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Castrol India’s Q3CY24 revenue was broadly in-line with our estimates. Castrol’s topline increased by 9% YoY but de-grew by 8% QoQ to Rs12.8bn. Sales volume grew 8% YoY, driven by new product launches and investments in branding and marketing. Commercial vehicle segment grew in double digits, while the personal mobility segment grew only in mid-single digits. EBITDA increased by 7% YoY to Rs2.8bn. However, EBITDA margin contracted by 49bps YoY to 22.2% primarily due to increased employee costs and higher other overheads. The management has re-iterated margin guidance of 22-25% and aims to grow ahead of the industry volume growth of 3-4%. We adjust our CY24 & CY25 EPS estimates by -1%/-2%, respectively. We value the stock at a PER of 22x CY25 EPS to derive a target price of Rs221 and maintain our HOLD rating on the stock.

Key Highlights and Investment Rationale

• Realization flattish: Castrol’s realization remained flat YoY but increased 2.1% QoQ to Rs234/litre. EBITDA per litre decreased by 1.7% QoQ to Rs51.94 due to higher employee cost, which includes one-time restructuring cost

• Strong distribution network: Castrol has expanded its service and maintenance network in India by increasing its presence over 9,400 multi brand passenger car workshops, 29,500 independent bike points, 35,000 workshops and retail outlets in rural India. Additionally, Castrol broadened its national footprint exceeding 136,000 outlets across the country.

• Maintain HOLD: Strong free cash flow generation, minimal capital requirements, high ROEs and strong payouts make Castrol an attractive franchise. However, rich valuations limit potential upside, so we await a better entry point in the stock.

Innovation and product expansion:

• The company has introduced four new rust-preventive products—Castrol Rustilo DW 800, 806,809,and 812 to address the evolving needs of its customers.

• The auto care product range has expanded, now reaching over 45,000 retail outlets and e-commerce platforms.

• The newly launched Castrol EDGE variants and Castrol CRB TURBOMAX+ CK4, engineered for compatibility with OEM engine platforms, have garnered strong positive feedback, further strengthening Castrol’s position in the premium lubricants segment.