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CV segment & Ad Blue drive volume growth

Our view

The 3QFY23 reported Ebitda at Rs 900mn (+17% YoY; 12% QoQ) stood higher than our estimates, primarily on higher than estimated sales volume, which in-turn was driven by higher sales of AD Blue. The gross margins stabilized at 37%, as the raw material (base oil) prices stabilized and the price increase undertaken over previous quarters, to offset increase in raw-material price, also aided margins. The core lubricant sales during the quarter stood 8% YoY and 6% QoQ higher at 34mn liters, whereas sales including Ad Blu stood at 55mn liters (+53% YoY; +20% QoQ). Weaker rural demand sentiment impacted sales for Agri and two-wheeler oils, the CVO segment nevertheless witnessed a strong growth. 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 3QFY23 at Rs 7.8bn stood higher by +30% YoY & 8.6% QoQ. The increase in revenue can be attributed to 53% YoY & 20% QoQ higher sales volume, which worked to offset the 15% YoY & 9% QoQ lower realization.

* Sales volume: While the core lubricants sales improved by 8% YoY & 6% QoQ to 34mn liters, the AD Blue sales at 21mn liters experienced a strong growth of 367% YoY & 50% QoQ. The growth in core lubricants was led primarily by CVO segment whereas higher sales of Ad Blue also led to lower blended realization as it is lower price product. While B2B segment recorded a robust growth, B2C segment faced tepid rural demand which impacted Agri and two-wheeler volumes.

* Operating Profits: The Ebitda for the quarter stood at Rs 900mn (+17% YoY; +12% QoQ). The Ebitda margin at 11.5% (2Q: 11.2%) stood slightly better QoQ as operating expense as a percentage of revenue stood marginally lower. The per unit realization at Rs 142/liter stood lower QoQ (2QFY23: Rs 156/liter) and so also Ebitda at Rs 16.4/liter (2QFY23: 17.4/liter), despite per unit operating costs being lower at Rs 29.6/ltr (2Q: Rs 32.9/ltr), primarily on higher sales of Ad Blue, which is a low price and low margin product.

Valuation

We value GOLI at Rs 660/sh on DCF basis, our TP implies a target P/E multiple of 10.0x FY25e, as against 6.6x the stock is currently trading at. As per our estimates, market is not ascribing any value to GOLI’s continued operation beyond FY35e. Whereas just ~20-25% of GOLI’s sales is aligned with personal mobility, which is mostly at threat from advent of EVs, rest being sales related to CVs and industrial lubricants, which is likely to be practically untouched by disruption from EVs

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