Castrol India: Bracing for change

30 Jun 2023 , 11:40 AM

Recommendation: Not Rated

Reliable, but premium supplier

Castrol India Ltd (Castrol) is a BP Plc company (51% stake), and commands ~20+% market share in after-sales automotive lubricants. With focus on quality, product innovation and sales support, it has established itself as reliable supplier over the years. Strong brand recall has allowed it to charge a premium for its products in a highly competitive and fragmented market.

Changing gears

Over the years, Castrol has achieved profit growth by expanding margins while volumes have remained flattish through CY13-22 — at a time when some of its peers have grown volumes. In the medium term, it does not expect EVs to be a key risk for its automotive lubricants (80% sales), for which it is changing gears and pursuing volume-driven growth while maintaining stability in margins. There has been change in leadership team — Sandeep Sangwan (MD) and Deepesh Baxi (CFO) have been empowered by the Board to change the organization’s mindset, for pursuing volume-led growth. Rebranding, introduction of new product categories, diversification of channel partners, partnerships, etc., are underway.

Cash machine, asset light model

Castrol has asset light model – Rs. 2.8 billkion capital, ex-cash- generating Rs. 8.15 billion PAT with OCF/EBITDA of 82% and ROIC of 272%; such has been the case over past decade. The stock’s cheap multiples (15x CY22 and dividend yield of 5.5%) can significantly re-rate, if Castrol walks the talk, and delivers volume driven earnings growth. Analysts at IIFL Capital Services believe, risk of further OFS by promoter remains low, which also has weighed high on the stock’s performance.