Recommendation From Lubricants Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon. 

CASTROL INDIA LIMITED : ENSURING A SMOOTH RIDE

HERE IS WHY
☛Attractive valuation
☛Debt-free status
☛Good growth prospects 

Castrol India Limited operates in the sectors of automotive, industrial and marine and energy applications. It is a leading international player with a dominant position in retail automotive lubricants and a significant presence in specialised industrial lubricants. With the advent of BS VI, the management believes that the company is poised to take advantage of further enhanced technologies, becoming the first company in the industry to have BS VI-compliant products across all categories of automotive lubricants.

It is also exploring different business models through adjacent businesses, moving beyond lubricants. Recently, it announced a strategic collaboration with 3M India to introduce a range of quality vehicle care products to be made available in the automotive after-market. This might become the next growth driver for the company as it already has the reach to distribute these products. Additionally, it has partnered with BP and Reliance Industries for increasing its channel reach. The partnership gives the company an opportunity to market its lubricants across the venture’s retailing network which is expected to be scaled up to 5,500 fuelling stations in the next five years. 

It is also investing in-plant capacity expansion to cater to increasing demand. An expansion plan for its Silvassa plant was approved to scale up installed capacity at the facility by 50 per cent. The quarter ending June 2020 has seen a slowdown. However, with pickup in economic activities, the company will better its financial numbers. For the quarter ended June 2020, the company’s net sales decreased by 52.81 per cent to Rs 490.60 crore from Rs 1,039.60 crore in the same quarter last year. The operating profit showed a decrease of 63.19 per cent to Rs 110.50 crore in June 2020 from Rs 300.20 crore in the same quarter last year. Net profit for the June quarter stood at Rs 65.40 crore as against Rs 182.70 crore in the same quarter last year, showing a decrease of 64.20 per cent. 

However, the company has shown good growth in the past few financial years (FY17-FY19). The company’s fiscal year ends in December. It has seen its profit after tax increase from Rs 691.81 crore in FY17 to Rs 827.37 crore in FY19. The PAT margin in the same period improved from 15.58 per cent in FY17 to 19.36 per cent in FY19. Cash flow from operations also saw a decent increase from Rs 608 crore in FY17 to Rs 879.49 crore in FY19. It has good ROCE of around 90 per cent for the financial year ending December 2019. The company is debt-free and hence faces no pressure on the balancesheet even with the recent slowdown in business activities. 

It also has enough cash and bank balance on books, which stood at Rs 946 crore as of December 2019. With no debt and healthy cash flow from operations in the past, the company has good dividend payout ratio of 65 per cent. This translates into a dividend yield of 4.25 per cent. The company is trading at PE ratio of 16.73x, which is below its 10-year median of 29.16x . The current PB is 8.60x which is below the 10-year median of 19.74x. Hence, there is good scope for multiple expansions too. The dividend yield of above 4 per cent is also a comforting factor. By virtue of these factors, our recommendation to reader-investors is to BUY this stock.