Key takeaways : Over CY05-15, while Castrol’s realization improved at 11% CAGR, its volume declined by 1.7% CAGR. This we believe is led by (a) lengthening drain intervals, (b) not aggressively pursuing low margin OEM business and (c) tepid economic activity in recent years, impacting CV segment (45-50% of total volumes). Taking cognizance of the continued volume decline, Castrol management reset its focus on profitable volume growth in the last few quarters.The volume trend has reversed in the last six months – volumes grew 7% in 1HCY16. The growth has been broadbased, with continued high single-digit growth in the personal mobility segment and recovery in the CV segment.India’s economic indicators have improved and the economic recovery should feed turnaround in CV volumes. Seasonally, 2H is usually weaker than 1H, however, management expects volume growth to sustain year-on-year. Of CSTRL's total volumes, CVs contribute ~47%, personal mobility ~40% (v/s 10% a decade back), and industrials ~13%. With personal mobility continuing to grow at high single digits, revival in the CV cycle would help to sustain volume growth.

Valuation : Maintain Buy: Motilal Oswal assume volume growth at 6%/7% in CY16/CY17 and largely stable realizations. CSTRL’s >80% payout policy, RoE/RoCE of ~100% and FCF to PAT conversion at >80% reflects its superior balance sheet and high quality cash flows, which warrant higher valuation multiples, in our view. The stock is trading at 28x CY17E EPS of INR15.7.Their fair value estimate is INR518 (33x CY17E EPS; in line with last 3-year average), implying 18% upside. Maintain Buy