Castrol India: Onward, Upward and Forward

27 Feb 2024 , 11:56 AM

At its 2024 analyst meet, Castrol India’s (Castrol) CFO Deepesh Baxi, outlined plans to grow volumes more than industry, with stability in margins (22-26%). This is to be achieved through focus on existing segments, diversification in new categories and investments in sunrise segments. Analysts of IIFL Capital Services like management’s focus to grow volumes, and think implementation of “Onwards, Upwards and Forward” strategy can materially re-rate the stock’s multiples; as such return ratios are best in class (ROE/ROIC of 43%/248%). 

Strategy of “onward, upward and forward”: 

Having historically prioritised maximising profits through premium pricing and margins, Castrol now recognises the imperative of sustainable growth; prompting a pivot towards a volume-driven growth strategy. It has refreshed its identity and is pursuing the ‘onward, upward, and forward’ strategy, which includes: 1) Prioritising volume growth in its core auto lubricants business. 2) Increasing the share of industrial volumes in the overall pie. 3) Continuing to invest in new initiatives to get future ready. In all, the company aims to grow the volumes by 2x of the industry’s growth through various initiatives like Rebranding, introduction of new product categories, digitisation of ecosystem, partnerships, etc. 

Eyeing stability in margins: 

Castrol sources ~60% of its raw materials requirements through imports; it also leverages group’s global sourcing strength to optimise the input costs. Its strong brand recall allows it to pass on any material variations to customers; going ahead, as it ramps up the non-retail segment (~30% sales), it aims to have price pass through clauses, and also offer value added services which should enable it to deliver margin stability. As such, it expects to earn 22-26% Ebitda margins (decade average of 26%) at a time when it plans to revive the volumes. Its new initiatives such as EV fluids, auto care products, workshops, etc., should contribute to profits in medium term as they gain traction in market. 

Best in class return ratios: 

Castrol’s asset light model has consistently led to best in class return ratios (ROE/ROIC of 43%/248% in CY23), and management expects this to sustain, even when it steps up investments in new areas (Rs1-1.5bn pa capex). Analysts of IIFL Capital Services see a good scope for steady earnings growth led by volumes, rather than margins alone. The valuation multiples are seemingly cheap at ~20x P/E on CY24 EPS with a ~4% dividend yield.