IGI Logo

Long-term challenges

Gulf Oil Lubricants (GOLI) reported 30% YoY growth (15% beat on estimate) in Q2FY22 sales as volumes grew 12% YoY. Higher base oil prices dragged gross margin 687bps YoY (up 83 bps QoQ). However a better sales mix and price hikes restricted EBITDA fall to merely 1% YoY (20% above estimates) with recovery in the B2C segment.

Waning raw material headwinds and the full impact of price hikes should lessen the pressure on margins. However, we see a slowdown due to EVs impacting lubricant consumption over the long term and hence cut the target to 16x (from 18x). All in all, we are downgrading GOLI to ‘HOLD’ with a TP of INR620 (INR690 earlier) on 16x FY23E EPS

Healthy recovery

GOLI’s Q2FY22 revenue grew 30% YoY as volume growth exceeded expectations (12% YoY) to 33,000KL despite strong pent-up demand in the base quarter. Castrol, in comparison, reported 22% sales growth. The quarter saw a recovery as retail markets opened up. The company logged double-digit growth across the CVO (commercial vehicles) segment and personal mobility (up 61% QoQ). GOLI reported strong growth in the industrials segment as well, with an uptick across customers and approvals from a thermopack manufacturer. Higher base oil prices were partially offset by price hikes and mix improvement with B2C forming 60% of sales. EBITDA dipped merely 1% YoY, up 83% QoQ. With base oil prices stabilising and price hikes pass-through underway, management anticipates margin improvement to sustain.

Future trends

GOLI has launched the parents’ global EV oils portfolio in India; however, market growth in the segment is expected to be slow. While GOLI continues to outperform the market, the natural slowdown in the market with rising drain intervals and shift to EVs are concerning. While the company is testing EV charging stations from the Indra tie-up and also sells VRLA batteries in India, their contribution will take time to scale up; so we await incremental announcements.

Outlook and valuation:

Long-term challenges; downgrade to ‘HOLD’ With market growth decelerating and headwinds from conversion to EVs we expect the lubricants’ market to remain tough over the long term. However, we have built in a 10% EBITDA CAGR over FY22–24E. Downgrade to ‘HOLD’ (from ‘BUY’) as we are cutting the target to 16x (from 18x) FY23E EPS, yielding a revised TP of INR620.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer
SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer