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Base oil costs trend key monitorable…

About the stock: Gulf Oil Lubricants is one of the leading private companies in the domestic lubricants business.

* The company reported volume growth at ~10% CAGR in FY17-22

* Total capacity of the company is 140 million litre

Q2FY23 Results: Gulf Oil delivered weak results QoQ.

* Revenue was up 34.9% YoY to | 719.5 crore on account of growth in volumes. Volume grew ~40% YoY to 46 million litre (core volume:32 million litre, AdBlue volume: 14 million litre)

* EBITDA was at | 80.2 crore, up 3.9% YoY

* PAT was at | 52.1 crore, down 11.2% YoY

What should investors do? In the near term, with a rise in crude oil prices, raw material costs are likely to be higher for the company, impacting margin. Potential disruptions like higher drain interval and EVs will be key monitorables for long-term volume growth.

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value Gulf Oil Lubricants at | 440/ share i.e. 6.6x FY24E EPS

Key triggers for future price performance:

* Faster volume growth in retail segment

* Base oil costs trend to be the key monitorable in the near term. Also, higher realisation/ passing on raw material costs to customers will be important to maintain margins

* Introduction of EVs may impact long term growth prospects

* Consistent dividend payout/return to shareholders

Alternate Stock Idea: Besides Gulf Oil, in our oil & gas coverage we also like Gail.

* Gail is India’s leading gas transmission company, which is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

* It operates a natural gas pipeline network of 14500 km as of end of FY22

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