Research: RBS
Rating: Buy
CMP: Rs 467.10
Castrol’s Q2FY10 results show that it is delivering on its promise of both topline and bottomline growth, which should help bridge the valuation gap with its peer group. RBS raises the earnings forecasts 6-18% and assumes a valuation in line with the peer group, thus raising the target price to Rs 525 from Rs 375.
With strong earnings growth in Q2FY10 Castrol reported topline and bottomline growth of 17% y-o-y in Q2FY10. This growth was particularly creditable since Q2FY09 showed a record margin due to a sharp drop in base oil prices.
Based on company’s performance in H1FY10, it is on track to deliver volume growth without sacrificing its margins. RBS has raised the volume growth estimates from 4.4% to 8.5% in FY10 and from 2.5% to 3.1% in FY11/12 and raised the net profit forecast by 6-18% over FY10-12. With the company now poised to deliver on volume growth, it deserves to be valued in line with its FMCG peer group, based on Bloomberg consensus estimates, especially given its higher return profile. Consequently, RBS maintains the `Buy’ rating.
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