Gulf Oil Lubricants: Cruising along smoothly

The GST blues are behind the company. However, momentum should pick-up

Demonetisation and the rollout of GST had put lubricant maker Gulf Oil Lubricants India’s revenues on the back-foot in late 2016 and in the first half of calendar 2017. But the company still did much better than the industry on volumes and profit growth.

Since then, with the impact of these macro-disruptors wearing off, the company has again resumed its strong growth path. Its sales volumes grew 13 per cent Y-o-Y in the September 2017 quarter and 22 per cent in the December 2017 quarter. This, along with better margins and a low base effect, aided profit growth of 38 per cent Y-o-Y to ₹40.4 crore in the September 2017 quarter and 59 per cent Y-o-Y to ₹42.5 crore in the December 2017 quarter.

The Gulf Oil Lubricants stock, after a strong pick-up since October 2017, has lost some ground (about 14 per cent) since mid-February. This may be due to the ongoing market volatility and concerns about the rise in crude oil price that will increase the cost of base oil — the company’s main raw material. This dip though presents a good buying opportunity for investors.

At ₹910, the stock trades at a price-to-earnings ratio of about 30 times, similar to its average valuation over the past three years. Strong earnings growth and the fall in the stock price have moderated the valuation from the high of about 38 times in early December.

 

 

The company is expected to continue doing well — aided by continuing robust growth in the auto sector (its key customer segment), initiatives to expand its market share and capacity expansion that should result in higher volumes.

Good pricing power and product mix, with premium products that enable passing on cost increases, should also help. For instance, in January, the company took price increases of 3-4 per cent across various product categories.

Even if margins moderate due to cost increase, healthy volume growth should keep profit on the growth path. Besides, a sharp increase in oil prices from the current levels (about $70 a barrel) seems unlikely due to likely supply-side responses from US shale oil.

Volume growth to continue

The automotive lubricants business is the key driver for Gulf Oil Lubricants, accounting for about 80 per cent of its revenue. The business should continue growing robustly, thanks to the buoyancy in the auto sector. In FY 2017-18, sales volumes in the auto sector grew in double-digits. This helped the company register double-digit volume growth in its diesel engine oils, motorcycle engine oils and passenger car motor oils segments.

Vehicle sales growth is expected to be healthy in FY 2018-19 too. Lower GST rates on lubricant products should also help volume growth in the personal mobility segment.

Gulf Oil Lubricants has been growing faster than the industry and improving its market share in automotive lubricants. This could continue with the company’s expanding distribution network, branding initiatives, advertising campaigns, and tie-ups with dealers and original equipment manufacturers (OEMs). In the December quarter, the company started exports to some of Bajaj Auto’s overseas markets.

The company’s industrial lubricants segment, accounting for about 20 per cent of revenue, also did well in the December quarter. Growth in infrastructure works in the country should aid this segment.

New plant benefit

Gulf Oil Lubricants completed works at its new 50,000 mtpa plant in Ennore, Chennai and commenced preliminary production in mid-December. This facility will help the company address the growing demand from its large market of South India and East India. The company’s Silvassa plant has a capacity of 90,000 mtpa.

With a net debt-free balance-sheet, the financial position of the company remains strong.

Risk

The possibility of a shift to electric vehicles could disrupt the transportation, fuel and lubricants markets. But given the challenges — economic, technological and infrastructural — the shift, if it happens, may take quite some years to materialise.

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