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Navigating inflationary trends; valuations attractive

* GOLI reported Q2FY23 EBITDA/PAT of Rs802mn/521mn, up 4%/down 11% YoY and down 6% QoQ each. EBITDA missed our estimate by 8% due to 7% lower gross profit, led by higher base oil and additive costs. PAT was a 10% miss due to higher finance costs.

* Sales volumes rose 41% YoY/fell 3% QoQ to 46.5mn ltr, with core lubes up 10% YoY/down 6% QoQ. AdBlue jumped by over 3x+/4%. Net realization rose by 5% QoQ to Rs154.7/ltr, while unit COGS was up 11% QoQ, leading to gross margin of Rs57/ltr, down 3% QoQ.

* Unit opex was down 3% QoQ/9% YoY (3% below estimate) at Rs39.7/ltr. EBITDA/ltr was Rs17.3 (EBITDA margin of 11%), down 3% QoQ/26% YoY and 4% below our estimate. Finance cost was higher on MTM forex losses (totaling Rs70mn), while ETR was at 26%.

* We have lowered our FY23-25E EPS by 5-9% to reflect a conservative margin profile due to cost pressures. We roll over to Sept-24E and lower our DCF-based TP by 9% to Rs620. Valuations continue to be highly attractive on double-digit earnings CAGR. Maintain Buy.

Highlights: Other expenditure rose 33% YoY/fell 8% QoQ to Rs1.51bn. EBITDA margin contracted 80bps to 11.2% QoQ, with the B2C sales mix falling to 57% due to slowdown in agri and motorcycle segments. Depreciation rose by 4% QoQ to Rs98mn, while Other Income was up 6% QoQ/down 9% YoY. Short-term borrowings (excl. lease) were flat HoH at Rs3.7bn, with elevated inventory and receivables days. Cash balances fell 9% HoH to Rs5.2bn.

Guidance: Management indicated market share gains in the PCMO segment. Q2 saw sustained cost pressures due to rising input costs, currency depreciation, and demand slowdown in certain segments. Demand growth in rural (esp. agri) is likely to pick up going ahead. AdBlue product saw a spurt in its quarterly volumes from Q1FY23 at a run-rate of 14.0-14.5mn ltr vs. 3-5mn ltr in the past. This has led to volume expansion; however, it is a lower single-digit unit EBITDA business. GOLI is supplying the same to 10 OEMs so far. GOLI took price hike in Sep-22 and has guided for gradual margin improvement while maintaining long-term guidance of 14-16%. The company reiterated its volume guidance of 2-3x over the industry’s 3-4% CAGR in the medium term. GOLI plans to expand its distribution outlets in double digits annually. Capex guidance continues to be Rs150-200mn p.a., with plant expansion on the anvil in the next 2-3 years along with cash preservation for new ventures. GOLI can run its plants at three shifts vs. two currently to meet demand. The battery segment recorded revenue of Rs240mn in Q2FY23. GOLI has recently launched EV fluids for Piaggio (3Ws) and Switch Mobility (buses), with 100KL annual volume target initially. It continues to extend its foray into the EV ecosystem and synergize the existing business.

Valuation: Our Sep-23 DCF-based TP implies a target PE multiple of ~12x. Key risks: adverse base oil prices/currency, competition, and technology changes.

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