On A Smooth Drive

Castrol India (CIL) formed a part of the recommendations in our issue dated July 6, 2009 under the cover story on dividend growth stocks. The scrip was recommended at a price of Rs 372.75 with the anticipation that it would provide a return of 20 per cent, thus setting a one year price target of Rs 448. CIL was recommended primarily because of its 19-year consistent dividend history and a high dividend yield of 4 per cent. Secondly, we expected CIL to do well since it commands a market share of 22 per cent and has the advantage of a strong brand recall for its products. It has attained leadership position in most of the segments it operates in, thus offering good growth visibility. The third reason was that CIL is almost a zero debt status company with huge cash reserves worth more than Rs 256 crore. And last but not the least was its attractive valuation.

The scrip has outperformed our expectations and has already yielded overall appreciation of 36.47 per cent. At its CMP of Rs 491 the appreciation is 32 per cent, while the Sensex during this period has been up by only 1.3 per cent. One of the reasons for this performance is the good show put up by CIL in its Q2CY09 results (CIL follows the calendar year) wherein its PAT grew by 55 per cent to Rs 128.4 crore. In fact the CIL management has been focusing on a strategy of defending margins and attacking cost inefficiencies and the Q2CY09 are the results of the same. Thus, with such a quarterly performance, the fact that CIL has gone past our target price of Rs 448 it makes sense to book profits.