15 May 2013
C
orner
O
ffice
Interaction with the CEO
the
Expect steady improvement in market share
But, focusing more on profitability than on volume leadership
We met Castrol India’s Managing Director, Mr R Kirpalani and Director - Finance, Mr S
Vaidya to better understand the company’s growth strategy, business outlook,
competitive scenario and vision. Key takeaways:
Near-term challenges persist, led by high raw material cost. However, the
management is confident of long-term growth and expects its market share to
increase, driven by (1) ahead of the curve product launches, supported by parent,
BP, (2) focus on the fast growing Personal Mobility segment, and (3) continued
investments in brand building / creating product differentiation awareness.
Castrol expects lubricant volumes in India to grow at 3-4%, adjusted for negative
impact of increasing drain intervals and positive impact of 10% value improvement.
It has 22% market share, with volumes of 200m liters and leadership in Personal
Mobility lubricants.
With strong technology support from parent (BP Plc has 71% stake), Castrol India
continues to maintain its premium positioning through differentiated products. The
management’s focus is more on improving profitability further than on becoming
the largest volume player.
Castrol India
Mr R Kirpalani
Managing Director
Mr Ravi Kirpalani
took over as MD
of Castrol India in April 2013. He
joined the company in 1999 and
has served in various capacities
across Sales, Marketing and
Strategy. He has played a key
role in the implementation of
Castrol's global strategy. Earlier,
he worked for Reckitt Benckiser
for 12 years and for a leading
consumer products company in
Muscat, Oman. Mr Kirpalani is
an Economics (Hons) graduate
from St Stephens College, Delhi
and holds an MBA from IIM,
Kolkata.
Expect steady market share improvement over next five years
Significant headroom for growth:
In developed markets like Europe, the
share of synthetic / semi-synthetic lubricants is 80-85% against single-digit
share in India, implying significant headroom for growth. This would be
supported by shift of Indian car manufacturers to synthetic lubes.
Domestic market volumes to grow at 3-4%:
Castrol expects lubricant
volumes in India to grow at 3-4%, adjusted for negative impact of increasing
drain intervals and positive impact of 10% value improvement. Of the global
voume growth, it believes that 80% of the volume growth would come
from India and China, as car demand in developed countries has peaked.
Castrol’s market share should improve:
Castrol expects its market share to
improve by 0.5% per year over the next five years. Currently, its market
share is 22%, with volumes of 200m liters. The company enjoys leadership
in the Retail Automotive segment. Its recent market share loss was driven
by deliberate opting out of categories like State Road Transport (where
purchases are through the tendering process).
Near-term challenges persist:
The last two years have been challenging
due to overall macroeconomic slowdown: (a) GDP growth has declined
from 9% in 2HCY10 to 5%, (b) ban on mining, and (c) slowdown in
Infrastructure / Construction sectors. Company-specific challenges have
been: (a) sharp increase in raw material prices (INR4.4b impact in 2011),
and (b) rupee depreciation (INR1.8b impact in 2012). While LOBS prices
had declined in 2HCY12, rupee depreciation and higher additive prices
impacted raw material cost. In the recent months, despite the easing crude
oil prices, LOBS prices have strengthened.
Mr Sujit Vaidya
Director - Finance
Mr Sujit Vaidya
is an Associate
Member of the Institute of
Chartered Accountants of India.
He has over 24 years of
experience in Finance, Accounts,
Commercial and Business
Advisory Services. He joined
Castrol in March 2003 as General
Manager - Performance. Since
then, he has managed various
senior roles within the BP Group.
Earlier, he spent over 14 years
with organizations such as
Citicorp, Procter & Gamble India,
ITC AgroTech and The Boston
Consulting Group.
1
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Kunal Gupta
(Kunal.Gupta@MotilalOswal.com); +91 22 3982 5445
Investors are advised to refer through disclosures made at the end of the Research Report.

C
orner
O
ffice
Focus on Personal Mobility segment to benefit Castrol
Produces/markets synthetic lubricants:
Mr Kirpalani pointed out that the lubricants
market is shifting from Commercial Vehicles (CVs) to Personal Mobility. The share
of CVs in lube sales has declined from ~75% to ~67%, and Castrol expects this to
decline further to ~50% (still sizable) in five years. As Castrol produces/markets
synthetic lubricants, which are not very prevalent in CVs, its focus on Personal
Mobility will help it to gain market share.
Protecting brand value a priority:
Castrol remains a premium brand. While the
management strives to maintain its premium image / differentiate its product
offerings, this is challenging. It is entering new categories / avenues with
comfortable unit profitability (gross margin per liter), but is also mindful of the
risks of downtrading. Some of its key focus areas to protect and enhance its brand
value, apart from product development, include (a) in-house intellectual property
(conducts 3k-4k raids to prevent counterfeiting), and (b) innovations in packaging.
Key market trends influencing lubricants market
Demand shifting from CVs to Personal Mobility:
Castrol’s focus on the Personal
Mobility segment has enabled it to achieve leadership position.
Sales moving from shops to workshops:
This is positive for private players like
Castrol, as sales at traditional petrol stations are declining (currently, 15% of
CV lube sales happen at petrol stations).
Shift towards semi-synthetic and synthetic lubes:
The quality of lubricants has
improved over the years and Castrol has an advantage over competitors due
to strong support from its parent, BP.
Governments insisting on lower carbon emissions:
This should result in higher
demand for semi-synthetic/synthetic and high quality lubricants. While electric
cars could become more popular, even by 2050, the share of electric cars
globally is expected to be very low. The share of hybrid cars could rise, but
they use lubricants.
OEMs reducing engine size:
Drain intervals are becoming longer. For trucks,
the drain interval improved from 9,000km to 18,000km, then to 36,000km, and
now to 50,000km. Hence, volumes are likely to decline.
the
Focusing more on profitability improvement than on volume leadership
Castrol India intends to become more profitable and not necessarily the largest volume
player. Since its products are branded, they do not follow the typical commodity
cycle. Besides, the following will help Castrol India in its quest for profitability
improvement.
Not much capex required in medium term:
Castrol India continues to invest in its
capacities and the management pointed out that its units are still working in
single shifts. The recent capex has been more towards removing bottlenecks (e.g.
in packaging).
Fuel deregulation:
In the current environment, OMCs do not view lubes as a profit
center and are more focused on volume growth. However, in a deregulated
scenario, OMCs are also likely to focus on profits, which will indirectly help private
players like Castrol.
BP support helps remain ahead of the curve:
Castrol has to pay 3.5% of its turnover
to BP as royalty, with a cap of 10% of the profit (effective payout of 2.29% for last
15 May 2013
2

C
orner
O
ffice
several years). BP renegotiates its royalty percentage every year. The percentage
varies from country to country and depends on the range of technology used. In
India, BP shares almost its entire range with Castrol, which benefits significantly.
BP is the world’s second largest lubricants company in terms of volumes after
Shell. Castrol is able to draw on BP’s global experience and given the rapid pace of
technology change in engine design as well as lubricants, support of the parent
becomes critical.
Some of Castrol India’s core strengths
Strong brand:
Castrol’s products enjoy ~20% premium over competitors.
Strong distribution:
Castrol has ~300 distributors, servicing over 91,000 retail
outlets.
Technology leadership:
Proprietary technology and parent BP’s global
experience helps Castrol to stay ahead of the curve.
Great partnerships:
Castrol has tie-ups with OEMs like Maruti Suzuki, Tata
Motors, Ford, Volkswagen, Skoda, BMW, Audi, and more recently, Toyota.
However, refill volumes still continue to drive Castrol’s volumes; <20m liters
of its total volumes of 200m liters are from first fill.
the
Valuation and view
The stock trades at 29.3x CY14E EPS. Our DCF-based price target is INR315. Though we
are positive on the long-term prospects, given Castrol’s rich valuations, we maintain
Neutral.
Trading from volumes to value: Realizations improve > volumes Near-term profitability under pressure due to high RM cost
Base oil price trend (USD/MT)
Asia-Pacific price
trends 2011-13
Source: Company, MOSL, ICIS
15 May 2013
3

C
orner
O
ffice
Income Statement
Y/E December
Net Sales
Change (%)
Raw Material
Employee Cost
Other Manuf. Exp.
Selling Admin. & Other Exp.
Total Expenditure
EBITDA
Change (%)
% of Net Sales
Depreciation
EBIT
Interest & Finance Charges
Other Income
PBT
Tax
Effective Rate (%)
Reported PAT bef. MI
Change (%)
Adjusted PAT
Change (%)
2009
23,906
5.7
11,238
1,045
6,492
4,152
18,154
5,752
43.9
24.1
272
5,480
35
361
5,806
1,996
34.4
3,811
45.2
3,852
46.5
2010
28,020
17.2
13,847
993
6,492
4,446
20,770
7,249
26.0
25.9
243
7,006
24
395
7,377
2,474
33.5
4,903
28.7
4,914
27.6
2011
29,818
6.4
16,945
1,078
6,492
4,134
23,253
6,565
-9.4
22.0
251
6,314
19
846
7,140
2,334
32.7
4,807
-2.0
4,850
-1.3
2012
31,209
4.7
16,894
1,284
6,492
4,213
25,038
6,171
-6.0
19.8
266
5,905
18
722
6,608
2,189
33.1
4,419
-8.1
4,474
-7.7
2013E
32,847
5.3
18,774
1,183
6,492
4,336
25,620
7,228
17.1
22.0
322
6,906
20
778
7,663
2,590
33.8
5,073
14.8
5,073
13.4
the
(INR Million)
2014E
35,524
8.1
20,258
1,243
6,493
4,689
27,625
7,899
9.3
22.2
338
7,561
20
814
8,354
2,824
33.8
5,531
9.0
5,531
9.0
Balance Sheet
Y/E December
Equity Capital
Share Capital
Reserves
Net Worth
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
2009
1,236
1,236
3,714
4,950
4,950
2,805
1,692
1,113
261
5
2010
2,473
2,473
3,062
5,535
5,535
2,955
1,752
1,203
166
0
11,628
2,442
1,784
6,193
1,209
7,833
4,949
2,884
3,795
371
4,793
2011
2,473
2,473
3,569
6,042
6,042
3,066
1,941
1,125
310
0
12,035
3,009
2,190
5,490
1,347
7,991
5,140
2,852
4,044
562
6,042
2012
4,946
4,946
1,547
6,492
6,492
3,287
2,026
1,261
310
0
12,574
3,158
2,196
5,746
1,474
8,303
4,366
2,668
4,271
651
6,493
(INR Million)
2013E
4,946
4,946
2,295
7,241
7,241
3,916
2,348
1,568
0
0
14,441
3,576
2,365
7,022
1,478
9,419
4,881
3,206
5,022
651
7,241
2014E
4,946
4,946
2,347
7,293
7,293
4,286
2,686
1,600
0
0
15,312
3,859
2,558
7,297
1,599
10,270
5,267
3,604
5,042
651
7,293
Curr. Assets
10,036
Inventory
2,086
Sundry Debtors
1,606
Cash & Bank Balances
5,258
Loans & Adv.&Other Curr. Assets 1,086
Current Liab. & Prov.
6,812
Sundry Creditors
4,317
Provisions
2,495
Net Current Assets
3,224
Deferred Tax Liability
346
Application of Funds
4,258
E: MOSL Estimates
15 May 2013
4

C
orner
O
ffice
Ratios
Y/E December
Basic (INR)
Adj. EPS
Adj Cash EPS
Book Value per Share
DPS
Payout (Incl. Div. Tax) %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price to Book Value
Dividend Yield (%)
Profitability Ratios (%)
EBITDA Margins
Net Profit Margins
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors (Days)
Working Capital (Days)
Asset Turnover (x)
Gross Fixed Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2009
7.8
8.3
10.0
25.0
94.9
2010
9.9
10.4
11.2
15.0
88.2
2011
9.8
10.3
12.2
7.5
89.7
2012
9.0
9.6
13.1
7.5
96.7
2013E
10.3
10.9
14.6
7.5
85.3
2014E
11.2
11.9
14.7
9.5
99.1
the
37.1
35.1
26.0
5.1
25.6
2.2
32.8
30.8
22.0
4.8
23.0
2.2
30.0
28.3
20.1
4.5
22.8
2.8
24.1
15.9
58.1
82.1
25.9
17.5
79.4
112.6
22.0
16.1
93.7
133.6
19.8
14.2
83.8
109.1
22.0
15.4
71.4
94.2
22.2
15.6
73.9
100.6
26
67
138
-46
4.8
8.5
24
60
129
-44
5.1
9.5
23
58
109
-28
4.9
9.7
26
61
93
-6
4.8
9.5
25
63
94
-5
4.5
8.4
26
65
94
-3
4.9
8.3
0.0
0.0
0.0
0.0
0.0
0.0
Cash Flow Statement
Y/E December
PBT before E.O. Items
Add : Depreciation
Add: Interest
Less : Direct taxes paid
Inc/Dec in WC
CF from operations
CF from Oper. incl. EO Items
(Inc)/Dec in FA
CF from investments
Inc/Dec in Networth
Less: Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
15 May 2013
2009
5,806
272
35
1,996
2,543
6,660
6,660
(202)
(202)
0
3,616
(3,757)
2,701
2,556
5,258
2010
7,377
243
24
2,474
364
5,535
5,535
(238)
(232)
7
4,325
(4,367)
935
5,258
6,193
2011
7,140
251
19
2,334
(952)
4,125
4,125
(318)
(318)
11
4,311
(4,510)
(703)
6,193
5,490
2012
6,608
266
18
2,189
29
4,733
4,733
(402)
(402)
356
4,325
(4,075)
256
5,490
5,746
(INR Million)
2013E
7,663
322
20
2,590
526
5,941
5,941
(319)
(319)
0
4,325
(4,345)
1,277
5,746
7,022
2014E
8,354
338
20
2,824
254
6,143
6,143
(370)
-370
0
5,478
(5,499)
275
7,022
7,297
5

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