Gulf Oil Lubricants: Oiled for growth

Lubricants maker Gulf Oil Lubricants India put up a decent show in the June 2017 quarter. Volume growth in April and May 2017 was in double-digits y-o-y. The GST implementation led to some de-stocking and inventory reduction by distribution partners and retailers in June. Despite this, the company’s volumes grew about 7 per cent y-o-y in the June 2017 quarter, in its core business (after excluding the impact of non-recurring institutional sales volume in the June 2016 quarter). This, along with improvement in margins, helped the company grow its profit nearly 13 per cent y-o-y. The management says that Gulf Oil Lubricants has done much better than the industry that was badly impacted by the GST implementation, with some peers seeing volume decline of 10-20 per cent in June; the company continued growing faster than the market in the June quarter with double-digit volume growth in key segments.

The market though wasn’t impressed. The stock has lost about 6 per cent after the results were announced last week. A few factors played spoilsport. One, the management commentary that the GST impact continued in July with business expected to normalise by August-September. This may have raised fears of subdued earnings growth for the fourth consecutive quarter. After growing 30 per cent in 2015-16 and 39 per cent y-o-y in the half year ended September 2016, the company’s profit growth was just about 5-6 per cent in the December 2016 and March 2017 quarters due to the impact of demonetisation.

The 13 per cent profit growth in the June quarter, while better than the prior two quarters’ performance, is still much lower than about a year back. A subdued September quarter would further stretch the stock’s valuation, which has already risen, thanks to the nearly 35 per cent rally in the stock since December. At ₹812, the Gulf Oil Lubricants stock now trades at 32 times its trailing 12-month earnings, higher than the average 29 times in the past three years. It is also costlier than the stock of market leader Castrol India which quotes at about 29 times. Historically, the Castrol India stock commanded a premium and Gulf Oil Lubricants played catch-up in valuation. What also may have soured sentiment is the rise in crude oil prices over the past few days to above $50 a barrel. This could mean costlier base oil, Gulf Oil Lubricants’ main raw material and a crude oil derivative.

Despite these concerns, shareholders can buy the stock. Gulf Oil Lubricants’ profit has been growing much faster than Castrol India’s for quite some time now, and the reversal in the stock’s valuation pecking order seems justified. The current valuation is also not way off the average and is still lower than the peak of 33 times since the stock’s listing in July 2014. Next, oil prices, while they have risen recently, should stay range-bound in the $45-$60 a barrel range due to global demand-supply dynamics. This should keep the company’s raw material cost under control.

Also, the company has good pricing power which should help maintain margins. Importantly, the company should be able to improve its profit growth from the second half of 2017-18, once the GST transition effect wears off; a low base in the year-ago period will also help. Volumes of automotive lubricants, the company’s mainstay accounting for about 80 per cent of revenue, should continue growing, thanks to the steady show in the auto sector. Sales volumes in the auto sector grew about 7 per cent in 2016-17 and 6 per cent y-o-y in the June 2017 quarter. While the commercial vehicles (medium and heavy) and two-wheelers segments were weak, other segments, including passenger vehicles and two-wheelers, on which the company has been increasing focus, have been growing steadily.

Higher disposable incomes in urban areas, improving rural outlook due to good monsoon, low interest rates and cheaper cost of many vehicles due to lower GST rates should aid volume pick-up in the personal mobility segment. This should benefit Gulf Oil Lubricants. The company, with its expanding distribution, branding initiatives and increasing tie-ups with original equipment manufacturers (OEMs) and dealers should continue growing faster than the industry and gain market share.

Manufacturing growth, when it picks up, will also support the company’s industrial lubricants business. The capacity expansion under way should help Gulf Oil Lubricants meet increasing demand. The new 50,000 mtpa plant in Ennore, Chennai, is expected to start commercial production by the third quarter of this fiscal year. This should help the company strengthen its presence in and around the auto hub of Chennai and other regions in South India. The company’s existing plant in Silvassa has capacity of 90,000 mtpa.

Under GST, the rate for the company’s products is 18 per cent as against the 28 per cent effective rate earlier. This should mean lower prices for products and aid volume growth, though not much, since oil change decisions by vehicle owners are not necessarily price-driven. Also, the expected shift under GST from the unorganised to the organised segment should aid companies such as Gulf Oil Lubricants.

COMMENT NOW