Castrol, The Heartthrob of the Street

The lubricant maker Castrol India has been the heartthrob of the market off late. The stock has been on the expected line with 5% increase in the sale and 12% increase in the net profit. The company’s net profit had risen 30% in the year ended December 2015 and 17% in March 2016. The volume had hiked by 7% while raw material, as a proportion of sales, fell to 39% from 44% a year ago. The company has been gaining from the falling crude oil prices and the continued up-tick in the auto industry which has aided the sales of automotive lubricants.

Castrol has reported a decent growth despite the slug in the auto lubricant segment. With auto sales in the middle of an upturn and continuing to grow rapidly, Castrol’s automotive lubricant business, which contributes almost 90 of the company’s revenue and profit, remains on a strong footing.

Crude oil price have started stabilizing therefore the near future may not see any more expansions in the gross margins. However, the company is planning to increase its proportion of semi-synthetic lubricants. This will increase Castrol’s revenue realization and the margin in the long run. The company’s margin has always been better than the industry average. It is because most of the company’s revenue comes from the premium segment. The company leads the market of the automotive lubricant private sector players with 20% market share in the personal vehicle segment and 30% market share in the commercial vehicle segment.

The company is looking forward for the decent expansion of sales in the upcoming quarter due to the good monsoon and seventh pay commission. Despite increasing competition, Castrol India remains the market leader in a fragmented market regardless of its premium pricing. With powerful branding, extensive distribution network, technological muscle, finest products such as synthetic lubricants and regular launches, the company should be able to uphold a hearty growth even if some market share is relinquished.

Castrol has all the attributes of a Bluechip company. It is one among the few counted companies whose Return on Capital Employed is above 100%. The company generates a free cash flow because of its limited capital expenditure requirements. Castrol is a zero debt company that holds a cash reserve of over 700 crores for funding its expansion plans. It dedicates 70% of its net profit to its investors every year in the form of dividend.

Dynamic Level analysts have faith in the stock and hence we recommend the Buy at Rs. 402 with the target price of Rs. 427. Castrol share price is currently trading at Rs. 406.90 up by 0.44% and rising.