Gulf Oil Lubricants India: Well-oiled for growth

In a volatile market, the stock of lubricant maker Gulf Oil Lubricants India has gained about 8 per cent since our buy call last November. A strong performance by the company helped; profit growth was a solid 22 per cent Y-o-Y in the September quarter and improved further to 43.5 per cent in the December quarter. Despite the rally, investors with a long-term perspective can buy the stock.

One, its valuation is not demanding. At ₹526, the Gulf Oil Lubricants stock trades at about 28 times its trailing 12-month earnings, a tad lower than its average valuation since listing in July 2014, and less than the 32 times about a year back. It is also cheaper than bigger peer Castrol India whose growth has slowed.

Exposure needs to be limited though, given the small cap nature of the stock (market cap of about ₹2,600 crore).

Gulf Oil Lubricants has been growing much faster than the industry for quite some time now. Its volume growth for the nine months ended December 2015 was around 9 per cent Y-o-Y, compared with the low single-digit growth for the industry.

This has meant a steady increase in the company’s market share.

Also, despite a dip in realisations — a result of passing on some of the cost benefits to customers — the company’s revenue has grown about 5 per cent in the nine months ended December 2015.

The rout of crude oil, which has cut the cost of base oil, the main raw material, has also helped significantly. The company’s operating margin improved to more than 17 per cent in the recent nine months from about 14 per cent in the year-ago period, and net profit grew more than 26 per cent Y-o-Y.

The December 2015 quarter, in particular, was very good for the company with double-digit volume growth, driven by the automotive lubricants business, which accounts for more than three-fourth of revenue; industrial lubricants make up the rest. Orders from some state transport undertakings helped accelerate growth in the December quarter.

The company should continue growing sales and profit at a healthy pace, even if not as high as in the December quarter.

The key drivers — improving auto sales volumes and a benign cost environment — remain strong. Car sales volumes grew in high single-digits last year, and are expected to maintain momentum.

While scooters did quite well last year, motorcycle sales lagged. But the latter too should improve with the strong rural push in the government’s economic agenda and hopes of a normal monsoon this year.

Heavy commercial vehicle sales are expected to continue doing well, while lighter vehicles too should pick up.

Lower interest rates, after recent measures by the government and the RBI, should also aid volumes in the auto sector, and encourage overall economic growth.

Ergo: both automotive and industrial lubricants volumes should grow.

Gulf Oil Lubricants seems well-placed to capture an increasing share of this growing pie. The company is investing in brand building, and adding steadily to its sales and distribution network.

It has also launched new products for the passenger car motor oil segment. The new plant being set up at Chennai, expected to be operational in 2017, should help the company cater to the opportunity in the country and increase volumes in the coming years. Besides, replacement demand should keep volumes ticking.

Raw material cost should stay subdued. Crude oil may have inched up in recent months, but is unlikely to stage a strong rally due to global oversupply and weak demand conditions. This should help the company sustain its margins.

The company has a healthy balance sheet, with debt-to-equity ratio of about 0.6 times, and cash of nearly ₹180 crore as of September 2015.

These metrics would have improved further with the strong December quarter performance. The company has also been paying dividends regularly.

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