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Volume and margins stage recovery; BUY

Our view

The 2QFY22 operating profits at Rs 773mn (-1% YoY; +83% QoQ), stood significantly ahead of our estimates on stronger than expected revival in sales volume and higher realization. GOLI undertook several price revisions to pass on the sharp increase in raw material (base oil) price; given that base oil has stabilized, further increase in price might not be required. The price revisions nevertheless helped GOLI restore margins as gross margins increased by 9% QoQ to Rs 67/liter, which though below Rs 70-75 range seen over FY20, but was nevertheless a firm signal of pricing power. A strong recovery in sales of CV and personal mobility oils along with firm industrial oil demand helped GOLI register a 12% increase in volumes despite higher prices. Going ahead, even as threat of disruption from EVs looms large, but given ~80% of GOLI’s sales is derived from segments other than personal mobility, the impact on its sales is expected to be limited. Maintain BUY with a Mar’23 TP of Rs 1100/sh.

Result Highlights

* Revenue: Revenue for the 2QFY22 stood +30% YoY & 28% QoQ higher, at Rs 5.3bn, thereby taking the 1HFY22 revenue to Rs 9.5bn, +46% YoY. The strong growth in revenue was driven by a robust revival in sales volume (+29% YoY in 1HFY22), along with 13% YoY improvement in per unit realization to pass on rising raw material costs.

* Sales volume: Sales volume improved to 33mn liters (+12% YoY; +20% QoQ) in the 2QFY22, as demand recovered after impact of Covid-2 nd wave in previous quarter. The growth in volumes was led by strong double-digit growth in CV segment and revival of sales in personal mobility. In comparison the domestic lubricant industry experienced a 9.7% YoY growth during the 2QFY22, thereby indicating market share gain for GOLI

* Operating Profits: The Ebitda for the 2QFY21 at Rs 773mn, however stood 1.3% lower YoY but 83% higher QoQ, as sharp increase in raw material (base oil) price was offset by price revision undertaken by GOLI. Given the price increase is passed through with a lag, while Ebitda margins improved QoQ to 14.5% (1Q: 10.1%), but still a full revival to 16-18% range yet to be seen. Nevertheless, with the price increases undertaken the gross margins improved to Rs 67/liter (1Q: Rs 61.6/liter) leading to a QoQ better EBITDA of Rs 23.4/liter (1Q: Rs 15.3/liter).

Valuation

GOLI has underperformed the index and returned -4% on absolute basis over past 3M on concerns of slower growth and weaker margins. However, now the same appears to be behind us, given the improvement in margins, backed by price revisions offsetting the increase in base oil cost. Going ahead as base oil prices moderate, GOLI should be able to improve margins further. In addition, as economy emerges out of Covid’s shadow and recovers, improved mobility should aid incremental growth for GOLI. While in the longer run, adoption of EV could impact sales of engine oils, but overall broadening of vehicular base and relatively lower reliance on personal mobility segment should help GOLI retain growth trajectory. We value GOLI at P/E of 20x FY24e, as against 9x implied by CMP.

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