Castrol Q3 Results Review - Lower-Than-Expected Raw Material Costs Drive Beat: Motilal Osawal

Motilal Osawal Report

Castrol India Ltd. revenue grew 7% YoY to Rs 12.6 billion in Q4 CY23, driven by 15% YoY growth in volumes, although realisation declined 6% YoY. Base oil prices declined to $1,000/million tonne in Q4 CY23 from $1,150-1,200/million tonne in Q4 CY22. The company has partially passed on the benefits of lower input costs to end customers.

Castrol India has ended its relationship with three months and launched auto care products under its own brand name. This segment currently accounts for a small portion of the company's revenue and the management estimates it will take another four-five years before it starts contributing meaningfully to revenue.

The company is actively working on thermal solutions for electric vehicle batteries and its portfolio already has fluids that go into EVs. BP, parent of Castrol India, announced global investments of €50 million in thermal management of batteries, underscoring the company’s keen interest in this field.

Castrol India believes that lubricant demand would stay robust till late 2030s and early 2040s due to low penetration of cars in India. Domestic lubricant demand generally grows by 4-5% annually and the company intends to grow faster than the market rate. The threat from EVs is real, however, their penetration would happen gradually.

The company has always enjoyed its brand legacy, and we believe it will be able to secure its profitability with a better product mix, cost control, and the launch of advanced products with better realisation.

We reiterate our 'Buy' rating on the stock with a target price of Rs 230.

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