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Gandhar Oil Refinery (India)

• Gandhar Oil Refinery (India) is coming out with a 100% book building; initial public offering (IPO) of 3,06,31,910 shares of Rs 2 each in a price band Rs 160-169 per equity share.  
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors. 
• The issue will open for subscription on November 22, 2023 and will close on November 24, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 80.00 times of its face value on the lower side and 84.5 times on the higher side.
• Book running lead managers to the issue are Nuvama Wealth Management and ICICI Securities.
• Compliance Officer for the issue is Jayshree Soni.

Profile of the company

The company is a leading manufacturer of white oils by revenue with a growing focus on the consumer and healthcare end-industries. As of June 30, 2023, its product suite comprised over 440 products primarily across the personal care, healthcare and performance oils (PHPO), lubricants and process and insulating oils (PIO) divisions under the ‘Divyol’ brand. Its products are used as ingredients by leading Indian and global companies for the manufacture of end products for the consumer, healthcare, automotive, industrial, power and tyre and rubber sectors. The white oil market is the fastest growing segment in the specialty oils sector and the company is India’s largest manufacturer of white oils by revenue in Financial Year 2023, including domestic and overseas sales and is one of the top five players globally in terms of market share in the calendar year 2022. 

As of June 30, 2023, the company’s products were sold in over 100 countries across the globe. It catered to over 3,500 customers in the Financial Year 2023, including leading Indian and global companies such as Procter & Gamble (P&G), Unilever, Marico, Dabur, Encube, Patanjali Ayurved, Bajaj Consumer Care, Emami and Amrutanjan Healthcare, supported by its global supplier base and manufacturing operations in India and United Arab Emirates. As a manufacturer of speciality oils, its products and processes are required to comply with strict standards and other specifications prescribed by its customers, and its long-standing relationships with several leading Indian and global companies demonstrate its qualification of these requirements. It has completed rigorous selection processes for securing business from several of its customers and has been able to maintain high customer loyalty. Its customer engagement, relationships and the quality and other certifications awarded to its manufacturing facilities demonstrate the quality of its products and its capabilities.

Proceed is being used for:

• Investment in Texol by way of a loan for financing the repayment/pre-payment of a loan facility availed by Texol from the Bank of Baroda.
• Capital expenditure through purchase of equipment and civil work required for expansion in capacity of automotive oil at the company’s Silvassa Plant.
• Funding working capital requirements of the company.
• General corporate purposes.

Industry Overview

The Indian specialty oil market is estimated to be $7.33 billion in 2023 and reach $9.30 billion by 2028, at a CAGR of 4.9%. In terms of volume, the market is estimated to be 5,578 kilo tonne (KT) in 2023 and reach 7,098 KT by 2028, at a CAGR of 4.9%. White oil is expected to be the fastest-growing segment over the forecast period, given the favourable outlook for enduser industries amid rising focus on product safety and awareness about health and hygiene. In terms of market share, automotive oil holds the largest share, although the market is expected to provide relatively slow and sustained growth rate. Industrial oil represents the second-largest product category by market size.

White oil, the fastest-growing segment of the Indian specialty oil market, is estimated to be worth $0.473 billion in 2023 and reach $0.759 billion by 2028, at a CAGR of 9.9%. In terms of volume, it is expected to reach 1,236 KT by 2028 from 782 KT in 2023, at a CAGR of 9.6%. One of the categories in this area that is growing particularly quickly is personal care and cosmetics. The market is anticipated to be driven by improving standard of living and rising demand for cosmetics. The other growing category is pharmaceuticals. Government initiatives such as the PLI scheme, expertise in low-cost generic patented drugs, quality service at a low cost compared with the US, Europe, etc., and strong domestic demand are the key drivers of the Indian pharmaceutical market.

The rubber process oil market is expected to grow with a 5-yr CAGR of 6.4% to reach $0.165 billion in 2028 from $0.121 billion in 2023. Based on volume, the market is estimated at 218 KT in 2023 and projected to reach 293 KT by 2028, growing at 6.1% CAGR. The demand for rubber process oil in rubber processing is projected to increase as more industrial and automotive items, including tyre and other products, and footwear made with rubber, are used in India.

Pros and strengths

Leading market share of Indian white oils market: The company was India’s largest manufacturer of white oils by revenue in Financial Year 2023, including domestic and overseas sales and was one of the top five players globally in terms of market share in the calendar year 2022. As of June 30, 2023, it offered a diverse portfolio of over 440 products primarily across the PHPO, lubricants and PIO divisions. Its products form a major component by volume for various consumer and healthcare end-industry products such as cosmetics, skin care products, ointments, over-the-counter and other medicines, as well as lubricants, processing oils and insulating oils. The company’s pro forma consolidated revenue from finished goods sold has grown at a CAGR of 48.61% over the last three Financial Years, from Rs 17,287.41 million in the Financial Year 2021 to Rs 38,181.63 million in the Financial Year 2023 and Rs 9,816.77 million in the quarter ended June 30, 2023. The PHPO division is the company’s largest business division and contributed to 54.96% of its pro forma consolidated revenue from finished goods sold for the Financial Year 2023 and 56.29% for the quarter ended June 30, 2023. 

Extensive and diversified customer base and supplier base: Leading consumer and pharma manufacturers prefer long-term relationship with established suppliers of specialty oils as spot purchases from distributors are cost inefficient and lead to erosion in margins. It has been able to establish such relationships with its customers, including through its ability to offer customized products and address their stringent quality requirements. It catered to an extensive customer base of 3,558 Indian and global companies during the Financial Year 2023. It has long-standing relationships with several of its key customers and has been able to maintain high customer loyalty. The company’s customer engagement, relationships and certifications obtained by its manufacturing facilities demonstrate the strength of its reputation, the quality and consistency of its products and the strength of its operations, management and technical capabilities. This provides it with a significant competitive advantage over new entrants in the industry. It manufactures products for its customers based on purchase orders issued by them. For certain customers, it enters into agreements that are renewed annually, which include provisions for price pass-through to the customers. 

Strategically located manufacturing facilities and in-house R&D capabilities: The company currently operates three manufacturing facilities, with two plants located in Western India and one plant located in Sharjah, United Arab Emirates, spread across 1,28,454 square meters to cater to its Indian and global operations. As of June 30, 2023, the combined annual production capacity of its manufacturing facilities was approximately 522,403 kL. Its Silvassa Plant, with an annual production capacity of 143,853 kL as of June 30, 2023, primarily manufactures specialty oils for the Indian market. Its Taloja Plant, with an annual production capacity of 143,256 kL as of June 30, 2023, primarily manufactures white oils, petroleum jelly and waxes for overseas sales. Its Sharjah Plant, with an annual production capacity of 235,294 kL as of June 30, 2023, primarily manufactures specialty oils for the GCC, Africa and Middle-East regions. It is also in the process of enhancing the production capacity of its Taloja Plant by an aggregate of 100,000 kL, out of which, it commissioned an incremental capacity of 25,000 kL in October 2022. This enhancement of capacity is proposed to be funded out of its internal accruals and through external borrowings obtained by the company. Further, it has an R&D facility located at its Silvassa manufacturing facility where it undertakes the R&D activities to support its manufacturing activities. The R&D facility is registered with the DSIR.

Resilient, flexible and scalable business model with prudent risk management framework: The company has three decades of experience in the specialty oils industry. It has increased the scale of its operations over the years, while increasing efficiency and reducing costs. The company started with the Taloja Plant in 1993, subsequently set up the Silvassa Plant in 2000 and set up Texol (which has become its Subsidiary with effect from March 30, 2022) with a partner in 2017, to expand into United Arab Emirates. Its business model affords it the flexibility to grow and manage its operations. It also made investments in expanding its production capacities, upgrading its equipment and technology systems over the last three Financial Years. The company’s resilience is driven by its risk management framework. It focuses on minimizing price risk and foreign exchange risk, efficient inventory management and prudent capital, credit and liquidity management. It conducts quality checks and testing on its raw material. 

Risks and concerns

The company is subject to strict quality requirements and standards and inspections: Most of the company’s products constitute a large percentage of the overall weight and volume of the end-products in which they are used, such as petroleum jellies, waxes and cosmetics. Accordingly, defects or lapses in quality controls in its products would result in a large number of end-consumer products being defective and being subject to recall. Any lapse in its quality controls or other reasons due to which its products are rendered defective may result in a cancellation of orders placed by customers with the company or an embargo on its products, which would have a material adverse effect on its financial condition, cash flows, results of operations, business and prospects. Its customers also have the right to return or reject its products in the event that they do not conform to the quality standards set out under the agreements. While it seeks to maintain high quality standards for its products through quality checks and inspections at its manufacturing facilities prior to delivering products to its customers, it may not be able to achieve such quality on a consistent basis, which may adversely affect its business, reputation and financial condition.

The company exposed to counterparty credit risk: The company is exposed to counterparty credit risk in the usual course of its business due to the nature of, and the inherent risks involved in, dealings, agreements and arrangements with its counterparties who may delay or fail to make payments or perform their other contractual obligations. Its operations involve extending credit to its customers in respect of sale of its products and consequently, it face the risk of the uncertainty regarding the receipt of these outstanding amounts. It cannot assure of the continued viability of its counterparties or that it will accurately assess their creditworthiness. It also cannot assure that it will be able to collect the whole or any part of any overdue payments. A significant delay in, or non-receipt of, large payments or non-performance by its customers, suppliers or other counterparties could adversely affect its cash flows and results of operations. Timely collection of dues from customers also depends on its ability to complete its contractual commitments and subsequently bill for and collect from its customers. If it is unable to meet its contractual obligations, it may experience delays in the collection of, or be unable to collect, its customer balances, which could adversely affect its cash flows and results of operations.

Do not have long-term contracts with suppliers: A significant percentage of the company’s raw material requirements are met by these suppliers and its business is dependent on the successful continuation of its relationship with these suppliers. In accordance with the general business practices in the industry in which it operate, its agreements with its major suppliers are generally annual contracts and may be terminated for, among other reasons, uncured material breaches of the terms of the contract. The loss of any of its major suppliers, due to its inability to renew its contracts with them or failure to secure orders from them, or a decision by any one of them to reduce the volumes of raw materials supplied to it could result in a decline in its revenues due to an inability to meet its manufacturing schedules. Further, if any of its major suppliers’ financial conditions were to deteriorate in the future, and as a result, one or more of these suppliers was required to cease their operations or are otherwise unable to supply to the company due to any reason, its business and results of operations would be significantly affected. 

Significant working capital requirements: The company’s business requires significant working capital, including in connection with its manufacturing operations. The actual amount of its future working capital requirements may differ from estimates as a result of, among other factors, unanticipated expenses, fluctuations in raw material prices, economic conditions, changes in the terms of its financing arrangements, changes in the credit terms of customers and suppliers, inventory fluctuations, additional market developments and new opportunities in the specialty oils and lubricants business. Its sources of additional financing, required to meet its working capital needs, may include the incurrence of debt, the issue of equity or debt securities or a combination of both. If it decide to raise additional funds through the incurrence of debt, its interest and debt repayment obligations will increase, which may have a significant effect on its profitability and cash flow.

Outlook

Gandhar Oil refinery (India) is a leading manufacturer of white oils by revenue, engaged in producing Pharmaceutical, Health care, and performance oil (PHPO), Process Insulating Oil (PIO) and Lubricants (automotive oils and industrial oils). These products also meet national and international quality standards and are approved by India FDA, ISO Certifications, Kosher, BIS and Halal. It has a diversified customer base that comprised 3,558 customers during the fiscal 2023. It produces a broad variety of speciality oils and lubricants such as White oils, waxes, jellies, automotive oils, industrial oils, transformer oils and rubber processing oils. Its products are sold under its flagship brand “Divyol”. It has long-standing relationships with several of its key customers and has been able to maintain high customer loyalty. On the concern side, the company’s agreements with its key customers are generally renewed on an annual basis and the abrupt termination of such agreements, including due to its failure to meet its contractual obligations to supply certain minimum volumes of its products to such customers, could adversely affect its business, financial condition and results of operation. 

The issue has been offered in a price band of Rs 160-169 per equity share. The aggregate size of the offer is Rs 490.11 crore to Rs 517.68 crore based on lower and upper price band respectively. On the financial front, the company’s total income increased by 20.71% to Rs 41,017.91 million for the Financial Year 2023 from Rs 33,979.76 million for the Financial Year 2022. The company’s restated profit after tax increased by 15.67% to Rs 2,131.75 million for the Financial Year 2023 from Rs 1,842.99 million for the Financial Year 2022. Meanwhile, the company’s expansion strategy is primarily focused on leveraging its existing customer relationships to increase its wallet share with such customers across multiple jurisdictions. It intends to focus on expanding its overseas business to additional countries where it currently has a limited business presence. It intends to strengthen its relationships with its existing customers and explore opportunities to grow by expanding the array of products and solutions that it offers to its customers, and to win new customer business by developing products and solutions aligned with their needs.