Buy Gulf Oil Lubricants Ltd For Target Rs.880 - HDFC Securities
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An improved demand outlook
Gulf Oil witnessed a healthy demand in 3Q, with volumes rising 16% YoY – with this, the FY21E volumes are expected to be flat YoY (vs. expectations of a decline earlier). However, the EBITDA margins at 17.3% moderated (-170bp QoQ) on firming costs. The company expects double-digit growth in FY22E as the management is confident of growing at 2-3x the industry. Diversification initiatives: After entering the battery segment in the past, Gulf has made its first strategic move into the e-charging segment with a minor investment in Indra, a UK-based electric charging company. We reiterate our BUY rating on the stock and set a revised Mar’22 PT of Rs.880. Our estimates for FY22-23E are increased by 10% / 2% - we value the company at 20x forward earnings.
* 3QFY21 financials: Net revenue came in at Rs 4.8bn (+14% YoY, 17% QoQ) as volumes grew 16%. EBITDA margin, at 17.3% was lower QoQ on firming input costs. Reported PAT at Rs.640mn was up 15% YoY.
* Call and other takeaways: (1) Demand growth surprises: Gulf reported 3Q volumes of 33,000 litres. With this, the company has gained market share as it has grown 4x the industry. The share of higher-margin B2C segment remains above 60% - contribution from personal mobility segment has sustained at 24% and DEO was 37% of sales as CV volumes have revived. (2) Margins: The 3Q margins were lower at 17.3%(-170bp QoQ) on firming costs (RM costs +30bps, other exp +240bps). To offset the impact of rising crude, industry has taken price hikes in 3Q. (3) Diversification initiatives: The 2W battery business has broken even this quarter as sales have reached Rs.250mn (5% of revenue). The company has also invested in the EV charging company as highlighted above. The management highlights that the lubricants will be in used over the next 2-3 decades based on their assessment. However, they are gradually diversifying into newer businesses.
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