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Stock pick of the week: Castrol is expected to give strong performance in few more quarters

Volume growth and margin expansion is expected to continue for a few more quarters. Continuous launch of new products in the personal mobility space, demand revival from commercial vehicle and agriculture space are expected to help Castrol.

, ET Bureau|
Last Updated: Feb 10, 2020, 09.48 AM IST
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Analysts expect that volume growth and margin expansion will continue for a few more quarters.
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After reporting lacklustre results in the third quarter of 2019, Castrol beat street expectations with its fourth quarter numbers. Castrol’s revenue and net profit grew by 19% and 44% respectively q-o-q. Despite fall in volumes from industrial and OEM segments, Castrol achieved 23% q-o-q overall volume growth due to better performance by the personal mobility segment.

Increase in margins during the fourth quarter is worth mentioning. Its gross profit per litre improved further to Rs 108. The price increase by Castrol in September 2019 is one reason for this. Efficient sourcing of raw material is the next reason. Though international base oil prices remained almost flat in the fourth quarter, Castrol could bring down its cost per litre by 9% due to its sourcing efficiency. Volume tilt towards high margin personal mobility segment in the fourth quarter is another reason for the margin jump.

Analysts’ views
Buy 9
Hold 2
Sell 1

Analysts expect that volume growth and margin expansion will continue for a few more quarters. In addition to continuous launch of new products in the personal mobility space, demand revival from commercial vehicle and agriculture space should also help Castrol achieve this. The revival in automobile manufacturing, after few months of production disruptions, should also help Castrol to regain its OEM volume.

Its margin expansion in coming quarters will be aided by the recent fall in crude oil—Brent has crashed from $66 on 31 Deccember 2019 to $55 now. Castrol has already launched products for BS-VI vehicles and this shift will benefit it in the short term because BS-VI products have high margins. Though volume growth and margin expansion will moderate after few quarters, Castrol is expected to report industry beating growth rates.

For example, analysts believe that Castrol will be able to maintain 5% plus volume growth in the long term. This will be achieved through continuous brand building and enhancement in distribution network. Acquisition of new clients, like its recent tie up with Ford India, Honda Two Wheelers India, Jawa Motorcycles, Renault India, etc. should also help it to improve future volume.

Since Castrol believes in profitable growth and maintains strict profitability targets for each segment—in terms of profit per litre—its margins should also remain at elevated levels. The Castrol counter is slowly coming back to the limelight after being an underperformer. However, its valuation is still low and therefore, long term investors can consider this counter.

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Castrol compared with ET Oil & Gas and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.
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