Is Castrol India a mispriced deep value bet or just a dividend play?

The lubricants major’s valuation has eroded over fears of volume contraction due to the onset of electric vehicles  

The company has developed a range of e-fluids to meet the needs of EV manufacturers - Sandeep Sangwan, managing director, Castrol India

A storied debt-free MNC with RoE of 50% should ideally have investors bidding it up to the moon, without not much help from Tesla. That clearly has not been the case for lubricants major Castrol India which has seen a multiple de-rating over the years (See: Premium erosion). While a party pooper such as Tesla came into the picture much late, Castrol’s stock has been an underperformer for five years now. Domestic mutual funds have all but stayed away. Of the 3.09% mutual fund holding as of December 2020, 1.27% is held by Aditya Birla Sun Life Equity Fund, which itself has been gradually reducing its stake. Of the remaining 26.09% institutional holding, 11.99% is held by foreign investors and 13.43% by domestic insurers, of which LIC alone holds 10.57%. In hindsight, parent BP’s decision to dilute its holding from 71% to 51% in 2016 for $578 million seems astute. Today, Castrol India’s market cap stands at $1.75 billion having hit a 52-week low of $1.2 billion in March 2020.

Downhill journey
In recent years, Castrol has been plagued by stagnant or falling volume growth (See: Going nowhere). According to Reliance Securities, public sector oil marketing companies such as IOC, HPCL and BPCL dominate the lubricant market with ~45% market share. Castrol is the leading private player with ~12% market share followed by Gulf Oil (6%), Shell (6%), Valvoline (5%), Total (5%) and Veedol (4%), with the remaining players holding 17%. Along with intense competition, slowing economic growth has been the prime driver for falling volume. Then, there is the bugbear about electric vehicles (EVs) eventually replacing internal combustion engines, the mainstay of Castrol’s business.

The management maintains there is huge potential for lubricants in t


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