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Mumbai: The de-rating story of Castrol India could prove to be a valuable lesson for investors to understand the possibility of expensive stocks in branded and semibranded categories facing a similar situation, said Kotak Institutional Equities.
The institutional brokerage broke down the reasons for the stock’s derating to 20-25 times forward priceto-earnings ratio from 40-45 times earlier to two factors — skewed price value proposition and market concerns about disruption from electric vehicles.
“We wonder if Castrol stretched the price-value proposition too much over the past few years, which allowed other players in a semi-branded space to offer better price-value proposition,” said Kotak Institutional Equities.
“Castrol’s volumes have been stagnant for the past several years; better-quality lubes and engines may have also contributed to longer ‘drain’ times,” said Kotak.
Shares of Castrol, which ended 1.52 per cent lower at Rs 155.45 on Monday, have not changed much over the past five years.
On a five-year basis, the stock is down 2.76 per cent.
The maker of automotive and industrial lubricants’ severe de-rating may also reflect the market’s concerns about the disruption from electrical vehicles — their eventual uptake and consequently, the lower usage of lubes as the share of electrical vehicles in total vehicle population reaches a sizeable figure, said the brokerage.
In the context of expensive stocks facing a similar situation, the brokerage said branding and semibranded products could face disruption from standardisation and formalisation.
Kotak Institutional Equities said semi-branded businesses such as building components will be the first to see the disruption from standardisation of products.
Private labels of organised players (e-commerce and physical) may even disrupt the stranglehold of FMCG companies, a possible outcome of formalisation of retailing in India, said the brokerage.
