The Hindu Business Line : Sah Petroleums: Avoid

INVESTORS can ignore the public offer of equity shares by Sah Petroleums. The company works in the highly competitive lubricants industry dominated by strong public sector oil companies and multinationals.

The industry operates on thin margins and is also characterised by high raw material price volatility. Given these, the scope for rapid growth appears limited for a small player such as this company.

Sah Petroleums is in the business of blending and marketing automotive and industrial lubricants. It plans to expand operations by increasing capacity at its two plants in Vasai and Daman respectively.

The project, costing Rs 40.53 crore, has neither been appraised by any independent agency nor is any lending institution funding it. Almost 80 per cent of the outlay will be financed through the current equity offer with the balance coming from internal accruals.

The company claims that it is an OE supplier to several big automobile companies, state road transport corporations and the railways. The lubricants industry is neatly carved out between the PSU oil companies and multinationals such as Castrol and Shell.

There are presently two-dozen players fighting it out for a market, that is barely over a million tonnes in size and growing at a slow pace.

Any serious player in this industry needs to invest heavily in establishing a marketing network especially for automotive lubricants. Again, margins are rather thin in this business and earnings growth can be achieved only through increases in sales volumes. It is doubtful if a small player like Sah can generate enough volumes to sustain earnings.

The raw material for lubricants — base oil — is a crude oil derivative, which means that prices will be rather volatile.

Presently, lube base oil prices have increased tracking higher crude oil prices and this has affected even a major, established player such as Castrol, which has seen an erosion in its margins in the last couple of quarters. Good quality base oil has to be imported and Sah is also doing that, exposing it additionally to forex risks.

Lastly, the fact that the promoters, who fully own the pre-issue equity of Rs 5.46 crore, have subscribed in cash to just 9 per cent (Rs 0.49 crore) of that does not lend confidence.

The rest of the equity has accrued to them through bonus offers made by the company. Investors can avoid this offer from Sah Petroleums.

Raghuvir Srinivasan

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