Stock Call . How well-placed is Gulf Oil Lubricants to weather the current phase?

Like many other companies, lubricant maker Gulf Oil Lubricants India, too, had a tough March 2020 quarter, with revenue dipping 17.5 per cent (y-o-y) to ₹360 crore and net profit falling about 24 per cent to ₹36 crore.

This was primarily due to the impact of the sudden Covid-19 lockdown in the last fortnight of March, a period that generally sees strong sales on account of year-end growth-related incentive programmes.

The June quarter could be worse with the lockdown extending for most of this period.

Not surprisingly, the Gulf Oil Lubricants stock slipped badly — falling more than 35 per cent from about ₹800 in early February to about ₹500 by late March.

While the stock has recouped a part of its loss since then and now hovers around the ₹600 mark, it is still quite far from its earlier highs.

There are a few reasons for this.

Stock dampeners

One, there is still much uncertainty about the recovery path for the economy, in general, and for the auto sector — Gulf Oil’s key customer segment — in particular. Discretionary spending, especially on big-ticket items such as autos, could stay subdued till things stabilise on the pandemic and the economic front. But there is another school of thought that expects an increase in sale of cars and two-wheelers with people preferring private transport over public ones. How this plays out in the near term needs to be seen.

Next, the recent dispute among the promoter group members — the Hinduja brothers — may have further dampened the sentiment. Besides, the market, despite the recovery since March, remains quite volatile, especially in small-cap counters such as Gulf Oil — the stock had gone close to ₹700 in early June before losing ground again.

Good opportunity

But all this seems to present a buying opportunity for patient investors in a stock that is fundamentally sound and with good growth prospects in the long-term. One, the Gulf Oil stock’s valuation is attractive. At ₹ 584, the stock trades at 14.5 times trailing twelve-month earnings, compared with the average of about 25 times it traded at in the past three years, and about 20 times at the start of calendar 2020.

Next, while promoters hold a significant 72 per cent stake in the company, it seems unlikely that disputes among them will affect the company’s business and operations, given that Gulf Oil is run by a professional management. The three Hinduja brothers on one side of the dispute have termed it a “private affair” and said that the litigation would not have any impact on the group’s global businesses.

Well-placed

Importantly, Gulf Oil Lubricants is well-placed in the Indian lubricants market — growing faster than the competition and gaining market share. Until December 2019, most of the company’s business segments, except OEM (Original Equipment Maker) factory fills, were growing in double digits (at about 10 per cent), despite the slowdown in the auto industry and weak economic growth. Business was also good until February this year.

But the overall volumes in the March 2020 quarter declined about 13 per cent y-o-y due to the lockdown, leading to a dip in the quarter’s profit. Yet, Gulf Oil’s profit for the full year FY2020 was up about 14 per cent to ₹203 crore. This was aided by benign cost of base oil (the key raw material), better margins and tax rate cuts that offset weakness in volumes and dip in revenue.

The company’s business was weak in April 2020, too, though agricultural lubricants and some other segments saw sales pick up. The overall volumes started recovering in May and got better in June; full recovery to earlier levels could take time though.

Most of the company’s distributors have re-opened for business now.

There is hope that with greater attention towards revival of the economy now, business could get better over the year. The rural economy, in particular, seems better-placed with good harvest and rain. This, along with low interest rates could help demand revive in the auto sector.

Gulf Oil’s tie-ups with tractor companies such as Mahindra and Swaraj should also help. Replacement sales should also provide cushion.

That said, the company’s business in FY21 could see contraction. But it should be able to contain the downside with the continued push in distribution and marketing across segments.

The company’s retail outlets as of March 2020 grew to about 78,000, a double-digit increase compared with a year ago.

There could be healthy revival in FY22, given the low-base effect and a possible return to economic normalcy.

It helps that Gulf Oil has a strong balance-sheet with low leverage and a good cash position (about ₹550 crore as of March end) to tide over the storm. The company is also taking cost-optimisation measures.

In the long term, the firm’s fledgling battery business could also grow well.

Exposure to the Gulf Oil stock can be limited though, given that it is a small-cap, more susceptible to market volatility.

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