Castrol India-Oil Izz Well

In a state of turbulent markets it is better to stick to counters having a constant topline as well as bottomline growth and good dividend payment history. Castrol India is one such counter and hence has been recommended as our choice scrip. But this is not the only reason. There are certain other compelling factors also, the first of which is the strong sales growth expected in the automobile sector which is ultimately expected to drive its volume growth (being the second largest in the lubricant market with a market share of 22 per cent). Further, it is a debt-free company and has revealed a strong cash balance of Rs 525 crore as on December 31, 2009 - up from Rs 255 crore in CY08. On the valuation front, with its EV/EBITDA of 13x and CMP discounting its trailing four quarter earnings by 22x, it looks a bit expensive, but then consistency is always rewarded on the bourses with higher premium. Further, being an MNC, we may not rule out a buy-back offer which is currently happening with other MNC counters.

Castrol India manufactures oil lubricants. It has two business segments viz automotive (contributing 85 per cent of revenues) and industry (15 per cent of revenues). The noticeable factor is that while it is second in terms of overall market share, it has leadership positions in most of the automobile segments in which it operates. Hence, with automobile sales expected to witness good growth going ahead, the demand drivers are already in place. Further, Castrol has already seized the opportunity on both pricing front with premium pricing and product innovation. It has been aggressive and proactive in increasing prices without waiting for pressure arising out of any sharp movement in crude oil prices. This is clearly visible from the CY09 results, wherein despite lower volume against CY08, Castrol managed to post better topline growth on account of better realisation. Another factor is that it also appears to have handled its imports well, given the fluctuating forex rates.

Its imported raw materials accounted for 47 per cent of all raw material consumption in CY09. As result, the net cash generated from operations grew exponentially to Rs 567 crore from just Rs 161 crore in CY08. In the industrial segment, the demand is expected to grow on account of deployment of modern equipments which require lubricant oils. So there will be growth in both its segments. As mentioned earlier, Castrol India has a strong history of dividend payment. Actually, due to lower capital expenditure and working capital requirement it has been very aggressive in paying dividends. In CY09 too it paid a dividend of 250 per cent. We expect the same to happen going ahead also.