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Castrol: Buy back support - Views on News from Equitymaster
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  • Jun 29, 2001

    Castrol: Buy back support

    Castrol India Ltd. (CIL) is having a rough time sustaining its financial performance given that the industry scenario has turned unfavourable. In FY01, the lubes industry contracted by an estimated 6% YoY. Nevertheless, the hard times faced by the company do not seem to be reflected in the stock.

    The Castrol India scrip has managed an identical performance to that of the BSE Sensitive index, which has declined by 7.7% over the past three months. The relative equivalent performance has been due to the open offer announced by parent, BP Amoco and Burmah Castrol. The open offer was made at Rs 312, which was the average market price existing on July 7, 2000 the date the global acquisition came into effect. However, SEBI is of the opinion that the parent should take the acquisition announcement date, March 14, 2000, as the benchmark for pricing the open offer. In which case, the open offer should be priced at Rs 350.

    However, BP Amoco and Castrol UK decided to contest this ruling before the Securities Appellate Tribunal (SAT). As per latest reports the SAT has passed an order in favour of SEBI. BP Amoco and Burmah Castrol will now contest this ruling at the Mumbai High Court. The offer has got mired in legal circles, which has delayed the buyback. Consequently, the stock price has fallen over the last six weeks as hopes of a quick arbitrage opportunity fade.

    Shareholding pattern
    (no. of shares in m)  
    Shares Outstanding 123.5
    Shares held by Castrol U.K 63.0
    Free Float 60.5
    Maximum open offer (@20%) 24.7
    Arbitrage Opportunity?
      SEBI BPAmoco
    % buy back of free float* 40.8% 40.8%
    Open offer price 351.0 311.9
    CMP** 221.2 221.2
    Premium to CMP 58.7% 41.0%
    Realisation from open offer 143.3 127.3
    Break-even price 131.7 158.7
    1QFY02 annualised earnings 7.9 7.9
    P/E Ratio (PER) 16.7 20.1
    * Assuming all non-promoter shareholders tender in their shares
    ** CMP Current market price

    Two scenarios have been analysed. One with a buyback price of Rs 351 as ordered by SEBI and Rs 312 as offered by BP Amoco. The break-even price is the post buyback price of the Castrol India scrip for the investor to come out quits in the deal. Therefore, to register any gains, the stock price of CIL will have to trade above these levels.

    At the respective break-even prices the resultant multiples (PER) have been mentioned, which are based on 1QFY02 annualised earnings. The Castrol scrip, over the last three years, has traded at an average multiple of approximately 27x.

    However, there is a definite re-rating impending post buy back, which has held up the counter. The company has stated that the automotive lubes segment is expected to grow by only 2.5% p.a. over the next five years. Oil prices continue to remain high, leading to firm base oil prices (key feedstock). Increased competitive pressure mainly from the PSUs. The automobile industry continues to remain in the doldrums. All this could adversely impact the future earnings ability of the company and consequently, the valuations.



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