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In-line results; volume beat offsets margin miss

* GOLI’s revenue/EBITDA/PAT rose 44%/41%/66% yoy and up 7%/down 6%/down 7% qoq to Rs5.17bn/781mn/598mn in Q4FY21 - 4% above/in line/1% below our estimates. Volume beat of 7% was offset by equivalent miss in EBITDA/ltr as gross margin weakened.

* Lube sales volume rose 39% yoy/6% qoq to 35.0mn ltr, driven by improved demand across segments due to better economic-industrial activity. B2B, OEM and industrial saw record sales in Q4, but although personal mobility improved it was below pre-Covid levels.

* Net realization increased 1% qoq to Rs147.8/ltr but was a 3% miss, while unit COGS rose 11%. Gross margin fell 9% qoq to Rs63.6/ltr (7% miss). Unit opex fell 16% yoy/8% qoq to Rs41.3/ltr (7% below est.). EBITDA/ltr came in at Rs22.3, down 12% qoq/up 1% yoy.

* We cut FY22/23E EPS by 3%/2%, building in 6%/8% lower EBITDA/ltr, partly offset by hike in volumes by 1%/4%. We retain 20x target multiple (Mar’23E EPS) due to conservative margin estimates. We lower TP by 2% to Rs1,000 and reiterate Buy.

Q4FY21 highlights:

There was volume traction till mid-Mar’21 before the second Covid wave moderated it. GOLI saw severe margin pressure due to sharp rise in input costs, which takes time to pass on to customers. Absolute opex was up 17% yoy/down 2% qoq to Rs1.45bn. EBITDA margin declined to 15% from 17% in Q3. Interest cost rose 12% qoq to Rs16mn (down 84% yoy) while Other Income was up 24% yoy/1% qoq to Rs127mn. Depreciation declined 4% qoq to Rs83mn (5% below est.) while tax rate was 26% in Q4. For FY21, GOLI’s revenue/EBITDA/PAT came in at Rs16.5bn/2.65bn/2.00bn (EPS: Rs39.8). EBITDA decline of 7% was due to 11% EBITDA/ltr contraction, partly offset by 4% volume growth. PAT was aided by lower interest cost and higher Other Income. The board recommended final dividend of Rs9/share (40% total payout in FY21). GOLI’s working capital increased HoH though was flat yoy, and the seasonal trend was mostly in line. OCF was healthy at over 95% of PAT.

Guidance:

All segments delivered double-digit growth yoy in Q4, with factory fills and exports also doing well. March base effect was there. B2C-B2B share was 60-40 in Q4. Industry declined in double-digits in FY21, while GOLI saw growth and gained market share. Q1FY22 saw the second Covid wave affecting demand but management expects a sharp bounce-back once the lockdowns are lifted, and maintains 2-3x of industry growth guidance. GOLI would try to manage EBITDA margins in the 16-18% guided band and has taken price hikes to cover for recent rise in raw material costs. Q2FY22 will see the full impact. Base oil prices now are stabilizing at higher levels with refineries increasing runs. Gulf has launched EV fluids globally. It is focusing on mineral based and semi-synthetics. BS 6 oils are 7-15% costlier than BS 4.

Valuation:

We value GOLI at 20x Mar’23E EPS. Key risks are adverse base oil prices/currency, competition, economic slowdown and technological changes.

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