INSUBCONTINENT EXCLUSIVE:
Motilal Oswal Securities has a buy call on Castrol India with a target price of Rs 215.
The current market price of Castrol India is Rs
160.50.
Time period given by the brokerage is one year when Castrol India price can reach the defined target
market in the world, accounting for nearly 7 per cent of the global market (39mmt)
It imports nearly 70 per cent of base oil (45 per cent from Korea), which follows crude price with a lag of three months
National oil companies (NOCs) command a market share of nearly 50 per cent, while nearly 20 per cent of the market is unorganized (over and
Among the private players, CSTRL has a share of nearly 8-9 per cent of the organized market and nearly 22 per cent of the bazaar segment
Many global brands like Exxon, and Valvoline are already doing well, while companies in the Middle East are looking at entering into the
Indian market.
Future trends: Base oil supply glut is increasing with new capacities coming online
Saudi Aramco and ADNOC added Group-III capacity of 1mmtpa recently
Moving from BS-IV to BS-VI would require lube that can perform well on viscosity index, drain interval and fuel efficiency
Due to the oligopoly nature of the market (Lubrizol, Infineum, Oronite, Afton), additives prices keep going up
With more launches, the premium of synthetic lube is likely to reduce
Amazon has launched its own lubes in the US
We expect the impact from EVs to be minimal in the near future, as advancement in ICEs is along the path
Forecasts suggest nearly 15 per cent penetration of EVs by 2040, as the transition to EVs gradually moves from the western countries to Asia
Independent workshop stations (IWS) like TVS and Mahindra are likely to grow fast
This combined with large fleet operators is expected to increase bargaining power of the customers.
Brand building remains the key driver:
Brand building remains critical
CSTRL spent Rs 1.3b on advertising in CY18, with ad expenditure expected to remain at nearly 3 per cent of sales
Willingness of consumers to pay a premium for the brands is the reason why lube companies have been increasing their margins,
disproportionately to the value they offer
CSTRL aims to invest Rs 1.4b in ramping up its capacity from 100m liters to 140m liters (current capacity utilization at 75 per cent)
This, combined with new product offerings, would help it retain its market share
However, the threat from other players would only heighten, going forward.
Maintain Buy; dividend yield attractive at nearly 3.4 per cent:
The stock trades at 21x CY20E EPS of Rs 7.2
balance sheet and high-quality cash flows, which warrant higher valuation multiples, in our view
To factor in intensifying competition and the threat to long-term growth/margins, we revise our CY20 P/E multiple to 30x EPS of 7.2
(applying nearly 50 per cent premium v/s global peers)
We arrive at a fair value of Rs 215, implying 39 per cent upside.
