costrol india ltd-monarch research

8/6/2019 Costrol India Ltd-Monarch Research

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strol India Limited BUY- CMP: Rs. 635

05th February 2010


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Bloomberg CSTRL IN

Reuters CAST.BO

BSE Code 500870

NSE Symbol CASTROL

BSE Group A

Stock Data

Benchmarks NIFTY

52 WK High 678.7

52 WK Low 287

M.Cap 7994.56

FV 10

Stock Codes

Promoters 71.03%

Institution 7.90%

Foreign 5.28%

Corporate 2.3%

Public &Other

13.49%

Sh.Holding Pattern(As on Dec 2009)

1mths 3mths 6mths

Castrol 9.03% 24.87% 38.51%

Nifty -7.39%

2.86% 3.52%

Stock Returns

Castrol India LimitedCMP:Rs. 635 Initial Coverage-BUY

Castrol India Limited is the subsidiary of Castrol Ltd.,UK based British Petroleum Group Company. From aminor oil company, with a share of about 6% in 1991,

Castrol India has grown to become the second largestlubricant company in India with a market share of around 22%. Castrol India manufactures and markets arange of automotive and industrial lubricants.It markets its automotive lubricants under two brands -Castrol and BP.

The automotive segment constitutes 85 % of total reve-nues while the remaining is contributed by non - auto-motive division under which the company sells industriallubricants.The company is a market leader in the retail automotivelubricant segment. It is also the third largest company inIndian lube oils and lubricants industry. The companyhas leadership positions in most of the segments inwhich it operates including passenger car engine oils,

premium 2-stroke and 4-stroke oils and multigrade die-sel engine oils.It has four manufacturing plants across India at Pahar-pur (West Bengal), Patalganga (Maharashtra), Silvassa(Dadra & Nagar Haveli) and Tondiarpet (Tamil Nadu)with a total installed capacity of 146.7 million litres of lu-bricating oils and industrial greases.

Company Back Ground

Business Detail


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The lubricant sector in India is broadly divided into 3 major markets sectors: Automo-tive, 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 themarket, the rest 30% is shared by several players including global majors, leading toan extremely competitive market scenario.

The year 2008 has proved challenging one in terms of demand and profit outlook asrising crude prices caused severe Base oil supply imbalances. It was an excellentstart to the year but shortage of raw material severely impacted it which in turncaused most lubricant players to take multiple price increases. The new generation,high technology truck segment expanded in 2008 & 2009. Further, Indian car makerspredict continued growth, particularly through customer migration from two to four-wheeler vehicles.

Two-wheeler segment is also predicted to grow in 2009; Growing personal disposableincomes and double income households are expected to drive demand for cars andtwo-wheelers despite the effects of the economic slowdown. The introduction of theTata Nano also give a shot in the arm for passenger car sales. It is also expected thatthe rural growth of 4-stroke motorcycles will continue to outstrip urban demand in theforeseeable future. All such factors supports the future prospects on Indian lubricantsindustry, thus we are positive on this sector with Castrol India Ltd as preferred stock.

Industry Outlook


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Bear Market Pick

A high dividend yield, sound business model and stable financials make Castrol IndiaLimited (CIL) an attractive long term investment. Even amidst a slump in the automo-bile 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 in-put costs and the recent increase in crude prices. CIL has been able to achieve goodnumbers due to high volumes and improved price realizations.

Building on Profitability

Castrol has gained market share in a declining lubricants market. The entry of neworiginal equipment manufacturers (OEMs) offering new technology vehicles will pro-vide additional opportunities for the company's products. Lube consumption is pro-

jected to grow strongly in cars, four-stroke bikes, as well as building and constructionequipment segments. Gradual growth in personal mobility, as well as corresponding

growth in demand for automotive services, are positive factors for the company in thelong run.

Investment Rationales


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72%

2%

8%

5%

13%

Promoters

Public and Others

Foreign

Corporate

Institution

Share Holding Pattern as on December 2009

Product Overview


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Positives Bubbling in the SkyStrong Growth Momentum

Castrol has gained market share in a declining lubricants market. The entry of neworiginal equipment manufacturers (OEMs) offering new technology vehicles will pro-vide additional opportunities for the company's products. Lube consumption is pro-

jected to grow strongly in cars, four-stroke bikes, as well as building and construc-tion equipment segments. Gradual growth in personal mobility, as well as corre-sponding growth in demand for automotive services, are positive factors for thecompany in the long run. Rather than a broad volume strategy, the company is look-ing 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 flag-ship brand Castrol CRB had completed 75 years in India in 2007. It has 4 subbrands with the names CRB Plus CRB Turbo, CRB Prima and CRB Prima Plus andhas been able to sustain its name in the diesel engine oil market. The brand imagecreated by CIL has been so strong that it has been able to garner many loyal andregular customers, which has made it the undisputed leader in the multigrade dieselengine oil segment.

The brand name and tag line IT'S MORE THAN JUST OIL. IT'S LIQUID ENGI-NEERING 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 re-launch to make it look more contemporary. The revamp comprised formulation upgradation and a new packaging giving it a rich vibrant look and feel.


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Higher realization from diesel oil business and rising share of auto-motive 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. Thediesel business contributes to about 80-85% of the sales. This share has been con-stantly reducing mainly due to the fact that a large chunk of the old trucks use dieselengine oil. But due to the introduction of new trucks, which are more powerful andtechnologically advanced, engine oil change happens almost after 4 times of that oilchanged 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 in-creasing realization due to increase in sales of advanced lubricants for technologicallyadvanced 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, whichis 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 thenext 3-5 years.

A push towards Industrial & Marine business

The industrial and marine business has been a growth driver for CIL and has per-

formed well over the last 1-2 years. CIL plans to increase the sale volume and valuein this business, as the margins are high. CIL is able to enjoy better margins in thissegment as compared to the automotive business due to its own exclusive facility for manufacturing oil for industrial business.


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The industrial business offers comprehensive lubricant solutions to its customers.Leveraging the wide range of CIL's products and application expertise, the businesswas able to deliver value to its customers throughout the manufacturing value chain. Italso introduced and installed a real time automated monitoring system for metal work-ing fluids Castrol System RT tool for the first time in India. This would help in proac-tive fluid management for large centralised coolant tanks. Some of its esteemed cus-tomers 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 CY06and CY07 resulting in low volume growth in these years.

Increased shipping activities at the India port and an increase in the offshore plat-forms off the coast, has given a boost to CIL's Marine & Energy lubricant business. In2007, the marine business consolidated its existing customer base and focused onselect growth opportunities like Fishing and Shipyard sectors while Energy lubricantsfocused more on offshore business to gain market share. As this is a high marginbusiness, the focus on this business stream is expected to remain high in future aswell.

Efficient capital management

CIL is one of the most efficient users of capital in the industry. The main reason for theuse 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 cy-cle, wherein the debtors' turnover and inventory turnover ratios are very low and it isset off by a high creditors turnover ratio. The debtors' turnover ratio for CY08 was at22 days and the inventory turnover ratio at 28 days and a high creditor turnover ratioof 66 days, accounting the working capital cycle to just 16 day. It also benefits fromoutsourcing part of its output (close to 20%). CIL is able to maintain such a monopolis-tic position in the private sector, as there are no large private sector players to chal-lenge CIL in the lubricants space. But this position may be in jeopardy with the adventof large international private players.


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CIL is losing its sheen in diesel oil due to change in oil change intervals. Newtrucks are replacing old trucks and oil change happens after longer intervals. Thereplacement of old to new trucks and change from 2 stroke to 4 stroke engines isslowly eroding the share of CIL's diesel oil business.

In the industrial sector, CIL could face price pressure by small regional and localcompetitors and tendency of PSU players to absorb the high raw materials cost togain 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 hasbeen 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 over-all 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 2-

wheelers 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 scenarioand reduced vehicular movement

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

Down Side of Investment Risk Factors


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Results Analysis 9Mths Ended September 2009

CY-08 9 months200909

9 months200809

VAR [%] 9Months

Net Sales 2262.37 1708.7 1669.8 2.3

PBIDT 441.41 480.5 359.8 33.5

PAT 262.37 300.3 215.3 39.5EPS 18.67 24.3 17.42 39.5

Equity 123.6 123.6 123.6

PBIDTM(%) 17.05 28.12 21.55

PBDTM(%) 16.91 28 21.39

PATM(%) 10.13 17.57 12.89

Fabulous show Q-o-Q and 9 months ended September 2009. Extremely sat-isfactory 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 pres-sure 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 fu-ture.


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CIL, which is a leading player in the lubricants business, is poisedto deliver steady growth in terms of turnover and profitability over the next few years, looking at the strong presence in its currentbusiness and foray into new revenue verticals like bike servicing.Growing personal disposable incomes and double income house-holds are expected to drive demand for cars and 2 wheelers de-spite hardening of interest rates.

Due to a strong presence in these segments, CIL could capitalizeon these opportunities and generate higher turnover. As business

in these segments is driven by workshop channel where superior service propositionis coupled by strong brand, this could improve CIL's business substantially. The in-creasing demand for the passenger cars and 2-wheeler segment could add the muchneeded strength to the automotive business. CIL's turnover could be negatively im-pacted due to the advent of new trucks as it takes a longer duration to change the oilas compared to old trucks.

This could pull the volumes down, but this would be set off by the growth in 2-wheeler and 4-wheeler engine oils. The Bikezone which is a new concept recentlylaunched by Company could prove to be a growing revenue stream, especially withthe increase in the number of outlets increasing in future.

The industrial and marine business being a high margin business as compared toautomotive 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/- Cas-trol India Limited is currently trading at 20.5x CY09E earnings of Rs. 31.This is fairlyin line with the 14% CAGR growth in profits over the last 5 years. We thus initiate cov-erage with a BUY recommendation.

Valuation & Outlook


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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).

Year End 200612 200712 200812 200912 201012

Net Sales 1802.54 1966.03 2262.37 2556.48 2888.82

Op.Profit 254.2 364.25 441.41 639.12 722.2051Net Profit 154.49 218.43 262.37 383.47 433.323

EPS 11.23 15.14 18.67 31.03 35.06

PE 17.97 23.82 20.29 20.47 18.11

Reserves- (in Crores)

351.93306.54

294.02266.42236.43

224.44202.14

050

100150200250300350400

200212 200312 200412 200512 200612 200712 200812

Ever increasing reserves of the company and completion of 100 years of CompanysIndian operation, We expect that company may announce Bonus to their share hold-ers, if this will happen this share definitely in limelight for next 1-2 month.

We believe the 6-7% price hike already announced in January 2010 will helpboost margins. Adding to that stable LOBS prices and strengthening rupee willlead to margin expansion .We expect that the hike is price is expected to imple-ment in the second week of February. Our new earnings estimates reflect a 6-7%price hike.


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Technical Outlook For Castrol India Ltd

ne the weekly charts the stock is certainly looking overbought. Its charts are very strong how-ver one cannot enter at current levels. This counter had broken out long before and the breakut target has been achieved. The stock has shown a tendency to rise in the overbought zone

nd it is already on a 52 week high so where would it stop is difficult to predict.HORT-MEDIUM TERM INVESTORS should accumulate this stock on every correction of s30-Rs50 and hold it till 2-3 months.

ONG TERM INVESTORS are recommended an entry level of 500-460 and below 561 onehould enter on dips with a capital investing ratio of 20-40-40 at levels of 561-500-470 respec-vely.


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Monarch Project & Finmarkets Limited is established in the Stock Market since 15 Years theRegistered Office of which is at Mumbai and the corporate office at Ahmedabad. The Com-pany 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 tilltoday and the same will continue for the coming days. We engaged in Eq-uity/Commodity/Online trading, looking to cater you as per your requirement. Monarch Pro-

ject & Finmarkets Limited is registered member of NSE & NSDL Whereas, Monarch Re-search & Brokerage Private Limited, a Business Associate, is the member ofBSE. Moreover,Monarch Commodities Private Limited is the Member of MCX & NCDEX, NMCE, DGCX.

Registered Office:

7/7A/7B, Yusuf Building,GroundFloor,B/h. Akbar Allys,Homi ModiCross Lane No 1,Nr. BombayHouse, Fort, Mumbai - 400 023.

Contact No. : +91-22-66211800

Email:[email protected]

MONARCH Opp. Ishwar Bhu-van, Commerce Six Road, Nava-rangpura, Ahmedabad

380009.

Phone: +91-79-26666595

Disclaimer: The information and views presented in this report are prepared by Monarch Research & Brokerage (p) Ltd ( hereinafter re-

ferred as MRBPL) and is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This Newsletter is for restricted circulation and not for public distribution. The information furnished in this docu-ment is solely for your information and must not be reproduced or redistributed in any manner. All having excess to this document are re-quired to observe such restrictions. The information in this document is for personal information and we are not soliciting any action basedupon it.. Recipients of this report should rely on their own investigation and take their own professional advice. Recommendation in this re-port may or may not suit risk reward ratio of individual investors and hence should not be completely rely upon. Information in this reportcould have been generated with a view of technical analysis using charts, price movement, volumes and various studies/ indicators applica-ble from time to time. They may not necessarily match the report published on fundamental analysis. The analyst of this document certifiesthat the views expressed in this document are his or her personal views on the subject and most accurate to the best of his/her knowledge.MRBPL and/or its affiliates, officers, directors, employees, remisers at all various locations may from time to time hold any long or short posi-tions and /or have any direct or indirect interest resulting in monetary gains of any nature and /or have other potential conflict of interest withrespect to any view expressed in this document. Recipients may please note that neither MRBPL nor any associate(s) accepts any liability or losses arising from the use of this information and views mentioned in this document. No part of this material may be duplicated in any formand/or redistributed without MRBPLs prior written permission.

HONORS: Information contained in this report is obtained from various reliable sources which are beyond the scope to mention each of them. We sincerely thank each different source for the valued information provided and purpose to use the information is just to share theinformation without any prejudice, malafied intention and/or for any commercial gains.

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