RBS maintains 'buy' on Castrol India

CASTROL INDIA

RESEARCH: RBS

RATING: BUY

CMP: RS 458

RBS is maintaining `Buy��� rating on Castrol India. Q2CY09 net profit of Rs 128 crore was 10% above expectation due to higher than expected margins resulting from favourable product mix, higher realisation and low base oil prices. RBS expects margins to remain high and volume loss to recover. Castrol���s gross margins stood at 56.8% in Q209 versus 45.9% in Q109.

Higher advertising spend continues to help brand image and maintain premium pricing. Interim dividend of Rs 10 (up 67%) indicates the management���s confidence on the sustainability of its profitability. Base-oil prices bottomed in Q2 and RBS expects these to rise in the coming quarter, as crude oil has risen back to $66/bbl levels.

While margins will drop versus Q2, Castrol will be able to maintain them at a high level, due to its superior product quality and ability to command premium prices. RBS raises the ���09 EPS growth estimate to 61% on the above expectations.