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Weaker INR & higher base oil impacts margins

Our view

The 2QFY23 reported Ebitda at Rs 802mn (+4% YoY; -6% QoQ) stood below our estimates primarily on higher than estimated raw material costs and therefore weaker than estimated gross margins. The gross margins at 37% stood sequentially weaker due to volatility in base oil prices coupled with depreciation in INR. GOLI undertook price revision during the quarter (in addition to price intervention taken earlier in the year) to offset the increase in base oil prices, however the full impact of the same shall be evident over 3Q-4QFY23. The core lubricant sales during the quarter stood 12% YoY higher but 4% QoQ lower at 32mn liters, whereas sales including Ad Blu stood at 46mn liters (+39% YoY; -4% QoQ). Weaker demand from Agri sector along with impact of monsoon, weighed on sales during the quarter. Going ahead, GOLI intends to continue to grow at 3-4x industry growth along with plausible Ebitda margin expansion. In our opinion, markets have heavily discounted GOLI’s growth potential and ability for cashflow generation in light of the EV narrative, and a disconnect exists to that extent, between perceived and intrinsic valuations. Maintain BUY

Result Highlights

? Revenue: Revenue for 2QFY23 at Rs 7.2bn stood higher by +35% YoY & 2% QoQ. The increase in revenue can be attributed to a) 39% YoY higher sales volume albeit the same was 4% lower, QoQ and b) 6% QoQ increase in price realizations. GOLI undertook a price increase during the quarter, in addition to price revisions earlier, to offset the increase in raw material prices (base oil & additive)

? Sales volume: While the lubricant sale stood at 32mn liters ( +12% YoY; -4% QoQ), the sale of Ad Blue stood at 14mn liters, taking the total sales to 46mn liters (1QFY23: 48mn liters). Lubricant sales were impacted during the quarter on account of seasonality during monsoon months, in addition the demand from Agri sector was on the weaker side. The B2B segment however posted healthy sales.

? Operating Profits: The Ebitda for the quarter stood at Rs 802mn (+4% YoY; -6% QoQ), sequentially lower despite QoQ 8% lower operating expenses at Rs 1.5bn. The Ebitda margin at 11.2% (1Q: 12%) stood sequentially weaker on account of QoQ weaker gross margins at 37% (1Q: 40%), as base oil trended higher. The per unit realization at Rs 156/liter stood higher QoQ (1QFY23: Rs 147/liter) however Ebitda at Rs 17.4/liter stood flat QoQ (1QFY23: 17.7/liter).

Valuation

We value GOLI at Rs 630/sh on DCF basis, our TP implies a target P/E multiple of 11x FY25e, as against 7.3x the stock is currently trading at.

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