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Stock Pick From The Oil & Gas Sector

| 7/12/2012 9:00 PM Thursday

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a leading manufacturer of automotive gears in India, and makes gears for commercial vehicles as well as tractors.

Castrol India - Zooming Ahead

HERE IS WHY

  • The company has the ability to steer well in varied economic cycles.
  • It is debt free and has a strong dividend payment history.
  • Increasing vehicle density is leading to higher demand for its products.
  • Declining crude prices are expected to result in better operating margins.

BEST OF LAST ONE YEAR

Company Name

Reco.

CMP (Rs)

Gain %

Ajanta Pharma

342

707

106.73

Asian Paints

2985

3763

26.06

Suprajit Engineering

19.8

23.5

18.69

FAG Bearings India

1261

1461

15.86

HSIL

133

152

14.29

Munjal Showa

71.5

80

11.89

Colgate Palmolive (I)

1014

1130

11.44%

Bharat Petroleum

686

751

9.48

CMP as on July 10, 2012

It is important to know how a company has navigated through difficult economic environments in the past. The market always puts a premium on companies which tide over difficult economic phases with as much ease as the good times. One company that aptly fits into this category is Castrol India.

Even in 2008, when most of the companies witnessed a decline in their bottomline, Castrol managed to post strong growth. In addition to this, other compelling factors like its debt-free status and consistent dividend payment history provide comfort during uncertain times like those we are currently facing. Further, the declining crude prices (along with some appreciation in the rupee) augur well for the company, as it results in an improvement in its operating margins. The scrip is trading 16.04x its trailing four quarter EPS and at an EV/EBITDA of 17.02x, which make it fairly attractive on the valuations front too.

The lubricants industry in India broadly caters to three industry segments – automobiles, industrial and marine & energy, though a major part of the revenues come from the automobiles segment. In terms of volumes, 50 per cent of the market is with Castrol, IOC, BPCL and HPCL put together. Within this, Castrol has a 22 per cent market share, next only to that of IOC.

The slowdown in manufacturing (including automobiles, which contribute to 85 per cent of Castrol’s revenues) has impacted its sales volumes marginally in CY11. However, the company has managed to grow its topline and bottomline consistently. Going ahead, we feel that even if there is a slowdown in the sale of new automobiles, the replacements market for Castrol is quite huge. This considerably mitigates the likely impact of an uncertain economic scenario on the company’s fortunes.

 

Find More Articles on: DSIJ Magazine, Choice Scrip, Stock Recommendations, Fundamental Picks

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