Castrol India Limited a Superior Long-Term Play Viewpoint

Castrol India Limited A superior long-term play Viewpoint

Castrol India Limited’s (Castrol) stock price has corrected by ~20% in the last Sector: Lubricants there months and offers a favourable risk reward given: 1) margin tailwinds from New Idea sharp 31% decline in base oil price (a crude oil derivatives) since January 2020 and premiumisation for BS-VI products and 2) well-placed to gain from a potential recovery in lubricant demand in H2CY2020 (as the government has relaxed the Change lockdown in 45% districts of India and expectation of gradual end of lockdown across the country) given strong market share of 22% in the Bazaar segment View: Positive and a 40-45% volume coming from personal mobility. Moreover, robust strong CMP: Rs. 119 free cashflow (FCF) yield of ~8-9% and consistent track record of high dividend payout (66-80% and dividend yield of 5-6%) provides comfort to investors. Upside potential: 25% Castrol’s valuation of 12.4x CY2021E EPS is attractive given steep discount of 51% to its historical average one-year forward PE multiple of 25.4x. Hence, we initiate our viewpoint coverage on Castrol with a Positive view and expect a 25% á Upgrade  No change â Downgrade upside potential from current levels. Margin tailwinds amid lower base oil prices; focus to shift to volume recovery Company details in H2CY2020 with relaxation of lockdown: Castrol’s key raw materials (base oil and additives) are directly linked to a movement in crude oil prices, which have Market cap: Rs. 11,768 cr plunged by ~53% since January 2020. Lower raw material cost (base oil price declined by 31% since January 2020), better product mix (high share of personal 52-week high/low: Rs. 162/90 mobility) and premium pricing for BS-VI products makes a strong case for margin improvement from H2CY2020. Hence, we expect a strong growth in gross margin NSE volume: (No of to Rs. 112-115/litre over CY2020-CY2022 as compared to Rs. 104/litre in CY2019. 20.6 lakh shares) The Indian lubricants market was growing at a decent pace of 2-3% before the COVID-19 pandemic struck. However, the COVID-2019 led lockdown has impacted BSE code: 500870 demand for lubricants across the automotive and industrial segments, given the limited movement of personal vehicles and manufacturing activity has come to standstill from the last week of March 2020. Given a relaxation of lockdown in 45% NSE code: CASTROLIND of India’s districts (green zone) and expectation of the gradual end of the lockdown across the country, we believe that lubricant demand would also normalise as Sharekhan code: CASTROLIND the fundamental demand drivers (rising demand from personal mobility) are well- placed. We do expect Castrol’s lubricant volumes to decline by ~10% in CY2020 but Free float: (No of 48.5 cr expect a sharp recovery over CY2021-CY2020 as the economic activity normalises. shares) Our Call Valuation – Initiate viewpoint coverage on Castrol with Positive view; expect a 25% upside: The correction of ~20% in Castrol’s stock price in the last three months Shareholding (%) adequately factors in the concerns of volume de-growth in CY2020 and ignoring the benefit of sharp expansion in margin given decline in base oil prices. Moreover, Promoters 51.0 we believe that the focus should shift back to volume recovery in H2CY2020, given that the lockdown has been relaxed in 45% of districts (green zones) and FII 11.8 expectation of a gradual reopening of the economy. Castrol’s valuation of 12.4x CY2021E EPS is attractive given a steep discount of 51% to its historical average DII 18.3 one-year forward P/E multiple of 25.4x. Moreover, robust strong FCF yield of ~8- 9%, consistent track record of high dividend payout (66-80% and dividend yield Others 18.8 of 5-6%) and strong RoE of ~55-58% lends comfort to investors. Hence, we initiate viewpoint coverage on Castrol with Positive view and expect 25% upside potential from current levels. Price chart Key Risks Lower-than-expected volume growth amid economic slowdown in case of further 170 extension of lockdown in India and likely impact on margin if crude oil price rises 150 sharply. 130 110 90 70 Valuation Rs cr 50 19 20 19 20 Particulars CY18 CY19 CY20E CY21E CY22E - - - - Jan Sep May May Revenue 3,905 3,877 3,489 3,934 4,274 OPM (%) 27.4 29.7 31.8 32.5 31.1 Adjusted PAT 708 827 825 952 994 Price performance % y-o-y growth 2.4 16.8 -0.3 15.5 4.4 (%) 1m 3m 6m 12m Adjusted EPS (Rs) 7.2 8.4 8.3 9.6 10.1 P/E (x) 16.6 14.2 14.3 12.4 11.8 Absolute 12 -18 -22 -20 P/B (x) 10.1 8.6 7.6 6.7 6.2 EV/EBITDA (x) 10.3 9.4 9.6 8.2 7.7 Relative to 6 5 0 -3 Sensex RoNW (%) 64.8 65.3 56.6 57.8 54.4 RoCE (%) 100.6 90.7 76.0 78.5 73.7 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

May 06, 2020 7 112-115/litre over CY2020-CY2022 as compared to Rs104.4/litre in CY2019. in over to CY2020-CY2022 Rs104.4/litre 112-115/litre compared as to Rs. margins gross in H2CY2020. in improvement growth margin for case strong a strong we Hence, expect we see realisation, higher apotential and tailwinds material raw given Hence, improve Castrol. for realization engines)also would evenfor i.e usable BS-IV compatible (backward products VI BS for pricing premium and mix) volume in 40-45% at mobility of share personal (high mix Moreover, product expansion. margin better gross drive and cost lower would material 2020) raw procurement since January better and ~31% by declined have prices oil 2020. (base since January costs ~53% Lower by material raw sharply declined has which prices, oil crude to linked the in movement are directly additives) and oil (base Castrol’s key materials raw products VI oil priceBS by lower for premiumisation base and to improveMargin supported May 06, 2020 would increase to 140 million litre. litre. million to 140 increase would plant Silvassa its at capacity the 2020). completed toby be expansion, (expected the Post litres million of 40 capacity incremental crore an and 140 acapex of Rs. at plant Silvassa its at capacity expanding also is Castrol Moreover, new of businesses. developing strategy to its vehicle care aligned market is Indian and million ~$200 the into entry an Castrol provides partnership The retail outlets. of over 1,10,000 network distribution and marketing pan-India its through tyre and dressers dashboard cream wax, cleaners, glass like shampoos, bike car products and offer Castrol enable would partnership The after-market. automotive the for products of vehicle a range care to 2019 bring June in Ltd (3M) India 3M with entered into a partnership India Castrol litres million 40 market; crore vehicle enter Silvassa to 140 to expand capex help capacity deal by care ofRs. 3M product to returns normalcy. recovery activity asharp economic over the CY2021-CY2020 as expect but CY2020 in ~10% by to volumes decline Castrol’s lubricant We placed. are expect well do mobility) personal (rising from return demand drivers demand to would fundamental demand lubricant also normalcy the as that we believe country, of lockdown the end across of gradual zone) (green expectation and India’s districts 2020 ofweek March last However,from of to lockdown due 45% lockdownin India. in relaxation of with come to standstill has activities manufacturing vehicles and of movement personal limited given segment industrial and automotive across demand lubricant However, impacted lockdown led has COVID-2019 the pandemic. of 2-3% COVID-2019 pace a decent before at the market growing was lubricant Indian The lockdown ends Lockdown to hit lubricant inCY2020; demand recovery up post to open economy imminent as expected Source: Bloomberg Sharp fallinBrentcrudeoilpricesinceJanuary2020 $/bbl 10 20 30 40 50 60 70 80 0

Jan-19

Feb-19 Mar-19

Apr-19

May-19

Jun-19

Jul-19 Brent oil price

Aug-19

Sep-19

Oct-19 Sharp fall Sharp Nov-19 destruction Dec-19 in oilin price given demand Jan-20 mdCv d Covi amid Feb-20

Mar-20 - 19 Apr-20

May-20 Margins expectedtoimprovesharply Source: Company;SharekhanResearch 100.0 120.0 140.0 20.0 40.0 60.0 80.0 0.0 CY18 93.5 104.4 CY19 Gross margin (Rs/litre) CY20E 112.0 CY21E 114.8 CY22E 114.7 8

Viewpoint Strong FCFgeneration Source: Company;SharekhanResearch May 06, 2020 we expect dividend of Rs. 5.5-7/share with a healthy dividend yield of 5-6%. yield dividend 5.5-7/share ahealthy of Rs. with dividend we expect Consequently, of 65-70%. payout dividend high continued ensure also and of 8-9% yield FCF result in would generation FCF Robust plant. Silvassa at capacity crore expansion for 140 of Rs. capex plan limited given over CY2020E-CY2022E crore annually 900-1,100 to of tune Rs. FCF strong to generate Castrol We expect payout high dividend maintain to help generate FCF Strong

Rs crore 1,000 1,200 200 400 600 800 0 CY18 4.0% 471 CY19 7.6% 897 FCF CY20E 7.8% 924 FCF yield CY21E 1,000 8.5% CY22E 1,104 9.4% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Consistent dividendpayoutratioandhealthyyield Source: Company;SharekhanResearch

Rs/share 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 CY18 4.0% 4.7 CY19 4.6% 5.5 DPS CY20E 4.6% 5.4 Dividend yield (%) yield Dividend CY21E 5.3% 6.3 CY22E 5.9% 7.0 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 9

Viewpoint May 06, 2020 Source: Company,SharekhanResearch RoE trend Source: Company,SharekhanResearch Revenue trend Source: Company,SharekhanResearch Volume tofallinCY20 beforerecoveryoverCY21-22 Financials in charts incharts Financials 165 170 175 180 185 190 195 200 205 210 215 220 10.0 20.0 30.0 40.0 50.0 60.0 70.0 0.0 Rs crore 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 500 0 CY18 CY18 214 64.8 CY18 CY19 CY19 65.3 204 CY19 Volume (mn litres) Revenues RoE (%) RoE CY20E CY20E 56.6 184 CY20E CY21E CY21E 57.8 CY21E 202 CY22E CY22E 54.4 CY22E 214 Source: Company,SharekhanResearch EBITDA/PAT CAGR of5%/6%overCY2019-CY2022 Source: Company,SharekhanResearch Margin toimprovesharplyledbyweakbaseoilprice Source: Company,SharekhanResearch RoCE trend 100.0 120.0 140.0 100.0 120.0 20.0 40.0 60.0 80.0 20.0 40.0 60.0 80.0 0.0

0.0 Rs crore 1,000 1,200 1,400 200 400 600 800 0 CY18 93.5 100.6 CY18 1,071 CY18 708 104.4 CY19 CY19 90.7 1,153 CY19 Gross margin (Rs/litre) 827 EBITDA RoE (%) RoE CY20E 112.0 CY20E 1,111 76.0 CY20E PAT 825 1,277 CY21E 114.8 CY21E 78.5 CY21E 952 1,328 CY22E 114.7 CY22E CY22E 73.7 994 10

Viewpoint May 06, 2020 Source: SharekhanResearch current levels. from 25% potential upside expect and view Positive with coverage Castrol on viewpoint weHence, initiate to investors. comfort lends of ~55-58% RoE strong and of 5-6%) yield dividend and (66-80% payout dividend record of track high consistent of ~8-9%, yield FCF of P/E 25.4x. Moreover, multiple strong forward robust one-year average of historical 51% discount a steep to given its of 12.4x attractive is CY2021E valuation EPS Castrol’s economy. of the reopening of agradual zones) (green expectation and relaxed 45% in of districts to recovery volume back H2CY2020, in been lockdown shift has the should focus the that given that believe Moreover, prices. oil base in decline given inmargin CY2020 we ofsharp expansion benefit the ignoring and in concerns de-growth of volume the in factors adequately months three last the in price Castrol’sin stock a25% The upside: of correction expect ~20% Positive view; coverage with viewpoint Initiate onCastrol Valuation expansion. to margin aid and improve Castrol for realization also would products VI BS for Premium pricing prices. oil the in fall with derivates)are likely to decline –crude additives and oil (base of key price improved as has materials raw outlook margin side, positive the On to normalcy. back resumes recovery activity sharp CY2020 economic over in the CY2021-CY2020 as expect ~10% but by to volume decline Castrol’s lubricants We placed. expect are well do mobility) personal from demand (rising drivers demand fundamental the as normalise lockdown would demand lubricant also across country, the zones) (green of the likely end the and lockdown 45% in the from of India’s relaxation districts providing demand for acrosshas impacted lubricants government the With automotive the segments. and industrial lockdown H1CY2020 in nationwide sharply the as oil Castrol’s price:low to volume base decline We expect Volume inH2CY20 recovery oflockdown; relaxation likely with Margin to expected improve sharply amid Outlook One-year forwardP/E(x)band

P/E (x) 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 0.0 5.0

Jan-11 May-11 Sep-11 Jan-12 May-12 Aug-12 P/E (x) Dec-12 Apr-13 Aug-13

Avg. P/E (x) Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Peak P/E (x) P/E Peak Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Trough P/E (x) P/E Trough Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 11

Viewpoint Top shareholders 10 Key management personnel Data Additional Key Risks to investors. comfort lends of ~55-58% RoE robust and yield government relaxes dividend gradually healthy lockdown generation, Strong FCF across country. norms the recovery the as volumes in potential from to gain placed well is company the but country lockdown the across led to due COVID-19 likely to impacted is get demand lubricant Although products. BS-VI for pricing premium prices) oil and crude in to fall (linked price oil to low improve base given India’s are expected margins Castrol theme Investment retail sites. 110,000 through customers servicing and distributor of 380 network distribution largest the has and India in plants 3manufacturing operates Castrol Bazaar in share ~22% segment. with market is leader company The vehicles. duty CVO heavy and volume segment industrial contributes from mobility, personal 12% to volumes while remaining comes from of its 40-45% derives company The segments. &energy marine and industrial automotive, to the caters company The India. in player lubricant sector private largest the is Plc, of a51% BP subsidiary India, Castrol company About May 06, 2020 Source: CompanyWebsite Source: Bloomberg Sr. No. Rashmi Joshi Sandeep Sangwan R Gopalakrishnan

10 9 6 5 2 8 4 3

7 1 Sharekhan Limited,itsanalystordependant(s)ofthemight beholdingorhavingapositioninthecompaniesmentionedarticle. Likely impact on margin in case of sharp rise in crude oil prices. oil crude in rise of case in sharp margin on Likely impact in India. of lockdown extension of case in further slowdown economic amid growth volume Lower-than-expected L&T MutualFundTrustee Ltd/India Norges Bank UTI AssetManagementCompany Aditya BirlaSunLifeTrustee Company Murray InternationalTrust Standard LifeAberdeenPLC Aditya BirlaSunLifeAssetManagementCompany Vanguard GroupInc/The JP MorganChase&Company Life InsuranceCorporationofIndia Holder Name Chief FinancialOfficer Managing Director Chairman Holding (%) 10.3 0.5 0.8 3.4 1.5 1.0 1.3 1.4 1.3 1.7 12

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