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Share price adequately reflects EV risks; maintain BUY with a reduced TP of Rs800

* We believe GOLI’s share price is adequately reflecting the upcoming, multi-decade EV transition; our Auto research team has modeled share of EVs in vehicle population (parc) at 10% by FY30E and 41% by FY40E, with share of EV sales at 31%/66% in FY30E/40E.

* 2W, 3W and buses would see the fastest EV adoption followed by PVs and LCVs, while M&HCVs would see fairly muted impact over the next decade. We model Indian lube volumes to see a CAGR of ~2% in FY21-30E and ~1% in FY30E-40E.

* We shift to DCF-valuation from P/E, and reduce TP to Rs800 (Sep’22E) from Rs1,000 (Mar’22E). We expect GOLI to sustain volume growth at 2-3x of industry, and thus forecast volume CAGR of ~4% over FY21-30E, followed by a 2% terminal FCFF growth post FY30.

* With stabilizing base oil prices, recent RSP hikes and volume recovery, EBITDA margin should return to 15%+ by FY23E, and RoICs to the earlier range of 40-45% from FY24E. GOLI is valued attractively at FY23E/24E FCFF yield of 8%/11% and stock at a 5-year low (excl. Mar’20 Covid). Key risk is capital allocation, even as we model a rising payout. BUY!

EVs to grow but concerns on medium to long-term Indian lube demand overblown: Based on our auto analysts’ forecast, FY21-30E non-EV parc is estimated to see 3.5% CAGR while beyond FY30, it is likely to remain stagnant. Our basic industry lube demand model in turn implies a 1.9%/1.4% CAGR in these periods. We note that players like GOLI’s exposure to segments like STC buses and 3W is minimal, which have sizeable EV risks. While 2W (GOLI’s volume share: 20%+) could see wide EV adoption, impact on PVs-4W (5%) and LCVs would be in varying degrees. M&HCVs, which is sizeable in the lube mix, are unlikely to see much EV conversions. Industrials would also be outside this. GOLI has maintained its 2-3x industry growth guidance (at least for the next 3-4 years), which implies continuing market share gains. We build in ~4% CAGR till FY30 and a ~2% terminal growth rate beyond this.

EBITDA margins likely to have bottomed out in Q1FY22 with guidance at 15-17%: The last 1.5 years saw volatility in GOLI’s margins owing to Covid and the sharp rise in base oil prices. However, with Covid situation improving and an uptick in global GRMs aiding higher refinery utilization, input costs should stabilize going ahead. Management has indicated LOBS prices are not moving up further and June-July saw good sales recovery. The company took four price hikes in H1CY21 and has largely covered the rise in COGS. Against 10% EBITDA margin in Q1FY22, management expects to return to 15-17% levels. With realizations up, EBITDA/ltr, which was Rs15.3 in Q1, is expected to reach Rs24-26 in FY23-24.

Strong financial metrics; healthy FCF to be put in EV chain and dividends: Our DCFbased TP implies 15.3x Sep’23E target PE (20x Mar’23E earlier) but is more objective with the long-term outlook embedded. GOLI’s financials are strong with a 35-40% recurring RoIC, 8-11% FCFF yield and 3-4x asset turnover in FY23-24. FCFF would be robust at ~Rs2bn p.a., to be put in the EV value chain (which we believe is a justifiable long-term de-risking strategy), capex and dividend. We do not expect core decadal expansion capex to be much and anticipate dividend payout to progressively increase going ahead (vs. 40% now). We cut FY22 EPS by 15% building Q1 number and FY23/24E by 4%/2% by lowering volumes. Key risks are recurring Covid waves, adverse commodities -currency and FCF usage/capital allocation.

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