Gulf Oil Lubricants India: Well-oiled for growth - Buy

The stock of lubricant maker Gulf Oil Lubricants India has lost about 12 per cent over the past three months. Blame this on volatile market conditions and a somewhat subdued performance in the June quarter.

From our buy call in May, the stock had rallied about 15 per cent to ₹549, but then ceded ground. This dip though presents a good buying opportunity for investors with a long-term perspective. One, valuations are attractive. At ₹485, the stock trades at about 29 times its trailing 12-month earnings, lower than the 32 times it traded at in May. It is also much cheaper than larger peer Castrol India which quotes at 36 times.

Next, the company has come back strongly in the recent September quarter. Profit grew 22 per cent Y-o-Y to ₹24 crore, much higher than the 13.5 per cent growth in the June quarter.

Operating margin at nearly 16 per cent was the highest since the company got listed in July 2014. Despite pricing discounts effected in order to pass on some of the lower material cost benefits to customers and counter the competition, the company’s revenue grew about 4 per cent.

This was thanks to a 6 per cent rise in volumes, primarily from automotive lubricants which contribute more than three-fourth of the company’s revenue. The key factors driving the robust profit growth — good momentum in auto sales and benefits on the material cost front — are expected to continue.

Besides, lower interest rates by aiding economic growth should help volumes in both automotive and industrial lubricants.

Passenger vehicles sales, led by cars, grew at a good pace (6 per cent y-o-y during April to September 2015). So did commercial vehicles as a whole (7 per cent plus growth).

This helped Gulf Oil Lubricants which has tie-ups with five to six vehicle manufacturers to fill up lubricants in new vehicles at the factories. Also, despite overall two-wheeler sales growth being lacklustre due to the rural slowdown, Gulf Oil did well in both motorcycle and scooter lubricant sales.

Automobile sales volumes in October have been robust (above 20 per cent Y-o-Y for passenger vehicles), thanks to festival demand. Heavy commercial vehicles continued to do well while light commercial vehicles, which were lagging, also picked up in October.

While sales may not be as high in the coming months, low inflation and low interest rates should keep auto sales and, consequently, volumes for Gulf Oil Lubricants ticking. On the cost front, with crude oil languishing, the cost of base oil, a derivative and the main raw material used in lubricants, has been on the decline.

In the September quarter, raw material as a percentage of sales fell to about 55 per cent from nearly 62 per cent a year ago. With weak global demand and oversupply conditions in crude oil, material costs should remain subdued and aid margins. Gulf Oil Lubricants’ volume growth in the September quarter continued to be higher than the industry’s. Competitively priced products and additions to its retail and distributor network helped.

The company is in advanced stages of getting approvals for its Chennai plant which should be ready by early 2017.

This should also aid volume growth. The debt-to-equity ratio at 0.7 times remains quite comfortable.