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Castrol – ABN Amro Overweight

April 29, 2008

Castrol’s 1Q08 net profit of Rs728m (up 76% yoy and 28% qoq) was 45% higher than expected, mainly due to higher sales and lower-than-expected costs.Castrol managed to show exceptional performance on volumes and realisations. It reduced its inventory and debtor days to 37 and 24, respectively (from 46 and 34 the previous year). At the same time it increased its creditors days, thus managing negative working capital with a cash balance of Rs27 per share. Base oil margins have dropped to record lows, but the crude oil price doesn’t show any signs of weakening.

Bike Zone Retail:
Castrol has launched more than 95 BikeZone retail outlets across 18 cities. It has adopted a strategy of building a strong model and testing it before rolling it out aggressively. Management has guided that it will be in a position to firm up its expansion plans prior to 2H08.

ABN Amro expects Castrol to deliver 2008 EPS of Rs21.5, representing growth of 21.6% yoy and ROE of 52%. Expect it to declare a dividend of Rs16 in 2008, resulting in a potential dividend yield of 5.8%. Buy with a target price of Rs 340.

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