Stock Review: Castrol India

Castrol India declared strong numbers for the quarter ending September post the market hours last Tuesday. The numbers were, however, largely in line with the expectations. While the stock zoomed nearly 5 per cent to hit an intraday high of Rs 525, it gave away the gains as profit booking set in to close at Rs 498.3, down 0.61 per cent last Wednesday, the day the markets reported their second biggest gains (in absolute terms) ever. Though the business prospects remain good, Castrol's stock appears to be fully valued at current levels.

Auto lubes boost performance

Castrol reported a net profit of Rs 117 crore, up 22.3 per cent, aided by a sharp decline in advertisement costs by about 20 per cent besides reduction in other expenditure heads compared to the same quarter last year. Additionally, tax expenses also grew slower. Revenues rose to Rs 641 crore, up 13.4 per cent year-on-year, aided by higher realisations on the back of a rise in prices in July and January (a total of 11 per cent) as the volumes slipped a little less than half a percentage point.

Castrol's automotive lubes revenues rose 12.4 per cent, led by a higher realisation. The automotive segment's profit margin came in higher at 25.6 per cent (up 270 basis points). Its industrial lubes segment reported 9.9 per cent y-o-y growth in revenues while profits dipped 10.9 per cent.

Castrol's key strength lies in its consistent technological upgrades aided by strong support from its UK-based parent. It has been launching four or five products every year to keep pace with technology, the emission norms and consumer needs. The boom in the auto sector provides the company's lubricants a large market to tap. With the economic outlook improving, lube consumption is projected to grow at a healthy pace across industries. However, in the auto lube segment, improvement in technology and an increase in the time interval for changing oil (especially commercial vehicles) has kept a tab on volume growth while ensuring better value-growth. Hence, it is not surprising to see Castrol's overall volumes grow in single-digits.

Outlook

While the company enjoys good pricing power, any spurt in base oil prices could impact its margins in the interim. However, with the user industries' prospects looking up, it should do well in the coming quarters. Analysts expect Castrol to clock an EPS of Rs 15.4 in CY10 and Rs 21 in CY11, with Ebitda margins around 27-28 per cent; they have assumed a y-o-y rise of $10 per tonne in input prices in CY11.

The stock has historically traded in a PE band of 14-18 times. At current price, it trades at all-time high multiples of 23.7 times, which suggests that upsides, if any, are limited in the near term.