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Stock factors in nil TV, core business outlook steady; Buy

* We reiterate our Buy rating on Gulf Oil Lubricants (GOLI) with a TP of Rs820 (rollover to Mar’24). The recent correction appears unwarranted as the stock seems to be pricing in nil terminal value (TV) beyond our DCF period of up to FY33.

* GOLI’s business outlook is steady. The industry is expected to grow 3-4% in FY23-24 following the Covid impact in FY20-FY22. GOLI has retained its 2-3x industry growth guidance. We believe GOLI would beat our 6% volume growth estimate in FY23/24 each.

* We expect GOLI’s EBITDA/ltr to improve as base oil prices currently are down 8-9% from the peak levels in Aug-Sep’21. Moreover, retail price hikes taken by GOLI till H1CY21-end should start to reflect from Q3FY22, leading to margin expansion in the next few months.

* We keep our estimates unchanged, but our assumptions are conservative (FY23-24E EBITDA/ltr of Rs23+ vs. historical peak of Rs26-27). Hence, we see upside risk. Our Mar’23 TP of Rs820 is slightly up by 1% due to the rollover from December to Mar’24

Recent stock correction unwarranted, stock reflecting nil TV:

Our Mar’24 DCF implies a Rs17bn NPV of the explicit period (FY24-33) FCFF, while Mar’23E end adjusted net cash of Rs6.7bn gives an FV of Rs23.8bn (Rs474/sh – near the CMP). The 20% correction in the last two months without any negative triggers implies nil TV beyond FY33 (DCF period), which is unreasonable as we do not expect such a major impact from electric vehicles (EVs). In our view, certain segments, like M&HCV and industrial (~50% volume share for GOLI), will continue to grow post FY33 and even segments like 2W and 4W will not completely shift to EVs. The ICE vehicle universe would still be significant. Based on our analysis of the Indian vehicle parc (Share price adequately reflects EV risks), we expect the Indian lube industry to grow by 2%/1% during FY21-30/FY30+. Against this, we have built in a 4% volume CAGR for GOLI during FY21-30E and 2% FCFF growth thereafter including terminal growth.

Core business outlook stable, margins to improve going ahead:

GOLI’s core business outlook is stable as base oil prices have cooled off by 8-9% from the peaks of Aug-Sep’21 on the back of higher refinery runs globally. Moreover, the full impact of retail price hikes taken in H1CY21 is expected to reflect from Q3FY22 onward, leading to EBITDA margin expansion. We expect margins to recover to 14-15%. Though, it is below the 16-18% range guided earlier, but due to higher realizations now. Corresponding EBITDA/ltr is estimated to be Rs23-24. In the past, GOLI had achieved Rs26-27 EBITDA/ltr. Our channel checks imply that the lube industry is expected to see a 3-4% CAGR in the next two years, and going by GOLI’s target, it should record double-digit volume growth vs. our 6% estimate. Hence, our TP of Rs820 is built on conservative assumptions. We expect RoIC to touch 40% by FY24-25. The stock currently trades at less than 10x FY23E PE.

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