge in automotive sales during financial year ended December 2008 at Rs.18679 million as compared with Rs.15828.30 million in year ago period. Similarly, non automotive revenues jumped around 11 percent at Rs.3378 million. On a quarterly basis, automotive sales increased by 5% to Rs.5,615Mn for quarter ended Jun'09 with its contribution to total sales at 88% while non automotive segment witnessed a fall in revenues but a rise in profits. Sales decreased 12% to Rs.760Mn for the quarter ended Jun'09 with its contribution to total sales at 12%. Segment PBIT increased by 37% to Rs.232Mn v/s Rs.169Mn for the corresponding quarter last year.

Premium Pricing Power

Castrol has been able to hold on to its market share in spite of stiff competition from PSU peers. Castrol has already seized the opportunity on both pricing front, with premium pricing, and on product innovation front. It has been so aggressive and proactive in increasing prices without waiting for a pressure to come due to sharp movement in crude oil prices. The higher product prices were well accepted by the market due to superior product quality and premium brand positioning to a segment which is less price sensitive and more value conscious.

High Dividend payout

120 100 80 60 40 20 0 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Jul-09 Dividend rate(%)

Castrol India has been able to pay decent dividends since ages. Due to lower capital expenditure and working capital requirement it is very aggressive to pay dividends both on a final and interim basis. It has recently paid a dividend at the rate of 100 percent.

Risks and Concerns

Base oil prices being a key input for lubricant manufacturing companies are function of crude oil prices. High volatility in crude oil prices posts a threat to such companies. Price undercutting by small regional competitors which are low cost firms and the tendency of PSU players to focus on volumes over margins along with global players posts stiff competition for the company. Monsoon performance poses a threat to auto segment especially to tractor segment.

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Consolidated Financial Matrix

Rs. Million Particulars Revenues Growth% Expenditure EBITDA Growth% EBITDA margin Other income Depreciation EBIT Interest PBT Tax Adjusted PAT Growth % Net Profit Margins Equity Capital Reserves & Surplus EPS CEPS CY05 14303.80 ---12187.00 2116.80 ---14.80 200.70 189.30 2128.20 30.10 2098.10 638.20 1459.90 ---10.21 1236.40 2664.20 11.81 13.34 CY06 17524.10 22.51 15324.30 2199.80 3.92 12.55 343.80 180.10 2363.50 41.10 2322.40 777.50 1544.90 5.82 8.82 1236.40 2940.20 12.50 13.95 CY07 18882.60 7.75 15586.90 3295.70 49.82 17.45 348.40 207.80 3436.30 37.90 3398.40 1214.10 2184.30 41.39 11.57 1236.40 3065.40 17.67 19.35 CY08 22057.00 16.81 18059.80 3997.20 21.29 18.12 418.10 256.80 4158.50 36.50 4122.00 1498.30 2623.70 20.12 11.90 1236.40 3519.30 21.22 23.30

Ratios
Particulars Sales to equity RONW% Interest Coverage Equity Turnover Asset Turnover Current Ratio Debt to Equity CY05 11.57 37.43 70.70 11.57 3.53 1.49 0.02 CY06 14.17 36.99 57.51 14.17 4.11 1.70 0.02 CY07 15.27 50.78 90.67 15.27 4.36 2.96 0.02 CY08 17.84 55.17 113.93 17.84 4.61 1.65 0.02

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Past Price movement of the stock

Valuation
With the economy and demand reviving as a whole, we expect the volumes to start flowing in again. Full impact of the correction in raw material cost was clearly visible in Q2CY09 and further on this would enable the operating margins to sustain in the range of 2224%. Castrol India Ltd. has strong brand power in the markets, going with its debt free status, high ROEs, distinctly superior delivery of products and improving cash flows. The company seems to continue its growth momentum through its high revenue generating base business and seems to be extremely attractive investment opportunity in the Indian lubricants market. Presently, the stock is trading at Rs 460 which is at 21.65 times to its earnings of CY09 of Rs 21.22 and 11.94 times to its book value of Rs 38.46. Since the stock offers good investment opportunity, we initiate a BUY signal on the stock with a target price of Rs 560 in three to four months investment horizon expecting an appreciation of about 22% from the current level of Rs 460.

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