5 Value Buys

Gulf Oil Lubricants: Oiled for growth

Anand Kalyanaraman

From its peak of ₹1,075 in February last year, the stock of lubricant maker Gulf Oil Lubricants fell nearly 35 per cent to ₹700 by October-end, amid the rout in the mid- and small-cap space. Since then, it has recovered some lost ground and now quotes at about ₹880. Even so, it trades about 20 per cent lower from its peak levels last year. Meanwhile the company’s performance has remained strong with healthy growth in volumes and profits. As a result, the stock’s valuation has moderated. It now trades at about 25 times the trailing 12- month earnings, lower than its three-year average of about 29 times and peak valuation of about 38 times.

Investors with a long-term perspective can consider buying the stock. Along with relatively attractive valuations, what should help is the company’s good business prospects.

Gulf Oil Lubricants has been growing much faster than the overall lubricant industry in the past few years and has steadily increased its market share. The company’s volume growth in the year-ended March 2018 was a healthy 14 per cent Y-o-Y, and in excess of 20 per cent Y-o-Y in the nine months ended December 2018. Net profit grew nearly 35 per cent Y-o-Y in the year ended March 2018 to ₹159 crore, and 11 per cent Y-o-Y in the nine months ended December 2018 to ₹130 crore.

In the quarter ended December 2018, volume growth in the core business was 20 per cent while profit growth was about 17 per cent. The good show over the past few years has been aided by factors such as premium products in the product mix, good pricing power, expanding distribution network, branding initiatives, advertising campaigns, and tie-ups with dealers and original equipment manufacturers (OEMs). These factors should continue to aid the company, going forward.

The automotive lubricants business is the key driver for Gulf Oil Lubricants, accounting for about 80 per cent of its revenue; industrial lubricants make up the rest. The buoyancy in the domestic auto sector until the recent past aided the company’s volumes, and the recent slowdown could bring down volume growth to an extent. That said, a good part of the company’s volumes comes from replacement demand that should continue steadily. Also, the auto industry could recover from the recent blues with moderation in interest rates, likely pick-up in post-election consumer sentiment and demand, and pre-buying before the rollout of the BS VI norms.

The cost of crude oil has been rising in the recent past and is not close to $70 a barrel. This will mean increase in cost of raw material (base oil) for the company. But given the global demand-supply dynamics, oil prices may be contained around current levels. Also, the company has the pricing power to pass on cost hikes. Major capital expenditure plans have completed with the commissioning of the Chennai plant, and Gulf Oil Lubricants has a strong financial position with a net debt-free balance sheet.

H G Infra Engineering: On track

K Venkatasubramanian

Road infrastructure players have had a rough run over the past one year, with delays in awarding contracts and financial closure becoming challenging for many firms.

But with the NHAI and several State governments resuming to award contracts over the past few months, and the Centre’s thrust on infrastructure, many companies in the space are reporting project wins.

In this regard, HG Infra Engineering, which listed last year, delivered a solid set of numbers even in the weak environment of the current fiscal and demonstrated a reliable execution track record. The company is involved in four-laning, six-laning, widening and constructing ring roads and highways, among a few other activities.

Since its listing last February, the stock declined more than 35 per cent, but has bounced back to levels close to its IPO price. Despite the rally, at ₹275, the stock trades at a little over nine times its likely per share earnings for FY20, much lower than the multiples enjoyed by the likes of PNC Infratech, KNR Constructions and Sadbhav Engineering — 12-15 times.

A strong order book, continuing thrust in winning low-risk EPC (engineering procurement and construction) contracts and the ability to win projects awarded under the new HAM (hybrid annuity model) mode are positives for the company. In the nine months of FY19, HG Infra’s revenue grew 61 per cent over the same period in FY18 to ₹1,430 crore, while net profits increased 80 per cent to ₹86.8 crore. The operating (EBITDA) margin has been stable at 14-15 per cent, which is fairly healthy for road infrastructure players. The debt-equity ratio for the company is a comfortable 0.4 times.

As of December 2018, HG Infra had an order book worth ₹5,925 crore, which is more than four times its FY18 revenues, thus giving it substantial visibility. About 80 per cent of its order book consists of EPC projects, while the rest is accounted for by HAM contracts. Recent order wins include four-laning of the Rewari-Ateli Mandi section of NH-11 in Haryana worth ₹580 crore under the HAM mode and construction of an eight-lane carriageway starting at Haryana-Rajasthan border (NH-148N) under Bharatmala Pariyojna, worth ₹997 crore under the EPC mode.

The company is also moving up the execution value chain as a full-fledged contractor. With operations spread across Rajasthan, Haryana, UP and Maharashtra, the company has a diversified mix of revenues.

Sobha: Strong foundation

Bavadharini KS

The stock of Bengaluru-based developer Sobha dropped 35 per cent between January and October last year. This was accentuated by the liquidity crisis gripping NBFCs that put brakes on the recovery of the residential real-estate sector.

However, the stock has since recovered over 20 per cent. This is thanks to the positive sentiments in the market — reduction in GST rates, decrease in unsold inventories and tax incentives announced in the Interim Budget. But for long-term investors, there is still notable upside left in the stock. At the current market price of ₹493, the stock trades at 18 times its trailing 12-month earnings, lower than its three-year average.

The company’s business prospects look healthy, with a strong launch pipeline of multiple projects set to be rolled out next year.

Residential sales have started picking up, though prices have remained stagnant in few cities.

For the nine months ending December 2018, the company reported good volumes growth of 11 per cent Y-o-Y in new sales and value growth of 7 per cent Y-o-Y. Sobha operates primarily in the residential segment (with about 67 per cent of its projects from Bengaluru) with presence in both luxury and affordable housing.

Sobha’s land bank in favourable locations bodes well for any future realisations.

The average realisation for Sobha is ₹7,689 per sq ft, while the average realisation in Bengaluru is around ₹4,681 per sq ft, according to a report by Knight Frank. This shows the company’s ability to command better pricing power.

The company plans to launch 11 residential projects with saleable area of 7.7 million sq ft over the next three to four quarters across key markets, including Bengaluru, Thrissur, Chennai and Pune. As some of these projects are in the affordable housing segment, they will be easier to sell and project completion will also be quicker, helping the company improve its earnings. The company also plans to launch affordable housing project in GIFT city Gujarat over the next four quarters.

Sobha also develops commercial properties and provides contractual services such as civil, electrical, interior and landscaping.

It is currently executing around 8.89 million sq ft of area across nine cities for various clients such as Infosys, LuLu, Azim Premji Foundation, Biocon, Syngene and Dell.

Crompton Greaves Consumer Electricals: Bright prospects

Rajalakshmi Nirmal

The stock of Crompton Greaves Consumer Electricals looks a value buy at the current market price of ₹229 a share. The stock has fallen 20 per cent from its August 2018 high and has underperformed the broader market due to lacklustre financial performance. The company’s new marketing strategy had disrupted sales. After a 20 per cent Y-o-Y growth in revenue in the June 2018 quarter, Crompton reported muted revenue growth of 8.1 per cent and 9.8 per cent respectively in the September and December quarters. Further, the operating profit margin was down due to price erosion in the lighting segment.

However, the outlook for 2019-20 is good as the new marketing strategy expected to pay off, with increased traction in sales. The effort to optimise on cost in the lighting segment and the launch of premium products are likely to help margins.

At the current market price of ₹229, the stock discounts its trailing one-year earnings by 38 times. The three-year average PE is 46 times.

About 70 per cent of Crompton Greaves Consumer’s revenue comes from the electrical consumer goods segment (fans, pumps and appliances) and the rest from lighting products. In the December 2018 quarter, the company’s lighting segment saw revenue drop marginally due to price erosion in LEDs in the market and lower orders from EESL — a JV of the four public sector power companies for implementation of energy efficiency projects in the country.

However, the company’s cost-cutting initiatives are paying off. The operating profit margin of the lighting segment was up 2.5 percentage points sequentially, to 8.9 per cent.

In the coming quarters, as sales of the company’s recently-launched premium products in bulbs and fans take off, margins will receive a further boost.

In the electrical consumer durables business, the growth was 16.3 per cent Y-o-Y in the December 2018 quarter. The market for fans in the premium and the mass premium category was good.

In pumps, Crompton is fast gaining traction in products launched under the residential pumps category. In the agri pumps business, the company plans to double market share over the next three years in the North and the East pockets. Revenue growth in pumps was about 15 per cent Y-o-Y in the December 2018 quarter. In the appliances category too, Crompton recorded strong growth.

It is expecting to be among the top three players in geysers over the next few years.

Indian Bank: Counting on recovery

Radhika Merwin

Most public sector banks have seen their capital erode over the past two to three years because of sharp rise in provisioning and weak core performance. Many of these banks have been relying on the Centre’s capital infusion, year after year, to meet their regulatory requirements. This infusion, at abysmal valuations, has hurt minority shareholders time and again.

Indian Bank is the only public sector bank that has not received capital from the Centre since FY15 fiscal, thanks to its relatively stronger capital adequacy ratio. The stock corrected about 35 per cent in 2018, along with the broader market correction, but there were other issues that weighed on it.

In the December 2018 quarter, the bank’s asset quality was impacted by its exposure to IL&FS — part of which slipped into NPA. There were also other slippages from the corporate book. Of the ₹1,769 crore of slippages in the December 2018 quarter, ₹664 crore pertained to IL&FS exposures. This one-off slippage added pressure on the bank’s operating profit (down 5 per cent Y-o-Y) and net profit (down 49 per cent Y-o-Y), on account of reversal of interest and rise in NPA provisioning. The bank has about ₹765 crore of exposure to IL&FS, which remains standard as of December 2018.

But the management expects upgrade and recovery to offset fresh slippages, leading to reduction in gross NPAs in the March quarter. Also, the bank has recognised a notable portion of exposure to IL&FS as NPA.

However, delays in recoveries from accounts under IBC could add some pressure in the March quarter. That said, Indian Bank is adequately capitalised — total capital adequacy ratio at 12.67 per cent and Tier I at 11.24 per cent as of December 2018.

Aside from providing cushion to absorb sudden risks of default, a higher capital buffer will also help fund the bank’s growth. Also, on the core lending front, the bank’s focus on retail, agri and MSME sectors is paying off. Over the years, the bank has been reducing its exposure to the corporate portfolio and, in turn, increasing its focus on higher-yielding retail and MSME portfolio; this has aided profitability. Indian Bank reported a healthy 15 per cent Y-o-Y growth in loans as of December 2018 — led by retail (17 per cent), agri (26 per cent ) and MSME (19 per cent).

After the sharp fall last year, the stock has moved up over 15 per cent in the last month, but still trades below its high of ₹377 levels last year.

At the current price of ₹273, the stock trades at about 0.7 times the one-year forward book value, which is attractive.

Long-term investors betting on the recovery in the sector and looking to ride the small- and mid-cap rally can invest in the stock.

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