Published on 6/07/2020 3:52:34 PM | Source: HDFC Securities Ltd

Buy Gulf Oil Lubricants Ltd For Target Rs.750 - HDFC Securities

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A tough quarter

Gulf Oil’s 4QFY20 adj. volumes declined ~13% YoY amidst the downturn in the auto industry and COVID-19 impact. However, we expect Gulf Oil to outperform the industry on the back of expansion of its distribution network and improving product/customer mix. The company is expected to gain market share in the PCMO segment as customers shift towards personal mobility. Maintain BUY.

* 4QFY20 Financials: Sales remained weak, with volumes declining -16% YoY to 25mn KL (~13% decline excluding institutional order in 4QFY19), owing to low factory fills and weak macros. Realizations at Rs 144/KL declined 3% QoQ resulting in lower revenues (-17% YoY). EBITDA margin at 15.4% (- 160/-300bps YoY/QoQ) surprised negatively owning to operating deleverage, despite stable base oil prices (which led to expansion in gross margins by 380bps YoY). PAT declined 24% YoY. Tax rates now settling at ~24% level due to new tax structure.

* Call & other takeaways:

(1) FY20 affected by weak macros: FY20 volumes declined by 7% (vols are flattish after adj. for the institutional order in FY19) owing to lower factory fill volumes. This account for 8-10% of total volumes and is affected by the downturn in the CV cycle. The decline in this segment was offset by growth in the other segments.

(2) Green shoots of demand in the Agri segment: As Gulf has tie-ups with Mahindra and Swaraj, they co has witnessed a volume pick up in this segment. Agri segment (15% of DEO segment) has witnessed growth in FY20.

(3) Situation post lockdown is easing: ~85% of markets are now open in India with ~90% of Gulf’s distributors open for operations. Demand pick-up has been witnessed in PCMO segment (demand for oil and battery replacement); however, DEO segment (excluding Agri) is yet to revive. The demand from infrastructure sector is picking up as work on projects is recommissioned.

(4) Other highlights: DEO segment contributes 40% to overall volumes. The PCMO segment accounts for ~30% - the share of 2Ws is the majority of this segment. Management expects this segment to grow as consumers are shifting to personal mobility. The company is focusing on increasing its market share in the competitive passenger car segment. Gulf is expanding its distribution network with 78k touch-points currently vs. 75k in 3QFY20 and 67k in the beginning of FY20.

* Maintain BUY: Our estimates our largely unchanged. We re-iterate BUY with a target price of Rs 750 @ 20x FY20 EPS. Key Risks: Delayed pick up in the DEO segment and increased competition in the PCMO segment.


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