Stock To Buy: Motilal Oswal Has Given Buy Call To This Oil & Gas Stock For 35% Potential Gains

Stock Outlook

The stocks of the Castrol India opened today at Rs 109 and after gaining 1.30%, it closed at the Current Market Price (CMP) of Rs 108.95. With the target price of Rs 146 and the CMP, Castrol has the potential to gain 35%. In the last 1 year, the stocks have witnessed a downfall, however, in the last 1 month, it has maintained a good hold. It touched the 52-week low level at Rs 99.05 on 30 March 2022. On the other hand, the 52 week high at Rs 154.90, was touched last year on 07 June 2021.

In CY21, as the world began to come to terms with the first wave of COVID, the second wave hit the economy and Castrol as a company faced several challenges and disruptions. To add to its woes, raw material prices were at an all-time high for Castrol. Despite this, the company managed to deliver a resilient performance during the year.

Higher volume and realization lead to sustained financial performance

Castrol's gross profit grew 23% YoY in CY21 led by higher volume and strategic price interventions by the company. In effect, realization improved 12% YoY to Rs 202/liter in CY21 from Rs 181/liter in CY20. Operating and other expenses increased 20% YoY in CY21 mainly due to the supply chain disruptions led by rising input costs. Availability of raw materials was also an issue with the highest adverse impact visible in the APAC region. In CY21, Castrol reported 30% YoY PAT growth, after it recorded a 30% YoY decline in PAT in CY20. However, gross margin contracted in CY21 to 51% from 58% in CY20. Likewise, EBITDAM contracted 200bp in CY21 to 25%.

According to the brokerage firm, the expansion of product portfolio through brand leverage continues in CY21 for the Castrol. Castrol launched products with BS-VI ready technology for both passenger cars and commercial vehicles. The company expanded its Castrol Auto Service (CAS) network to 116 multi-brand passenger car workshops in 50+ cities across India.

Why should you buy it? The growth drivers for Castrol

The growing demand for vehicles along with their increased usage is fuelling demand for automotive lubricants. Technological advancement in automotive hardware design is also leading to improved demand for more efficient and premium lubricants. The Government of India also introduced a vehicle scrappage policy in its Union Budget 2021 that aims to phase out cars and CVs older than 15-20 years, to slash urban pollution levels and stimulate automobile sales. This policy would also accelerate demand for OEMs and reduce pollution (emanated from vehicles) and oil import costs by encouraging demand for fuel-efficient, environment-friendly vehicles.

Brokerage Comments & Views on Ventures/Tie-ups, Target Price, Risks

Castrol's capex guidance for CY22 stands at ~Rs 1b and it would remain around similar levels in future as well. Castrol is venturing into new areas such as CAS and the tie-ups with Jio-BP (which would require capex) will help the company gain market share. Castrol is also looking to improve the yields through its cash on books of ~Rs 13b at present. Castrol is the perfect candidate of a value play with a return ratio of 47-50% and dividend payout policy of >70% (translating into a dividend yield of ~7%).On a one-year forward P/E basis, the stock trades at a ~55% discount to its LT P/E average of 25.9x. "We value the stock at 15x CY23E EPS to arrive at our Target Price of Rs 146," the brokerage has said.

The brokerage also highlights the downside risks to their buy call. According to the brokerage the risks are as follows:
a) General slowdown of the economy.
b) Continued volatility in input costs.
c) Foreign exchange issues that could hamper the company's margins.