Castrol India

Description
Castrol India, a 71% subsidiary of British Petroleum Group (BP), is a leading lubricants
player in India, with ~19% market share in the auto lube bazzar segment.
Castrol provides a vehicle to invest in a company with multiple and rare moats, huge
free cash flows, high governance standards and reasonable valuations.
Its key focus area is the premium personal mobility automobile segment, which is
relatively insulated from economic cycles, unlike the freight and OE market.
Over CY01-11, Castrol has posted revenue and net profit CAGR of 10% and 16%
respectively, while it has generated shareholder returns of 22% (adjusted for dividends).
Given its predictable and stable FCFs, low re-investment requirements and consistent
payout ratio, we believe DCF is the best way to value the company.
We initiate coverage with a Buy rating and a target price of INR629, 17% upside.

Enduring and widening moat
Castrol India
30 July 2012
Initiating Coverage | Sector: Consumer
Siddharth Bothra ([email protected]); +91 22 3029 5127
Castrol India
30 July 2012
2
Castrol India: Enduring and widening moat
Page No.
Summary ........................................................................................................ 3-4
Has created an enduring and widening moat ........................................... 5-11
To benefit from industry transition.......................................................... 12-15
Margin/unit to sustain .............................................................................. 16-25
A cash machine for shareholders.............................................................. 26-27
Buy with a DCF-based target price of INR629, 17% upside ..................... 28-32
Key concerns .................................................................................................... 33
Background ...................................................................................................... 34
Key management personnel ........................................................................... 35
Financials and valuation ........................................................................... 36-37
Castrol India
CMP: INR536 TP: INR629 Buy
Valuation summary (INR m)
Y/E Dec 2012E 2013E 2014E
Net Sales 32.9 35.4 38.6
EBITDA 6.4 8.0 8.9
Adj NP 4.6 5.6 6.3
EPS (INR) 18.4 22.7 25.4
EPS Gr.(%) -5 23 12
BV/Sh.(INR) 25.4 27.7 29.8
P/E(X) 29.1 23.6 21.1
P/BV (x) 21.1 19.4 18.0
EV/EBITDA (x) 19.8 15.8 14.0
EV/ Sales (x) 3.9 3.6 3.2
RoE (%) 83.8 74.0 85.6
RoCE (%) 109.4 99.1 116.7
Bloomberg CSTRL IN
Equity Shares (m) 247.3
52-Week Range (INR) 576/380
1,6,12 Rel.Per. (%) 5/16/7
M.Cap (INR b) 132.5
M.Cap (USD b) 2.4
30 July 2012
Initiating Coverage | Sector: Consumer
BSE SENSEX S&P CNX
16,839 5,100
Enduring and widening moat
A cash machine for shareholders; Buy for 17% upside
? Castrol India, a 71% subsidiary of British Petroleum Group (BP), is a leading lubricants
player in India, with ~19% market share in the auto lube bazzar segment.
? Castrol provides a vehicle to invest in a company with multiple and rare moats, huge
free cash flows, high governance standards and reasonable valuations.
? Its key focus area is the premium personal mobility automobile segment, which is
relatively insulated from economic cycles, unlike the freight and OE market.
? Over CY01-11, Castrol has posted revenue and net profit CAGR of 10% and 16%
respectively, while it has generated shareholder returns of 22% (adjusted for dividends).
? Given its predictable and stable FCFs, low re-investment requirements and consistent
payout ratio, we believe DCF is the best way to value the company.
? We initiate coverage with a Buy rating and a target price of INR629, 17% upside.
Has created an enduring and widening moat
Despite intense competition in the lubricants industry in the last decade, Castrol
has been able to successfully create and appropriate value through adept market
segmentation. Its primary market is the premium personal mobility automobile
segment, where it is able to leverage its trusted brand, product performance
track record and unique service attributes. Unlike its competitors that have been
making low to negligible investments in their brands, Castrol has consistently
been investing 6-7% of its sales (INR2.2b in CY11) in brand-building. It enjoys
tremendous pricing power, with most of its products commanding 20-25%
premium.
To benefit from industry transition
During the last decade, the distribution channel for automotive lubricants (lubes)
witnessed a major transition from the traditional ‘public sector petrol pumps’ to
‘bazzar trade’, which was positive for private sector players such as Castrol, Shell
and Gulf Oil. The distribution channel is now undergoing another transition.
With engine technology advancing and maintenance becoming more
sophisticated, the workshop channel is gaining traction at the cost of other
distribution formats. This is likely to lead to further polarization in the industry
and benefit large lube marketers like Castrol that have strong/established
relationships with original equipment manufacturers (OEMs).
Margin/unit to sustain, though volume growth to be muted
Over CY01-11, Castrol’s sales volumes have de-grown, not only due to increasing
drain interval, but also because it has deliberately vacated the price-sensitive
volume-driven market. Castrol depends on technology innovation and path-
breaking new product launches to drive growth and ability to organically generate
growth through internal initiatives is the most sustainable source of growth. We
model Castrol's net sales growth over CY12-21 at 9%. Concerns on account of
increasing drain intervals are largely unfounded, as Castrol has historically
30 July 2012
3
Stock performance (1 year)
Shareholding pattern (%)
As on Jun-12 Mar-12 Jun-11
Promoter 71.0 71.0 71.0
Dom.Inst 7.1 7.0 6.9
Forei gn 7.9 7.8 7.4
Others 13.9 14.1 14.7
Investors are advised to refer
through disclosures made at the end
of the Research Report.
Price as on 27 July 2012
Castrol India
30 July 2012
4
maintained its margin/unit, which we believe it can sustain. We estimate 2.4%
CAGR in Castrol’s volumes over CY12-14. However, revenue would grow at a CAGR
of 9%, driven by 6% CAGR in realizations. We expect EBIT margin to expand from
19.5% in CY11 to 22.2% in CY14 and estimate net profit CAGR at 17% over CY12-14.
A cash machine for shareholders; Buy
Over CY02-11, Castrol generated FCF of INR27b, with total reinvestment of negative
INR3b. Castrol’s cumulative net capex (capex - depreciation) over the period was a
negative INR408m, while cumulative net working capital (net of cash) was a negative
INR2.5b. It has paid out 87% of its FCF as dividend. Given its predictable and stable
FCFs, low re-investment requirements and consistent payout ratio, we believe DCF
is the best way to value the company. We initiate coverage with a Buy rating and a
DCF-based target price of INR629, 17% upside.
Industry structure: A differentiated oligopoly market
Differentiated Oligopoly market
Top four players IOC/ HPCL/ BPCL and Castrol
control >80% of the market
Nature of Firm Interaction
1. High interdependence amongst players
2. Maintaining distance amongst competitors
critical - segmentation matters
3. Oligopolies can retain abnormal profits in the
long run, because barriers to entry prevent
sideline firms from entering market to capture
excess profits.
Potential to Differentiate
1. Differentiation
possible, firms can
shape their own
environment
2. Technology keeps
evolving
3. Minimum efficiency
scale needed
Nature of Demand
1. Endogenous demand -
marketing matters
2. Earnings can be
managed by shifting
priorities appropriately
High Price
Elasticity
Low Price
Elasticity
Cost Advantage
Modest price cuts gain considerable share
Margin strategy: Maintain price parity
Big price cuts gain little share
Margin strategy: Maintain price parity
Product Advantage
Modest hikes lose considerable share
Margin strategy: Maintain price parity
Big price cuts gain little share
Margin strategy: Charge premium price
Given the industry structure, Castrol has got its strategy right
Source: MOSL
Castrol India
30 July 2012
5
Enjoys higher than industry average profitability...
Despite intense competition in the lubricants industry in the last decade, Castrol has
been able to successfully create and appropriate value through adept market
segmentation. Over CY06-10, Castrol has consciously vacated non-profitable price-
sensitive segments such as railways, government agencies, etc, to concentrate on
profitable segments. While this resulted in volume growth being negative over CY05-
11, EBIT margin increased from ~14.5% in CY05 to 20.5% in CY11. The company enjoys
tremendous pricing power, with most of its products commanding 20-25% premium.
Castrol's primary market is the premium personal mobility segment, where it is able
to leverage its trusted brand, product track record and unique service attributes.
...which should sustain, given multiple and rare moats
Over CY01-11, Castrol has maintained an average net profit margin of 12% (lowest:
8.6%; highest: 17.5%) and an average RoE of 53% (lowest: 35%; highest: 94%). It
generated free cash flow (FCF) of INR27b, with total net capex of a negative INR408m.
Castrol has been able to sustain its above average returns by virtue of the multiple
and rare moats it has created. The width of a moat indicates how long a firm's
competitive advantage will last. Most moats a company enjoys turn out to be weak or
transient, leading to the convergence of its profitability with competitors'. Few rare
companies, however, are able to secure enduring and widening moats, enabling them
to avoid this downward spiral. As such companies age, they also become stronger and
more profitable. Castrol is one such company. Its sustained performance over the last
decade highlights the strength of its inimitable model.
Castrol enjoys multiple and rare moats
Has created an enduring and widening moat
High pricing power; less dependent on volume growth
? Despite intense competition in the lubricants industry in the last decade, Castrol has been
able to successfully create and appropriate value through adept market segmentation.
? Castrol's primary market is premium personal mobility automobiles, where it is able to
leverage its trusted brand, product track record and unique service attributes.
? Unlike its competitors that have been making low to negligible investments in their brands,
Castrol has consistently been investing 6-7% of its sales (INR2.2b in CY11) in brand-building.
? Over CY01-11, Castrol's sales volumes have declined. However, its realizations have grown
at a CAGR of over 10%, resulting in sales CAGR of 9%.
(1) Increasing returns
advantages
(2) Technology and knowledge
base
(3) Established brand/
Enduring relationships
(4) Ability to create
uniqueness in drastically
different ways
? Cumulative experience across a learning curve
? Ability to invest in a series of actitivities to gain
strategic fit and widen competitive moat
? Support from parent BP
? Product performance track record and reputation
? Quality pre/post sales service
? Allows Castrol to operate in the high willingness to
pay/defendable and meaningful subset of the market
? Charge 20-25% premium on its products
? Leverage on its wide distribution network
? Introduce paradigm breaking new product concepts
? Compelling advertisement messages
High
Low
O
r
d
e
r

o
f

i
m
p
o
r
t
a
n
c
e
Enjoys tremendous
pricing power, with most
of its products
commanding 20-25%
premium
Has maintained an
average net profit margin
of 12% and an average
RoE of 53%
Source: MOSL
Castrol India
30 July 2012
6
Castrol has got its strategy right Lube price premium
Expect pricing premium over industry to stabilize at 20-25%
The industry players can be broadly divided into three categories: (1) low cost public
sector operators like IOC, BPCL and HPCL, with ~70% market share (lower cost due to
integrated model), (2) differentiators like Castrol, Shell and Total, focused on
increasing WTP, and (3) mid-sized/small players lacking competitive advantage - these
players compete with low cost players for market share to sustain minimum economies
of scale. Through its differentiation strategy, Castrol has managed to create and sustain
a wide gap between buyers' willingness to pay (WTP) and its cost.
Source: MOSL
Historically, Castrol has enjoyed 20-25% price premium vis-a-vis its competitors.
However, in CY11, Castrol's price premium compared to its key competitors had shot
up to 35-40% in some segments, because the competitors did not immediately follow
up on the sharp price increase (~14%) that Castrol took to offset raw material and
exchange rate (INR/ USD) impact. This resulted in the trade stocking cheaper products,
which led to loss of market share of ~200bp for the company, with the price-sensitive
motorcycle segment being the worst impacted. With IOC taking a sharp 10-12% price
increase in June 2012 and Castrol introducing a one-time INR20/pack discount for the
motorcycle segment, the issue of unsustainable premiums has been resolved.
Castrol
Mobil Esso
PSUs (IOC, HPCL, BPCL)
Gulf / Veedol
Others
+25%
-10%
0%
P
r
i
c
e

p
r
e
m
i
u
m
Player-wise positioning in the lubricants industry
*WTP - willingness to pay Source: MOSL
Low Cost
Operator
Industry
Average
Differentiator
Industry Average
WTP
Industry
Average
Cost
Firm
Surpl us
Firm
Surpl us
Firm
Surpl us
Buyer
Surpl us
Buyer
Surpl us
Buyer
Surpl us
INR
WTP
Cost
WTP
Cost
WTP
Cost
IOC/HPCL/BPCL Others Castrol/MOBIL
Has managed to create
and sustain a wide gap
between buyers'
willingness to pay (WTP)
and its cost
High Price
Elasticity
Low Price
Elasticity
Cost Advantage
Modest price cuts gain
considerable share
Margin strategy:
Maintain price parity
Big price cuts gain
little share
Margin strategy:
Maintain price parity
Product Advantage
Modest hikes lose
considerable share
Margin strategy:
Maintain price parity
Big price cuts gain
little share
Margin strategy:
Charge premium price
E
c
o
n
o
m
i
c

v
a
l
u
e

a
d
d
e
d
Castrol India
30 July 2012
7
Consistently investing in brand-building to sustain pricing power
Castrol's differentiation strategy provides it with tremendous pricing power and high
profit margins. In CY11, its net profit margin was 15.6%, and over CY06-11, its average
net profit margin was 13.4%. Over CY06-11, Castrol's realizations increased at a CAGR
of 12.8%, while its raw material cost, which accounts for ~50% of its sales, increased at
a CAGR of 7.9% (total cost grew at a CAGR of 8.9%). Castrol invests heavily in its brands
to sustain its pricing power. Unlike its competitors that have been making low to
negligible investments in their brands, Castrol has consistently been investing 6-7%
of its sales (INR2.2b in CY11) in brand-building.
Sharp increase in prices results in low volume loss (%) Castrol spends heavily on brand building
Source: Company/MOSL
Strategy to maintain competitive edge
Castrol maintains its competitive edge in the bazzar trade by: (1) leveraging its
technological strength and product development capabilities by working closely
with global OEMs, (2) working closely with mechanics, who play a key role in the
final decision making, and (3) by expanding distribution reach in semi-urban and
rural areas, where future growth is anticipated. Castrol has been coherent in the
communication of its value proposition to the consumer. Its key advertisement
plank has been 'Liquid Engineering'.
Castrol's three-pronged strategy Globally, Castrol is one of the strongest lube brands
Source: BP Energy Outlook Presentation 2030
Brand
Technology Customer Relationships
Low price elasticity
Negative correlation of -0.35
Adv. Expense
Has consistently been
investing 6-7% of its sales
in brand-building
Castrol India
30 July 2012
8
High technological support from parent, BP to continue
Non-OECD/BRIC countries are likely to be the fastest growing markets for lubricants
over CY10-30. Growth is likely to be led primarily by India and China, where vehicle
density per person is still very low. While vehicle per thousand people is expected to
witness marginal to flat growth in developed countries, countries like India and China
are expected to witness increasing vehicle density per person, which augurs well for
lubricant demand. Castrol's parent, BP has identified India as one of the most
promising markets. We expect Castrol to continue receiving high support from BP.
Non-OECD countries to witness fastest growth
Total number of vehicles Vehicles per thousand people Growth in lubricant demand

(2010-20)
Castrol has been coherent in its communication
? Engine that runs smooth like butter
? Engine oil that runs like blood through the
vehicle
? An indication of good engine oil is the sound
that the bike makes
? Engine is the heart of the vehicle
Few paradigm breaking new product concepts by Castrol
? 24 Hour Protection (bikes)
? Intelligent Molecules (cars)
? 5 Times Better Protection (cars)
? Elite Team of Engineers (mother brand)
? Trizone Technology (bikes)
? CRB Turbo Synthetic - Airplane Technology
(trucks)
BP's key focus area is premium lubes
Growth in lubricants (2010-20) Premium lubes as percentage of sales Relative BP unit margins (x)
Source: BP Energy Outlook Presentation 2030; BP Downstream Presentation
Source: MOSL
Castrol India
30 July 2012
9
The Indian lubricants industry - a background
? The size of the organized lubricants industry in India is ~INR230b in value terms
and ~1.8mt in volume terms. Volumes have been growing at 3-5% per year, as
the drainage period (longevity) has been continuously increasing. Till 1993, the
lubricants industry was governed under APM (administered price mechanism),
which ensured oil PSUs 12% RoE. Lubricants were auctioned to dealers and
stockists. The business was liberalized in 1993, post which import of base oil was
allowed. The customs duty on base oil was also cut from 85% in FY94 to 5% in
FY08.
? Even after liberalization, access to 'retail petrol pumps' (distribution channel)
remains restricted to the oil PSUs. Nonetheless, while in the late 1990s, PSU
petrol pumps accounted for ~80% of auto lube sales, they now account for less
than 20%. The bazzar trade accounts for over 80% of sales and is dominated by
private players such as Castrol, Shell, Tide Water and Gulf Oil.
? The oil PSUs have been milking their monopoly strength through petrol pumps.
They have been offering very low dealer discounts to their petrol pump dealers
compared to the dealer margins that private players offer in the bazzar segment.
However, the oil PSUs have now started making a more focused attempt to capture
a larger share of the bazzar trade.
? The oil PSUs (IOC, HPCL and BPCL) along with Castrol control ~80% of the market,
with 15 other players competing for the remaining pie. Competition in this
industry is truly international, with almost all major global lube players such as
Total, Shell, Caltex, Elf, Gulf Oil, etc already present in India for almost a decade.
Economies of scale are a key advantage in this industry, which is slowly weeding
out mid-sized players and increasing polarization.
? The industry can be broadly divided into Automotive (55% share) and Industrial
& Marine (45% share) lubricants. Automotive lubricants can be further divided
into the OEM and replacement markets. The replacement market can be divided
into retail petrol pumps (~20%) and bazzar trade (~80%). Castrol is primarily present
in automotive lubricants (~86% of revenue) and has an estimated market share
of ~21%.
Lubricants industry break-up Region-wise sales break-up of automotive lubes
Source: Industry/MOSL
Broad break-up of automobile industry demand: diesel engines ~70% and petrol engines 30%. With the
proportion of new generation two-wheelers increasing, the demand for 2T oils is reducing and the demand
for 4T oils is increasing.
Market size:
? INR230b in value terms
? 1.8mt in volume terms
Oil PSUs and Castrol
together control ~80% of
the market
Castrol primarily present
in automotive lubricants
Liberalization effect:
Year Share of PSU pumps
1990 ~80% of auto lube
sales
Now ~20% of auto lube
sales
Petrol
30%
Di esel
70%
Castrol India
30 July 2012
10
Key industry players
Top-4 lubes players volume-wise and value-wise
The top-4 lubes players in India are IOC, HPCL, BPCL
and Castrol. With the exception of BPCL, they have
witnessed erratic volume growth over FY09-11.
Reasonable pricing power allows companies to
increase prices and maintain value growth.
The three oil PSUs control ~70% of the market. Within
them, market share is distributed as: IOC - 45%, HPCL
- 28% and BPCL - 26% (FY11).
Monopoly control over the 'retail petrol pumps'
distribution channel allows oil PSUs to enjoy very
high margins on the lubes sold through this channel.
Split of market share within PSU lube sales Realizations for top-4 players
Castrol enjoys premium pricing.
Realizations also vary amongst players, depending on
the split between industrial and automotive
lubricants.
Source: Annual Reports of IOC/ HPCL/ BPCL and Castrol
(INR b) ('000 kl)
(INR/kl)
Castrol India
30 July 2012
11
Analyzing industry attractiveness through industry competition matrix
Buyer Power - Low
1. Lubricant a small fraction of buyers' maintenance cost, but extremely
critical for longevity of the vehicle
2. Buyers small and fragmented
3. Hence, despite intense competition in the segment, buyer power varies
from moderately high to low across segments (high for a major auto
OEM, low for an individual buyer, small fleet owner)
Entry Barriers - High
1. Ex post limit to
competition
2. High minimum economies
of scale needed to
challenge established
players; globally, industry
dominated by few large
pl ayers
3. Access to distribution
4. Brand identity
5. Access to complex and
expensive technology
Substitutes - Low
1. No current perfect
substi tute
2. Technology
developments, organic
lubricants a threat
Bargaining Power of Suppliers - Moderate
1. Most global/ local players fully integrated
2. Many competitive suppliers; product is standardized
Rivalry amongst Players - Low
Intensity of rivalry is low, despite presence
of numerous players and the fact that
firms sell similar goods, which are
substitutes and thus price sensitive.
Key reasons are (1) fixed cost
investment low (low exit barriers),
(2) ex post limit to competition,
(3) demand endogenous - allowing
market segmentation and
differentiation strategies to work
Source: MOSL
Industry structure: A differentiated oligopoly market
Differentiated Oligopoly market
Top four players IOC/ HPCL/ BPCL and Castrol
control >80% of the market
Nature of Firm Interaction
1. High interdependence amongst players
2. Maintaining distance amongst competitors
critical - segmentation matters
3. Oligopolies can retain abnormal profits in the
long run, because barriers to entry prevent
sideline firms from entering market to capture
excess profits.
Potential to Differentiate
1. Differentiation
possible, firms can
shape their own
environment
2. Technology keeps
evolving
3. Minimum efficiency
scale needed
Nature of Demand
1. Endogenous demand -
marketing matters
2. Earnings can be
managed by shifting
priorities appropriately
Castrol India
30 July 2012
12
To benefit from industry transition
From 'shops' to 'workshops' - advantage Castrol
? ?? ?? During the last decade, the distribution channel for automotive lubricants (lubes) witnessed
a major transition from the traditional 'public sector petrol pumps' to 'bazzar trade',
which was positive for private sector players such as Castrol, Shell and Gulf Oil.
? ?? ?? The distribution channel is now undergoing another transition. With engine technology
advancing and maintenance becoming more sophisticated, the workshop channel is gaining
traction at the cost of other distribution formats.
? ?? ?? This is likely to lead to further polarization in the industry and benefit large lube marketers
like Castrol that have strong/established relationships with OEMs.
Transition from 'shops' to 'workshops' positive for Castrol
During the last decade, the distribution of automotive lubes witnessed a major
transition from traditional 'public sector petrol pumps' to 'bazzar trade', which was
positive for private players such as Castrol, Shell, Gulf Oil, etc. Another transition is
currently underway - from 'shops' to 'workshops'. With engine technology advancing
and maintenance becoming more sophisticated, the workshop channel (both company
authorized and unorganized) is gaining traction at the cost of other distribution formats.
As a result, we expect the following trends to emerge:
? Increase in the share of the organized market
? Higher polarization, with market share of the top-4 lubricant marketers (Oil PSUs
and Castrol) increasing at the cost of mid-size and non-niche smaller players
? Technological innovation, value-addition, quality, and pre/post-sales service to
become critical
? Focus on innovative/premium product offerings leading to richer product mix
These trends are positive for Castrol. It can further leverage its premium positioning
and established relationships with key local and global OEMs (original equipment
manufacturers). Anticipating these trends, in CY11, Castrol had launched a professional
range of products and service support for its key OEM partners like Maruti Suzuki, Tata
Motors, Ford, Volkswagen, Skoda, BMW, Audi and Jaguar Land Rover. This is likely to
drive significant volume growth for its premium end of lubricants.
Auto Spare Parts
(50%)
Distribution of automotive lubricants
Others
(11%)
Company Workshops
(9%)
Lube Shops
(21%)
Repair Shops
(9%)
Automotive Replacement Market
Retail Oil PSUs (18-20% of market) Bazzar Trade (80-82% of market)
Source: Industry/MOSL
The workshop channel is
gaining traction at the
cost of other distribution
formats
Launched a professional
range of products and
service support for key
OEM partners
Castrol India
30 July 2012
13
Understanding the distribution channel - the lubes market is evolving
Distribution channels
Spare Parts Shop for Autos
Standalone Lubricant Shops
Repair Shops
Company Authorized
Workshops (CAW)
Others
Total
Market Share (%)
50
21
9
9
11
100
Remarks
? Main business auto spare parts, offer
lubricants as side business
? Do not stock many varieties
? Dedicated lube shops typically carry all
leading brands
? Do-it-yourself model but offer mechanic
service for additional cost. Do-it-yourself
model slowly declining
? Important channel for older vehicles
? High focus on technology and maintaining
effi ci enci es
? Association with top brands brings
credibility for the CAW
? ROI on premium products higher for CAW
? Prefer companies that offer pre and post
sales service, along with innovative
offeri ngs
? Varied usage
OEM relationships key to winning in workshop format
Though profit margins are low in the OEM market, strength in this market gives
lubricant companies easier access to the after sales market. According to industry
estimates, the dominant distribution channel for lubricants is the auto spare parts
shop, accounting for ~50% share. However, it is the company authorized workshop,
currently accounting for just 9% share, which is witnessing the strongest growth. This
channel seeks association with strong brands to achieve creditability and values pre/
post sales service from lube companies. Also, the margins for these workshops are
higher in the premium products/brands segment.
Automotive industry break-up Castrol's automobile lubricant break-up
Almost 75% of the lube demand is derived from CVs
and tractors, largely dominated by diesel engines.
2/ 3 wheelers account for another ~13% of the
market, while 4 wheelers/ MUVs account for ~5% of
the market
Source: Industry/MOSL
Source: Industry/MOSL
Castrol India
30 July 2012
14
Castrol the market leader in bazzar segment
IOC is the market leader in the overall lubricants industry, with industry sources
estimating its market share at ~40%. However, Castrol dominates the automotive
lubricants market, with 19% share of the bazzar segment, followed by IOC, which has
~14% share of the bazzar segment according to industry estimates. Private players
like Castrol, Shell, Gulf Oil, etc account for ~75% of the bazzar segment while the oil
PSUs account for ~25%.
Source: Industry/MOSL
Player-wise industry estimates of Industry estimates of Castrol's market share across key
market share in bazzar segment categories in bazzar segment
Castrol maintains its competitive edge in the bazzar trade by: (1) leveraging its
technological strength and product development capabilities by working closely with
global OEMs, (2) working closely with mechanics, who play a key role in the final
decision, and (3) by expanding distribution reach in semi-urban and rural areas, where
future growth is anticipated. Castrol has been coherent in the communication of its
value proposition to the consumer. Its key advertisement plank has been 'Liquid
Engineering'.
Focused strategies for various segments
While lubricants constitute a small fraction of maintenance cost, they are critical for
longevity and efficient functioning of vehicles. Hence, demand is endogenous and
brand-pull significant. However, the consumer dynamics and distribution channels
vary considerably across automotive segments. While the involvement of a car owner
in lube purchase is very low, it is very high in case of a two-wheeler or CV owner.
Similarly, the key distribution channel also varies considerably across segments.
Consequently, lube companies need to have focused strategies for various segments.
Dominates the
automotive lubricants
market, with 19% share
of the bazzar segment
Has been coherent in the
communication of its
value proposition to the
consumer
Castrol India
30 July 2012
15
Understanding the distribution channel - the lubes market is evolving
Vehicle
Trucks/ Tractors
Car Owners
2 wheelers
(2 stroke/ 4
stroke)
Agriculture/
Others
Main Distribution Channel
? Petrol Pumps
? Company Salesman
? Spare Parts Shops
? Company Authorized
Workshops
? Retail Petrol Pumps
? Mechanics/ Workshops
(Spare Parts Shops &
Distributors)
? Mechanics (Distributors)
? Spare Parts Shop
? Small Shops and
Unconventional Outlets
Remarks/ Characteristics
? High emotional connect to the vehicle
(bread earner)
? Meticulous understanding of lubes
and vehicle
? Brand pull significant but economy
biggest driver
? Very low involvement with purchase
deci si on
? Lubes regarded as mechanics'
domain and left for them to decide
? Level of involvement high with regard
to choosing lube oil
? Lube experience real
? Emotional connect high given first
vehicle purchase, status symbol
? Price key determining factor
? Unorganized segment key player
Understanding the lube oil demand profile for a typical CV
The exhibit below depicts the typical lube oil demand profile for a CV. Players such as
Castrol are able to capture a bigger share of the market within the first five years by
leveraging on their OEM relationships and after sales service agreements. The age
and nature of ownership of a CV determine what quality (and brand) of lube oil will
be used. In India, a CV is typically owned by large fleet operators for the first 4-5
years, after which it moves into the hands of many fragmented users. The share of
the unorganized market is higher for older vehicles.
Source: Industry/MOSL
Product life-cycle of a typical 16-tonne CV
Years
U
S
A
G
E
1-3 years 3-6 years 7-10 years
Organized Market
Through
vari ous
innovative
schemes, OEM
service
workshops,
gai ni ng
i ncremental
share
Competition
most severe
amongst
organi zed
pl ayers
- Low price
products
- Unorganized
segment
Source: Industry/MOSL
Castrol India
30 July 2012
16
Volumes have declined over CY01-11
Over CY01-11, Castrol's sales volumes have de-grown at a compounded annual rate of
0.8%. However, revenue has grown at a CAGR of 9%, driven by realization CAGR of
10%. The negative volume growth is not only due to increasing drain interval (up from
~18,000km in FY04 to 30,000km for modern 16-tonne CV), but also because Castrol has
deliberately vacated the price-sensitive volume-driven market. Castrol's net profit
margin expanded from 12% in CY02 to 15.6% in CY11. The company has been focusing
on improving its product mix through adept market segmentation and innovative
products. How effectively Castrol is able to continuously improve its product mix by
consistently expanding the premium end of the market and through paradigm-
breaking new product concepts is a key factor to watch.
Margin/unit to sustain
Though volume growth to be muted
? Over CY01-11, Castrol's sales volumes have de-grown, not only due to increasing drain
interval, but also because it has deliberately vacated the price-sensitive volume-driven
market.
? We estimate 2.4% CAGR in Castrol's volumes over CY12-14. However, revenue would
grow at a CAGR of 9%, driven by 6% CAGR in realizations.
? We expect EBIT margin to expand from 19.5% in CY11 to 22.2% in CY13 and estimate net
profit CAGR at 17% over CY12-14.
Source: Company/MOSL
Volume growth over CY00-11 (%) Revenue and realization growth over CY00-11 (%)
Management growth outlook for key segments
The management has guided for auto lube volume growth of 2-2.5% over the next 3-
5 years. Castrol's auto lube sales break-up: diesel engine oils (mostly CVs) 40%,
2-wheelers 20%, passenger cars 15% and OEM/ Construction/ Brake oil, etc 25%. The
management expects the 2-wheeler segment to double in volume terms in the next
3-4 years, while the other segments will likely post marginal growth rates. The
management expects growth in the industrial segment to be marginally stronger
than in the auto segment.
Though volumes
declined, net profit
margin expanded from
12% in CY02 to 15.6% in
CY11
Castrol India
30 July 2012
17
Source: Company/MOSL
Management growth outlook Automobiles: Segment-wise sales break-up
Castrol auto volume Company growth outlook over
break-up % CY12-15
Diesel Engine Oils 40 Expects very low to marginal
growth
2-Wheel ers 20 Expects volumes to double in
3-4 years
Passenger Cars 15 Expects 1% odd growth
OE/ Const/ Others 25 Marginal growth
Total 100 2-2.5% growth
Expect volumes to grow at a CAGR of 2.4% over CY12-14
We expect volume growth for lubricants industry to remain muted, given technological
advancements and increasing drain intervals. We estimate 2.4% CAGR in Castrol's
volumes over CY12-14.
Source: Conference Call post 3QCY11 results
Raw material cost assumptions
2008 2009 2010 2011 2012E 2013E 2014E
Base Oil
Volumes ('000 tons) 182,293 176,838 187,463 168,911 174,637 178,828 183,299
% Change -6 -3 6 -10 3.4 2.4 2.5
Value (INR m) 8,880 6,477 8,624 10,433 11,757 11,859 12,787
% Change 28 -27 33 21 13 1 8
Per Unit (INR/kl) 48.7 36.6 46.0 61.8 67 66 70
% Change 36 -25 26 34 9.0 -1.5 5.2
% of lube sales 41 29 32 37 39 37 36
Additives/ Chemicals
Volumes ('000 tons) 32,494 32,429 31,825 30,076 30,613 31,347 32,131
% Change -3.6 -0.2 -1.9 -5.5 1.8 2.4 2.5
Value (INR m) 3,153 3,363 3,554 3,959 4,392 4,430 4,777
% Change 8 7 6 11 11 1 8
Per Unit (INR/kl) 97 104 112 132 143 141 149
% Change 12 7 8 18 9.0 -1.5 5.2
% of lube sales 15 15 13 14 15 14 14
Total Raw Material Cost (INR m) 13,125 11,238 13,847 16,945 18,820 19,166 20,711
Base Oil (%) 68 58 62 62 62 62 62
Additives (%) 24 30 26 23 23 23 23
Others (%) 8 12 12 15 14 15 15
% of sales 58 47 49 55 57 54 54
Source: Company/MOSL
Castrol India
30 July 2012
18
Sensitivity of net profit and DCF (value/share) to volume growth and realization growth
Change DCF
(+/-) 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E CAGR Value
Volumes
Base (%) 2.1 2.4 2.5 2.7 2.7 2.7 2.7 2.6 2.6 2.5 2.6
Optimistic (%) +1 3.1 3.4 3.5 3.7 3.7 3.7 3.7 3.6 3.6 3.5 3.6
Pessimistic (%) -1 1.1 1.4 1.5 1.7 1.7 1.7 1.7 1.6 1.6 1.5 1.6
PAT (INR b)
Optimistic (INR b) +1% 4.6 5.7 6.5 7.3 8.3 9.4 10.7 12.2 13.9 15.7 14.6% 680
% Change 0.8 1.7 2.6 3.6 4.7 5.9 7.2 8.4 9.8 11.2 8.1
Pessimistic (INR b) -1% 4.5 5.5 6.1 6.8 7.5 8.4 9.3 10.3 11.5 12.7 12.1% 582
% Change -0.8 -1.7 -2.6 -3.5 -4.6 -5.6 -6.8 -7.9 -9.1 -10.3 -7.5
Realization
Base (%) 4.7 5.2 6.7 6.9 6.9 6.9 6.9 6.9 7.0 7.0 6.7
Optimistic (%) +1 5.7 6.2 7.7 7.9 7.9 7.9 7.9 7.9 8.0 8.0 7.7
Pessimistic (%) -1 3.7 4.2 5.7 5.9 5.9 5.9 5.9 5.9 6.0 6.0 5.7
PAT (INR b)
Optimistic (INR b) +1% 4.7 5.9 6.8 7.9 9.1 10.4 12.0 13.9 15.9 18.3 16.3% 699
% Change 3.2 5.8 8.7 11.6 14.6 17.6 20.6 23.6 26.6 29.7 11.1
Pessimistic (INR b) -1% 4.4 5.3 5.8 6.3 6.8 7.4 8.0 8.7 9.5 10.3 9.8% 564
% Change -3.2 -5.7 -8.6 -11.3 -14.1 -16.8 -19.6 -22.2 -24.8 -27.5 -10.3
Both Volume and Realization
Base (%) 6.8 6.7 8.3 8.8 8.7 8.7 8.7 8.7 8.7 8.7 9.48
Optimistic (%) +1 9.0 9.8 11.5 11.9 11.9 11.9 11.9 11.9 11.8 11.8 11.58
Pessimistic (%) -1 4.8 5.7 7.3 7.7 7.7 7.7 7.7 7.7 7.6 7.6 7.4
PAT (INR b)
Optimistic (INR b) +1% 4.7 6.0 7.0 8.2 9.5 11.1 12.9 15.0 17.5 20.3 17.5% 756
% Change 4.0 7.6 11.6 15.7 20.1 24.5 29.2 33.9 38.7 43.7 20.2
Pessimistic ((INR b) -1% 4.4 5.2 5.6 6.0 6.5 7.0 7.5 8.0 8.6 9.1 8.5% 522
% Change -3.9 -7.3 -10.9 -14.4 -18.0 -21.6 -25.1 -28.6 -32.0 -35.4 -17.0
Raw Material
Base (%) 9.0 -1.5 5.2 5.2 5.2 5.2 5.2 5.2 5.3 5.3 4.5
Optimistic (%) -1 8.0 -2.5 4.2 4.2 4.2 4.2 4.2 4.2 4.3 4.3 3.6
Pessimistic (%) +1 10.0 -0.5 6.2 6.2 6.2 6.2 6.2 6.2 6.3 6.3 5.5
PAT (INR b)
Pessimistic (INR b) +1% 4.5 5.4 5.9 6.5 7.1 7.8 8.9 9.4 10.4 11.4 608
% Change -2.4 -4.2 -6.2 -8.2 -10.2 -12.1 -14.0 -15.8 -17.5 -19.2 -3.3
Optimistic (INR b) -1% 4.7 5.9 6.7 7.6 8.7 9.9 11.3 12.9 14.7 16.6 650
% Change 2.4 4.2 6.1 8.0 9.8 11.5 13.2 14.8 16.3 17.8 3.3
Source: MOSL
High sensitivity to volume and realization assumptions
Castrol has high sensitivity to volume and realization assumptions. We have assumed
volume/realization CAGR of 2.4%/ 6% over CY12-14, implying revenue growth of ~9%.
Our volume and realization assumptions over CY12-21 are 2.6% and 7%, respectively.
Over CY01-11, Castrol has reported volume and realization CAGR of -1% and 10%,
respectively. Negative volume growth over CY01-11 was primarily due to Castrol
vacating the price-driven volume market. BP estimates (BP Refining and Marketing
Presentation) BRIC countries to be the largest lubricant market by 2020, given low
vehicle penetration. Furthermore, within the lubricant industry, BP expects premium
lubricants to grow at a faster rate compared to normal lubricants. Consequently, we
believe our assumption of 2.6% volume growth for Castrol is conservative and has
potential for upside surprise.
Castrol India
30 July 2012
19
Decline in raw material prices could boost margins
Historically, base oil prices have closely followed crude oil prices, with correlation at
0.93x. In the last three months, crude oil prices have declined by 18% in USD terms,
which bodes well for Castrol. The exhibit below depicts Castrol's spread between
lube oil realizations and base oil prices.
Spread between Castrol's base oil and lube oil prices Base oil prices follow crude prices with a lag (INR/bbl)
Source: Bloomberg/MOSL
Correlation of 0.93x
CY09 and CY10 were very strong years for Castrol; it retained the price increase it had
taken on the back of higher raw material prices even after the prices declined. Also,
Castrol has already taken marginal price increases in CY12 to cover itself for the sharp
rupee depreciation and increase in base oil prices. Even if base oil prices decline from
current levels, Castrol might retain its enhanced product prices. We model ~11%
increase in Castrol's blended base oil cost in CY12. Castrol imports ~40% of its raw
material requirements.
Raw material cost accounts for 50-55% of Castrol's sales. Most of its raw materials are
crude based and hence very volatile. Nonetheless, given Castrol's high pricing power,
we have summarized the impact on Castrol based on various scenarios. While a secular
upturn in prices is bearish and a secular downturn is bullish for Castrol. Contrary to
popular belief, price cyclicity is positive for Castrol, given its high pricing power.
Scenario outlook for raw material
Scenario Outlook Comments
Secular Increase in Base oil prices Beari sh Likely to impact demand, lead to down
trading and increase use of alternate or
substitutes (CY06)
Secular Fall in Base Oil Prices Bul l i sh Most positive scenario as it would boost
demand, while companies like Castrol
can apportion some part of the decline
and increase margins
Stagnant Base Oil Prices Moderate Bearish as ability to make major price
Beari sh changes limited
Cyclical Base Oil prices Moderate Positive as a company like Castrol
Bul l i sh due to its pricing power can pass on price
increases, while apportioning part of
savings when prices fall (CY09-10)
Source: MOSL
Given high pricing power,
price clycity is positive
Base oil Crude oil
Correlation of 0.83x
Castrol India
30 July 2012
20
Has maintained net margin per unit, negating increasing drain intervals
Over the last decade, the lubricants industry has been witnessing significant
technological advancement and increasing use of semi-synthetic products, which has
steadily increased drain intervals (longevity). For instance, the average drain interval
for a typical 16-tonne CV, which was ~8,000km in CY03, stood at ~18,000km in CY11,
implying a CAGR of 10.7%. As a result, the lubricants industry has grown at just 3-4%
during the last decade. Though Castrol has witnessed a volume decline during the
period, it has managed to maintain its net margin per unit.
Castrol's net spread (margin/kl, INR)
Net margins spread
CY (Year) 2011 2012E 2013E 2014E 2015E
Net Lubricant Spread (Margin/ Kl) 62 62 71 77 84
Drain adjusted Spread/ Kl 57.7 60.9 61.5 61.4
Drain interval 18,000 19,440 20,995 22,675 24,489
Adjusting for the drain Impact 2.25 1.1 1.2 1.3 1.4
CAGR Growth (%) 10.7 8.0 8.0 8.0 8.0
We have assumed a CAGR growth of ~8% for drain interval over CY12-15 and modeled
Castrol to negate the impact of increasing drain intervals and maintain its Margin/
Unit over FY12-15.
Source: MOSL
Net margins spread
CY (Year) 2003 2004 2005 2006 2007 2008 2009 2010 2011
Net Lubricant 26 26 29 29 40 45 62 65 62
Spread (Margin/ Kl)
Drain adjusted 26 23 25 24 31 33 40 31
Spread/ Kl
Drain interval 8,000 9,250 9,458 9,750 10,188 10,917 12,375 16,750 18,000
Adjusting for the 1.00 1.16 1.18 1.22 1.27 1.36 1.55 2.09 2.25
drain Impact
CAGR Growth 10.7%
Castrol India
30 July 2012
21
Expect Castrol to maintain margin at ~INR60/kl over CY12-15
Source: MOSL
Castrol's OoQ volumes are cyclical (MT) Castrol's YoY change in volumes (%)
Source: Company/MOSL
Volume decline (YoY) arrested in 2QCY12
Castrol registered four consecutive quarters of YoY volume decline, over 2QCY11-
1QCY12. This was on the back of Castrol undertaking price increase of ~14% in CY11 to
negate the impact of raw material price increases. Traditionally, Castrol has been the
price decider in the domestic lubricant market, with competitors following its
footsteps. However, in CY11, its key competitors did not follow up with price increases
immediately, which resulted in Castrol's premium over its competitors increasing
from the historical range of 20-25% to 35-40% for a period of about six months. This
resulted in Castrol losing 2-3% market share, with the 2-wheeler segment getting
most adversely impacted. This anomaly got corrected in June 2012, with market leader
IOC taking a 10-12% price hike and Castrol launching a promotional discount scheme
of INR20/pack for its 2-wheeler lubricants. As a result, Castrol's volume growth was
arrested in 2QCY12, with the company registering a 4.8% volume growth.
Registered 4.8% YoY
volume growth in
2QCY12
Castrol India
30 July 2012
22
Market to witness addition of 16m premium vehicles over FY13-15
The overall automobile lubricant market is likely to witness addition of ~76m vehicles,
over FY13-15. Nevertheless, the premium personal mobility segment, which is Castrol's
focus area is likely to grow at a faster pace. The premium mobility segment, comprising
of cars (A3 and above) and 4-stroke 2-wheelers (>125cc), is expected to report a
cumulative CAGR of 19% over FY11-15 and witness new additions of ~15.6m vehicles.
With increasing sales of premium vehicles, the overall market for premium products
is set to expand meaningfully over the next 3-5 years. This should be a key positive
for Castrol, as it is clearly focused on this particular segment and best placed to
leverage this opportunity.
Auto industry growth outlook
'000 units FY11 FY12 FY13E FY14E FY15E
CV 757 901 998 1,124 1,279
PC+UVs+MPVs 2,946 3,126 3,438 3,954 4,547
Three Wheelers 796 876 920 989 1,038
Two Wheelers 13,272 15,381 16,919 19,288 21,988
Total 17,772 20,284 22,276 25,355 28,853
Product Mix (%)
CV 4 4 4 4 4
PC+UVs+MPVs 17 15 15 16 16
Three Wheelers 4 4 4 4 4
Two Wheelers 75 76 76 76 76
Total 100 100 100 100 100
Cumulative Market*
Total CV 4,206 4,949 5,744 6,591 7,523
Old Generation 2,872 3,290 3,845 4,469 5,119
New Generation 1,334 1,658 1,899 2,123 2,404
PC+UVs+MPVs 15,653 18,057 20,716 23,641 26,960
Three Wheelers 4,599 5,259 5,904 6,557 7,221
Two Wheelers 77,963 88,993 100,852 114,519 129,933
Total 102,421 117,258 133,217 151,307 171,637
% growth 14 14 14 13
% of 2 Wheelers 76 76 76 76 76
Value added sales in personal mobility market
Cars above A3 segment 462 545 600 690 793
2W >125cc 3,092 3,574 3,932 4,482 5,110
Total 3,773 4,350 4,787 5,460 6,231
% Change 36 15 10 14 14
Cumulative value added sales in personal mobility market#
Cars above A3 segment 2,647 3,072 3,543 4,042 4,596
2W >125cc 13,920 17,494 21,139 25,139 29,729
Total 17,815 21,757 25,934 30,685 35,683
% Change 22 19 18 16
*We have considered life of vehicles as 10 years Source: SIAM/MOSL
# We have considered passenger cars (A3 segment and above) and 2-wheelers (>125cc) as
premium personal mobility market.
Castrol India
30 July 2012
23
Lube usage across vehicles in urban and semi urban areas
Drain Intervals Aprrox Slump Average Annual Average Annual Usage
(Km) Size (Ltrs.) Usage (Ltrs.) Usage Times (x) Per Year (Km)
Old Gen. CV 15,000 20 93 4.7 70,000
New Gen. CV 30,000 15 48 3.2 95,000
Cars 5,000 4 10 2.4 12,000
2 Wh. (4 St) 2,100 0.9 4 4.8 10,000
Source: Industy/MOSL
Typical usage of lube oil across vehicles
Lubricant usage is the highest in CVs (~93 liters per year for old generation CVs; ~48
liters per year for new generation CVs). Passenger cars require ~10 liters, while
two-wheelers require just ~4 liters a year. In case of two-wheelers, the lube oil is
typically changed ~5 times a year, given that the slump size of a motorcycle is only
one liter. Also, a high proportion of two-wheeler owners change lube oil on their
own. This could be the key reason for the high involvement of two-wheeler owners
in the purchase of lube oil.
Product mix of vehicles Total premium personal mobility vehicles ('000)
Average annual usage (KL) Average annual usage times (x) Drain intervals (KL)
Source: Industry/MOSL
Castrol India
30 July 2012
24
EBIT movement over CY04-14 (INR m)
Source: Company/MOSL
EBIT margins to improve from CY13
Castrol's EBIT margins have been under pressure in CY11 and 1HCY12, given pressure
from raw material and INR/USD. In CY11, base oil prices were impacted by external
issues such as trouble in the Middle East, fire outage at Formosa and national oil
companies taking shutdown. With crude prices under pressure (down 18% from its
CY12 peak), INR/USD expected to stabilize (our INR/ USD assumption for FY13 is 53.5)
and some other external issues getting resolved, we expect base oil prices to be
under pressure and model base oil prices at INR66/Kl (down 1.5%). This coupled with
realization improvement (4.7%/ 5.2% for CY12/ CY13) would boost CY13 margins by
308bp. We have modelled a 4.5% CAGR for raw material cost and 6.7% CAGR for per
unit realization over CY12-21. Realization improvement would be primarily driven by
new innovative product launches, improved product mix given move towards more
premium/ synthetic lubricants and technological advances. We have modeled Castrol's
EBIT margin to improve from 18.6% in CY12 to 22.2% in CY14.
Total cost break-up (%)
Source: Company/MOSL
Expect EBIT margin to
improve from 18.6% in
CY12 to 22.2% in CY14
E E E
Castrol India
30 July 2012
25
Expect revenue CAGR of 9%, net profit CAGR of 17% over CY12-14
We expect Castrol to post revenue CAGR of 9% and net profit CAGR of 17% over CY12-
14. Revenue growth would be driven by 2.4% volume growth and 5.9% realization
growth. We expect EBIT margin to expand from 19.5% in CY11 to 22.2% in CY13 on the
back of lower raw material cost (55% of sales in CY11 to 52.9% in CY13), in turn driven
by declining base oil prices.
Revenue and net profit CAGR over CY11-14
Source: Company/MOSL
Expect advertisement and discount cost to remain at ~10% of sales
Source: Company/MOSL
Castrol's FCF and payout over CY05-14 Castrol's RoE and RoCE over CY05-14
Source: Company/MOSL
Castrol India
30 July 2012
26
FCF of INR27b over CY02-11; 87% paid out as dividend
Castrol has been a cash machine for its investors. Over CY02-11, it has generated free
cash flow (FCF) of INR27b, with total reinvestment of negative INR3b. Castrol's
cumulative net capex (capex - depreciation) over the period was a negative INR408m,
while cumulative net working capital (net cash) was a negative INR2.5b. Furthermore,
it has paid out 87% of its FCF as dividend, allowing shareholders to redeploy the cash
in other opportunities. Castrol has been able to achieve this performance by virtue of
its inimitable business model and by commanding very favorable terms of trade.
A cash machine for shareholders
FCF of INR27b over CY02-11; 87% paid out as dividend
? Over CY02-11, Castrol generated FCF of INR26.8b, with total reinvestment of negative
INR3b.
? Castrol's cumulative net capex (capex - depreciation) over the period was a negative
INR408m, while cumulative net working capital (net of cash) was a negative INR2.5b.
? It has paid out 87% of its FCF as dividend.
Summary of FCF over CY02 to CY11 (INR m)
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
Revenues 11,751 12,075 13,477 14,645 18,025 19,660 22,624 23,906 28,020 30,821 195,003
% Change 3 12 9 23 9 15 6 17 10
Net Profit 1,409 1,253 1,154 1,348 1,545 2,184 2,624 3,811 4,903 4,810
% Change -11 -8 17 15 41 20 45 29 -2
EBIT 2,375 2,067 1,980 2,135 2,018 3,074 3,739 5,480 7,006 6,331 36,206
% of Sales 20.2 17.1 14.7 14.6 11.2 15.6 16.5 22.9 25.0 20.5 18.6
% Change -13 -4 8 -5 52 22 47 28 -10
EBIT(1-t) 1,571 1,367 1,310 1,412 1,335 2,033 2,473 3,625 4,634 4,187 23,947
Less: Total Re-investment -1,818 1,504 -354 341 381 -2,186 1,191 -2,613 -370 1,018 -2,905
Depreci ati on 134 143 249 189 180 208 257 272 243 251 2,126
Capex 116 27 36 75 94 244 369 202 238 318 1,718
Net Capex (Capex- Dep.) -18 -116 -212 -114 -86 36 112 -70 -6 67 -408
Change in WC -1,800 1,620 -142 456 468 -2,222 1,079 -2,543 -364 952 -2,496
FCFF 3,389 -137 1,664 1,071 953 4,219 1,282 6,238 5,003 3,169 26,852
Dividend Payout (with Tax) 2,238 1,151 1,155 1,163 1,269 2,044 2,170 3,616 4,325 4,311 23,441
% of PAT 159 92 100 86 82 94 83 95 88 90 94
% of FCF 66 -842 69 109 133 48 169 58 86 136 87
Computed Variables
Total Capital Invested 1,440 2,944 2,590 2,931 3,312 1,126 2,318 -295 -665 353
Reinvestment 1,504 -354 341 381 -2,186 1,191 -2,613 -370 1,018
ROIC 46 51 48 40 181 107 - - 1,186
Source: Company/MOSL
Expect FCF to remain robust over CY12-21, as well
We expect Castrol to repeat this performance over CY12-21, given that (a) industry
structure has become more conducive for large marketers like Castrol, (b) opportunity
size and growth is higher, and (3) its increasing returns advantage moat will allow it to
emerge stronger and bigger.
Castrol India
30 July 2012
27
Summary of FCF over CY12 to CY21 (INR m)
Base Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Total
Revenues 32,865 35,353 38,579 42,256 46,280 50,691 55,524 60,819 66,613 72,929 78,799 547,842
Net Profit 4,853 4,559 5,612 6,283 7,044 7,901 8,877 9,966 11,201 12,624 14,128 88,196
EBIT 6,106 7,657 8,580 9,690 10,894 12,248 13,765 15,476 17,467 19,540 18,439 133,757
EBIT(1-t) 4,189 4,039 5,066 5,677 6,411 7,208 8,103 9,107 10,239 11,556 12,928 12,199
- Reinvestment 1,018 -226 -199 -293 -243 -150 -319 -314 -242 -21 -412 -2,420
Depreci ati on 251 301 331 362 394 430 468 511 559 610 668 4,634
Capex 318 300 350 370 390 435 460 525 585 625 700 4,740
Net Capex (Capex- Dep.) 67 -2 19 8 -4 5 -8 14 26 15 32 106
Change in WC 952 -224 -218 -301 -239 -156 -311 -328 -268 -36 -444 -2,526
FCFF 3,170 4,266 5,265 5,970 6,654 7,358 8,422 9,421 10,481 11,578 13,339 9,780
Capital Employed 6,042 5,816 5,617 5,324 5,081 4,930 4,611 4,297 4,056 4,034 3,622
New Investments -226 -199 -293 -243 -150 -319 -314 -242 -21 -412
ROC 69% 90% 107% 126% 146% 176% 212% 252% 286% 357%
Dividend Payout (with Tax) 4,325 5,046 5,767 6,487 7,064 7,929 8,938 9,803 10,956 12,398
% of PAT 95 90 92 92 89 89 90 88 87 88
% of FCF 101 96 97 98 96 94 95 94 95 93
Source: MOSL
Our assumptions for both volumes and realizations are conservative. We have
assumed that (1) growth in lubes industry volumes would be low at 2.6%, given
continuous technological advancement, (2) Castrol's relative market share will improve
by just ~2%, and (3) the retail petrol pump distribution channel, which we believe
will account for 12-20% of the market over the period, will remain out of reach for the
private sector players. We believe the key trigger for Castrol will be higher than
expected volume growth, without compromising much on margins. When
accompanied by high growth, companies that enjoy high cash flows, low risks and
require little capital command very high valuation multiples.
Key trigger for Castrol
will be higher than
expected volume growth,
without compromising
much on margins
Castrol India
30 July 2012
28
We expect Castrol to post earnings CAGR of 17% and FCF CAGR of 18% over CY12-14.
We have valued Castrol using (a) DCF methodology, and (b) intrinsic P/E and P/B
multiple. Given that Castrol is a tremendous FCF generator, has stable cash flows,
requires very low capex, and maintains a high payout ratio, we believe the most
appropriate way to value Castrol is through DCF. We recommend Buy with a DCF-
based target price of INR629. Our key assumptions are tabulated below.
Buy with a DCF-based target price of INR629, 17% upside
Huge free cash flows; valuations reasonable
? Castrol provides a vehicle to invest in a company with multiple and rare moats, huge free
cash flow generation capability, high governance standards and reasonable valuations.
? We expect Castrol to post earnings CAGR of 17% and FCF CAGR of 18% over CY12-14.
? We initiate coverage with a Buy rating and a DCF-based target price of INR629, 17%
upside.
Key assumptions
Valuation Inputs (%) Comments
Growth Period
Risk free Rate (Rf) 8.1 RBI 10 year G-sec Bond Yield
Levered Raw Beta (B) 0.405 Bloomberg 1 year average Raw Regression Beta
Market Risk Premium (Rmp) 7.4 Implied India Risk Premium based on Sensex
Cost of Equity: Rf+B(Rmp) 11.0
Stable Period
Risk free Rate (Rf) 8.1 RBI 10 year G-sec Bond Yield
Levered Raw Beta (B) 0.38 Bloomberg 10 year average Raw Regression Beta
Market Risk Premium (Rmp) 7.4 Implied India Risk Premium based on Sensex
Cost of Equity: Rf+B(Rmp) 10.9
India country Default Spread 2.0 Bases on S&P Bond Default spread of 2% based on India's
BBB+ rating
Adjusted Risk free Rate (Rf) 6.05 Real Risk free rate in India
Terminal Growth rate (Tg) 6.05 Real Risk free rate in India (Rf minus Country Default Risk)
Source: MOSL
Valuation summary
Method Target Price (INR) Upside (%)
DCF CY13 629 17
Intrinsic PE and PB multiples CY13# 631 18
Source: MOSL
Expect Castrol to post
earnings CAGR of 17%
and FCF CAGR of 18%
over CY12-14
Castrol India
30 July 2012
29
DCF valuation at INR629/share
We believe DCF is the best way to capture the intrinsic value of Castrol, given its
stable cash flow, stable growth profile and low capex requirement. We have done a
two-stage DCF valuation for Castrol. We have assumed revenue CAGR of 9% and net
profit CAGR of 12% over CY12-21. Our terminal growth rate assumption is the real risk-
free rate of return in India, which is calculated as the 10-year risk-free rate minus S&P
default spread for India, which is currently at 2%. Using the DCF methodology, we
arrive at a value of INR629/share.
DCF calculations (INR m)
Terminal
Base 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Year
Revenue Growth (%) 10 6.6 7.6 9.1 9.5 9.5 9.53 9.53 9.54 9.53 9.48 8.1
Revenues 30,821 32,865 35,353 38,579 42,256 46,280 50,691 55,524 60,819 66,613 72,929 78,799
EBIT Margin (%) 20.5 18.6 21.7 22.2 22.9 23.5 24.2 24.8 25.4 26.2 26.8 23.4
EBIT 6,331 6,106 7,657 8,580 9,690 10,894 12,248 13,765 15,476 17,467 19,540 18,439
Taxes 2,142 2,066 2,591 2,904 3,279 3,687 4,145 4,658 5,237 5,911 6,612 6,240
EBIT(1-t) 4,189 4,039 5,066 5,677 6,411 7,208 8,103 9,107 10,239 11,556 12,928 12,199
+ Depreciation 251 301 331 362 394 430 468 511 559 610 668 688
- Capital Expenditures 318 300 350 370 390 435 460 525 585 625 700 756
- Chg WC 952 -224 -218 -301 -239 -156 -311 -328 -268 -36 -444 -236
FCFF 3,170 4,266 5,265 5,970 6,654 7,358 8,422 9,421 10,481 11,578 13,339 12,368
Terminal Value 258,036
Cost of Capital Calculations
Tax Rate (%) 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8 33.8
Cost of Equity (%) 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 11.0 10.8
Computed Variables
Total Capital Invested 6,276 6,050 5,851 5,558 5,315 5,165 4,846 4,531 4,290 4,268 3,857
Reinvestment Rate 0.24 -0.06 -0.04 -0.05 -0.04 -0.02 -0.02 -0.02 -0.02 -0.02 -0.02
Return on Capital (%) 97.3 126.6 146.6 174.3 205.0 237.2 284.1 341.5 407.2 457.8
Present Value Calculations
Cumulative WACC 1.00 1.11 1.23 1.37 1.52 1.69 1.87 2.08 2.31 2.56
Present Value of FCFF 4,266 4,743 4,844 4,863 4,845 4,996 5,034 5,044 5,020 5,210
Present Value of Terminal Value 100,774
Source: MOSL
Valuation
PV of FCFF during high growth phase = 48,864
PV of Terminal Value = 100,774
Value of Operating Assets of the firm = 149,638
Value of Cash & Non-operating assets= 5,950
Value of Firm = 155,588
- Value of Outstanding Debt = 0
Value of Equity = 155,588
Value of Equity in Common Stock = 155,588
Value of Equity per share = 629
Upside (%) 17.4%
Source: MOSL
Castrol India
30 July 2012
30
Sensitivity of DCF (value/share) to terminal growth rate
Sensitivity of volume growth to DCF (value/share) Sensitivity of realization growth to DCF (value/share)
Source: MOSL
Sensitivity analysis
Terminal Growth and Cost of Equity (COE)
COE (%)
9% 10% 11% 12% 13%
Termi nal 5.05% 636 596 559 525 493
Growth 6.05% 719 672 629 590 553
7.05% 846 789 737 689 645
Source: MOSL
Growth beta and terminal growth
Terminal Growth Rate (%)
4.05 5.05 6.05 7.05 8.05
0.20 559 615 694 815 1023
Growth 0.30 533 586 661 775 970
Beta 0.40 509 559 629 737 921
0.50 487 534 600 701 875
0.60 466 510 572 668 831
Stable period beta and terminal growth
Terminal Growth Rate (%)
4.05 5.05 6.05 7.05
0.28 544 608 703 860
Stable Period 0.38 509 559 629 737
Beta 0.48 481 521 575 653
0.58 458 491 534 593
Source: MOSL
Base case -1% +1% +1% +1% -1% -1% Base case -1% +1% +1% +1% -1% -1%
DCF (value/sh)
(val ue/sh)
Source: MOSL
Base case -0.5% -1% -1.5% +1.5% +1% +0.5%
Base case -0.5% +0.5% +1% +1.5% -1% -1.5%
(val ue/sh)
Castrol India
30 July 2012
31
Intrinsic P/E calculation for Castrol
Intrinsic PE Multiple
Current Inputs
Current Earnings (INR m) 4,559
Book value of equity (INR m) 6,276 ROE = 73%
Revenues (INR m) 33,672
Growth Period
Length of growth period (Years) 10
Growth rate during period (g) 11.38% Expected ROE = 63%
Payout ratio during period (%) 82
Cost of Equity during period (%) 11.01
Stable/ Terminal Growth Period
Growth rate in steady state (%) 6.05
Payout ratio in steady state (%) 85 Expected ROE = 40%
Cost of Equity in steady state (%) 10.84
Price/Earnings Ratio 27.8
Target Price (Based on CY13E EPS) 631
Current Price 536
% Upside 18
Footnote: The intrinsic P/E of a company can be stated as "Payout Ratio * (1 + Growth Rate) / (Cost of Equity - Growth Rate)". Here,
the growth rate (G) can be further divided into growth during high growth period and growth during stable/terminal period. P/
E for a stock is a derivative of the RoE a company makes in its current business (value in place), RoE it expects to make in its
future investments (value for growth) and the RoE we expect the company to make in its stable/terminal period. The reinvestment
in growth and stable period is calculated as (1- Payout Ratio).
Intrinsic P/E based valuation at INR631/share
Given its cash flow, growth and margin attributes, we have calculated the intrinsic
P/E multiple for Castrol. Relative valuation comparisons fail to adjust the variance in
cash flow (FCF), risk (beta), growth profile (reinvestment needs) and returns (RoE) in
different stocks. Intrinsic multiple calculations, however, incorporate the various
characteristics that determine the value of a firm.
Based on our intrinsic P/E calculation, Castrol should tarde at a P/E multiple of 27.8x
v/s the current 23.6x CY13E EPS. The intrinsic P/E of 27.8x implies a value of INR631/
share (based on CY13 estimates). Our expected RoE for Castrol in the growth period is
63%, while our expected RoE in the stable/terminal period is 40%.
Cost of Equity: Growth Period Cost of Equity: Stable Period
Rf 8.1% Rf 8.1%
Rmp 7.4% Rmp 7.4%
Beta 0.40 Beta 0.38
COE 11.0% COE 10.8%
Castrol India
30 July 2012
32
Castrol India: Historical P/E Castrol India: Historical P/B
Comparative valuations
CMP M Cap EPS Gr. (%) P/E (x) P/BV (x) EV/EBIDTA RoE (%) RoCE (%) Pay. Ratio
(USD b) FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY12
Asian Paints 3,564 6.0 17.7 17.9 29.4 24.9 10.2 8.4 17.7 13.9 34.7 33.8 46.6 45.6 38.8
Col gate 1,166 2.8 11.9 13.2 31.2 27.6 30.7 25.5 22.5 19.3 108.1 101.0 108.5 101.3 78.0
HUL 476 17.9 25.2 15.3 31.9 27.7 22.7 17.6 25.1 21.6 71.2 63.7 93.3 83.8 63.0
ITC 251 35.5 16.4 17.8 27.0 22.9 8.7 7.4 17.5 14.7 32.3 32.2 45.4 45.7 52.7
Nestle India* 4,453 7.6 16.5 20.4 36.2 30.0 23.7 18.5 23.3 18.7 77.0 69.1 64.9 66.5 53.3
Castrol India* 536 2.3 23.4 11.9 23.6 21.1 19.4 18.0 15.6 13.9 74.0 85.6 99.1 116.7 89.9
* CY year end Source: Bloomberg/MOSL
Castrol India: Historical EV/ sales Castrol India: Historical EV/EBITDA
Source: Bloomberg/MOSL
Castrol India
30 July 2012
33
Key concerns
Longer oil drain intervals: Over the last decade, volume growth in the lubricants
market has been low at 3-5%, despite strong growth in the automobile industry. This
has primarily been due to advances in technology, resulting in steadily increasing
drain intervals. Castrol enjoys superior pricing power and has been able to maintain
its margin/unit; it does not need to depend on volume growth.
Volatile raw material prices: Most of Castrol's raw materials such as base oil and
additives are crude oil derivatives. As such, raw material price volatility is a key risk.
However, given low price sensitivity of lubricant demand and endogenous demand,
Castrol has historically been able to successfully deal with this challenge.
Aggressive foray by oil PSUs into bazzar trade: The oil PSUs have begun attempting
aggressive forays into the bazzar trade and have begun giving tough competition to
private players. BPCL has enjoyed decent success with its 'MAK' brand. Increasing
advertisement spends by the oil PSUs could result in margin pressure for private
players like Castrol.
OEMs introducing own brands: Some OEMs have introduced their own brands.
However, for these OEMs, lubricants are not a core business, and they do not have an
addressable market beyond their immediate requirements. Due to these issues, their
costs are relatively higher and they are also not able to achieve minimum efficiencies
of scale.
Exchange rate volatility: Castrol imports ~40% of its raw material requirements, and
raw materials account for ~50% of its sales. As such, it is exposed to exchange rate
volatility. Nonetheless, Castrol has been able to pass on any adverse impact and
maintain fairly stable margins.
Castrol India
30 July 2012
34
Background
Castrol India Limited, a 71% subsidiary of BP, is a leading lubricants player in India,
with ~20% market share of the domestic automotive lubricants industry. It
manufactures and markets a range of automotive and industrial lubricants. It markets
its automotive lubricants under two brands - Castrol and BP. The company enjoys
leadership in most of the segments it operates in, including tractor oils, car engine
oils, two-wheeler 4-stroke oils, and multi-grade diesel engine oils.
Castrol has the largest manufacturing and marketing network amongst the lubricant
companies in India. It has five plants across the country, including a state-of-the-art
manufacturing facility at Silvassa. It has a distribution network of 270 distributors,
servicing over 70,000 retail outlets.
Though Castrol is present in both automotive lubricants and industrial lubricants, its
strengths are in the automotive segment. In CY11, the product mix between the
automotive and industrial & marine segments was ~86% and ~14%, respectively. EBIT
contribution was also similar, with the automotive segment contributing ~84% and
the industrial and marine segment contributing ~16%.
Castrol: Involvement across the value chain
Castrol: Revenue and EBIT contribution from the automotive segment
Source: Company/MOSL
Source: BP Downstream Presentation 2030
Castrol India
30 July 2012
35
Key management personnel
Mr SM Datta, Chairman
Mr SM Datta graduated with Honors in Chemistry from the Presidency College, Kolkata
and obtained a Post Graduate degree in Science & Technology from the University of
Calcutta. He is a Chartered Engineer, Fellow of the Institution of Engineers, Fellow of
the Indian Institute of Chemical Engineers, Member, Society of Chemical Industry
(London) and Honorary Fellow of All India Management Association. He has been
President of Associated Chambers of Commerce & Industry, President of the Council
of EU Chamber of Commerce in India, President of the Bombay Chamber of Commerce
& Industry, President of Indian Chemical Manufacturers Association, and Chairman of
Bombay First.
Mr R Kirpalani, Chief Operating Officer, Director - Automotive
Mr Ravi Kirpalani is an Economics (Honors) graduate from St Stephens College, Delhi
and an MBA from IIM, Kolkata. Mr Kirpalani has over 30 years of experience in Sales,
Marketing and Strategy. He joined Castrol India in 1999 as General Manager, East and
was promoted in 2002 to Vice President - Sales. In 2004, he was appointed as Customer
Director for India, Middle East, Turkey and Africa. In 2005, he moved to the UK as
Transformation Director and was a Member of the Global Strategy Team. He played a
key role in the implementation of the group's global strategy. Mr Kirpalani returned
to Castrol India in 2009 as Director - Automotive and Chief Operating Officer. Prior to
Castrol, Mr Kirpalani worked for Reckitt Benckiser for 12 years and for a leading
consumer products company in Muscat, Oman.
Mr Uday Khanna, Director
Mr Uday Khanna is a Chartered Accountant. Before joining Castrol, he was with the
Lafarge Group. He joined the Lafarge Group in Paris on 1 June 2003 as Senior Vice
President for Group Strategy, after a long experience of almost 30 years with Hindustan
Lever/Unilever in a variety of financial, commercial and general management roles
both nationally and internationally. From July 2005 to July 2011, Mr Khanna was the
Managing Director and Chief Executive Officer of Lafarge India.
Mr Sujit Vaidya, Director - Finance, Whole-time Director
Mr Sujit Vaidya has been Director - Finance and Whole-time Director since November
2010. Mr Vaidya served as an Additional Director at Castrol India from 12 October 2010
to 16 November 2010. He is a qualified Chartered Accountant with a varied experience
in financial control & accounting, business strategy & planning and financial analysis
of over 20 years in MNCs (P&G, Citibank), accounting & consulting firms (BCG & KPMG)
and a large oil company (BP/ Castrol).
Castrol India
30 July 2012
36
Financials and Valuation
Income Statement (INR Million)
Y/E December CY10 CY11 CY12E CY13E CY14E
Net Sales 28,020 30,821 32,865 35,353 38,579
Change (%) 17.2 10.0 6.6 7.6 9.1
Raw Material 13,847 16,945 18,820 19,166 20,711
Employee Cost 993 1,111 1,183 1,273 1,350
Other Manuf. Exp. 6,492 6,492 6,492 6,492 6,493
Selling Admin. & Other Exp. 4,446 4,650 4,831 5,179 5,671
Total Expenditure 20,770 24,239 26,458 27,364 29,637
EBITDA 7,249 6,582 6,407 7,989 8,942
Change (%) 26.0 -9.2 -2.7 24.7 11.9
% of Net Sales 25.9 21.4 19.5 22.6 23.2
Depreci ati on 243 251 301 331 362
EBIT 7,006 6,331 6,106 7,657 8,580
Interest & Finance Charges 24 19 19 20 20
Other Income 395 846 807 848 940
PBT 7,377 7,158 6,893 8,485 9,500
Tax 2,474 2,348 2,334 2,873 3,217
Effective Rate (%) 33.5 32.8 33.9 33.9 33.9
Reported PAT bef. MI 4,903 4,810 4,559 5,612 6,283
Change (%) 28.7 -1.9 -5.2 23.1 12.0
Adjusted PAT 4,914 4,853 4,559 5,612 6,283
Change (%) 27.6 -1.2 -6.1 23.1 12.0
Balance Sheet (INR Million)
Y/E December CY10 CY11 CY12E CY13E CY14E
Equity Capital 2,473 2,473 2,473 2,473 2,473
Reserves 3,062 3,569 3,803 4,370 4,886
Net Worth 5,535 6,042 6,276 6,843 7,359
Capital Employed 5,535 6,042 6,276 6,843 7,359
Gross Fixed Assets 2,955 3,066 3,676 4,026 4,396
Less: Depreciation 1,752 1,941 2,242 2,573 2,935
Net Fixed Assets 1,203 1,125 1,434 1,452 1,461
Curr. Assets 11,628 12,035 13,064 14,169 15,587
Inventory 2,442 3,009 3,334 3,388 3,664
Sundry Debtors 1,784 2,190 2,333 2,510 2,739
Cash & Bank Balances 6,193 5,490 5,950 6,716 7,525
Loans & Advances 1,209 1,347 1,446 1,556 1,659
Current Liab. & Prov. 7,833 7,991 8,784 9,341 10,251
Sundry Creditors 4,949 5,140 5,834 5,750 6,213
Provisions 2,884 2,852 2,950 3,592 4,038
Net Current Assets 3,795 4,044 4,280 4,828 5,336
Deferred Tax Liability 371 562 562 562 562
Application of Funds 5,535 6,042 6,276 6,843 7,359
E: MOSL Estimates
Castrol India
30 July 2012
37
Financials and Valuation
Ratios
Y/E December CY10 CY11 CY12E CY13E CY14E
Basic (INR)
Adj. EPS 19.9 19.6 18.4 22.7 25.4
Adj Cash EPS 20.9 20.6 19.7 24.0 26.9
Book Value per Share 22.4 24.4 25.4 27.7 29.8
DPS 15.0 15.0 15.0 17.5 20.0
Payout (Incl. Div. Tax) % 88.2 88.4 94.9 89.9 91.8
Valuation (x)
P/E 27.0 27.3 29.1 23.6 21.1
Cash P/E 25.7 26.0 27.3 22.3 19.9
EV/EBITDA 17.4 19.3 19.8 15.8 14.0
EV/Sal es 4.5 4.1 3.9 3.6 3.2
Price to Book Value 23.9 21.9 21.1 19.4 18.0
Dividend Yield (%) 2.8 2.8 2.8 3.3 3.7
Profitability Ratios (%)
RoE 79.4 93.7 83.8 74.0 85.6
RoCE 112.6 133.6 109.4 99.1 116.7
Turnover Ratios
Debtors (Days) 24 23 26 26 26
Inventory (Days) 60 58 59 59 59
Creditors (Days) 129 109 110 108 108
Working Capital (Days) -44 -28 -25 -23 -23
Asset Turnover (x) 5.1 5.1 5.2 5.2 5.2
Gross Fixed Asset Turnover (x) 9.5 10.1 8.9 8.8 8.8
Leverage Ratio
Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0
Cash Flow Statement
Y/E December CY10 CY11 CY12E CY13E CY14E
PBT before E.O. Items 7,377 7,158 6,893 8,485 9,500
Add : Depreciation 243 251 301 331 362
Add: Interest 24 19 19 20 20
Less : Direct taxes paid 2,474 2,348 2,334 2,873 3,217
Inc/Dec in WC 364 (952) 224 218 301
CF from operations 5,535 4,129 5,104 6,181 6,966
CF from Oper. incl. EO Items 5,535 4,129 5,104 6,181 6,966
(Inc)/Dec in FA (238) (318) (300) (350) (370)
(Pur)/Sale of Investments 5 0 0 0 0
CF from investments (232) (318) (300) (350) -370
Inc/Dec in Networth 7 8 0 0 0
Inc/Dec in Debt 0 0 0 0 0
Less: Dividend Paid 4,325 4,311 4,325 5,046 5,767
CF from Fin. Activity (4,367) (4,514) (4,344) (5,066) (5,787)
Inc/Dec of Cash 935 (703) 460 765 810
Add: Beginning Balance 5,258 6,193 5,490 5,950 6,716
Closing Balance 6,193 5,490 5,950 6,716 7,525
E: MOSL Estimates
Castrol India
30 July 2012
38
N O T E S
Motilal Oswal Company Gallery
Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: [email protected]
Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement Castrol India
1. Analyst ownership of the stock Yes
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
4. Investment Banking relationship with company covered No
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Any business interaction pursuant to this report will have to be executed
within the provisions of this Chaperoning agreement.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

doc_807913701.pdf