Castrol India awaits more triggers that can drive earnings
The healthy dividend yield, cheap valuations can support downside for the stock that is trading at 15.5 times CY22 earnings estimates (more than 40% discount to the historical average PE multiple).
Castrol India Ltd has continued to see improvement in performance with the regular recovery in economic activities. Pent-up demand in two-wheelers post easing of lockdown restrictions helped, along with strong agri demand helping spur Commercial Vehicle Oil (CVO) sales.
Recovering industrial sales improved CVO sales. Further, some more uptick in the personal mobility segment helped the company clock 6 % sequential revenue growth during the December quarter. However, the revenues were down 7.5%.
Also Read | The health nudge is merely a mirage
Castrol follows the January-December financial year and the December quarter is its fourth.
The volumes disappointed at 52 Million Litre during Q4, representing a decline of 3.7% y-o-y. The personal mobility segment sales are yet to recover completely. Reduction of inventory at the distributor level is also said to have impacted volumes.
The company during 4Q2020 continued to see a significant increase in marketing and advertising spends (Rs65 crore in 4Q2020 versus Rs11 crores in 4Q 2019). Though this was to drive sales growth moving forward, it nevertheless pulled down the Q4 operating profits. The rising base oil prices too played spoilsport.
To push CVO sales growth the company has taken corrective pricing actions. However, the same pulled down blended realisation, weighing on operating performance further.
Castrol India Q4CY20 performance was below our expectation as volume declined and there was 438 bps y-o-y decline in EBITDA margin to 29.3% said Abhijeet Bora, Research analyst at Sharekhan. The operating expenses increased due to higher ad spends (limited spend in H1CY20) and price cut in certain product categories pulled down operating performance" added Bora.
The street thereby will be watching improvement on volumes growth led by personal mobility segment sales that also has higher margins and remains key focus area of the company. Company has taken price hikes of around 4% in some categories. However, whether the same will be sufficient to take care of cost pressures needs to be watched for, said Yogesh Patil, Research analyst at Reliance Securities Ltd.
Meanwhile, Castrol lubricants are now available across over 1,350 Jio-bp sites and expansion in stores should drive growth for Castrol. Nevertheless, analysts are waiting for clarity on volume numbers to incorporate the benefit of channel sales in their forward estimates. Castrol has also launched fluids for Electric vehicles and started supplies to Tata Motors and MG Motors. A significant ramp-up in the segment sales is awaited too.
The company meanwhile has reiterated that it will maintain similar levels of dividend policy (80% payout). The healthy dividend yield, cheap valuations can support downside for the stock that is trading at 15.5 times CY22 earnings estimates (more than 40% discount to the historical average PE multiple).
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!