IDBI Capital has a buy call on Castrol India with a target price of Rs 237.The current market price of Castrol India is Rs 164.80.Time period given by the brokerage is one year when Castrol India price can reach the defined target.
Investment rationale by IDBI Capital:Volume growth strong: Sales volumes grew 12 per cent YoY to 57mn ltrs, much higher than industry growth rate.
Nearly 80 per cent of the volume growth during the quarter was due to new products launched during the last three quarters.
Apart from volume growth in personal mobility segment, commercial vehicle engine portfolio also delivered record volume growth.Realization disappoints: During Q2CY18, Castrols realization fell 0.9 per cent QoQ to Rs 178/ltr due to adverse changes in product mix.
Nevertheless, EBITDA/ltr improved 7.3 per cent YoY to Rs 44.2.Outlook and Valuation: Historically Castrol has reacted to contracting margins with price hikes.
With nearly 500bps QoQ contraction in Q2CY18 margins, we expect pricing actions by Castrol in H2CY18.
Strong free cash flow generation, minimal capital requirements, high ROEs and strong payouts make Castrol an attractive franchise.
Dividend yield at 4.0 per cent on our CY19E remains attractive.
Castrol is currently trading at a PE of 19.8x CY19E.
We value Castrol at 26.0x on its CY19E EPS to derive a target price of Rs237 and maintain our BUY rating.