INDUSTRY LUBRICANT CMP (as on 8 Aug 2018) Rs 872 Target Price Rs 1,027 Nifty 11,450 Sensex 37,888 KEY STOCK DATA Bloomberg GOLI IN No. of Shares (mn) 50 MCap (Rs bn)/(us$ mn) 43/633 6m avg traded value (Rs mn) 28 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,100 / 744 3M 6M 12M Absolute (%) (3.6) (13.7) 8.7 Relative (%) (11.2) (23.8) (9.7) SHAREHOLDING PATTERN (%) Promoters 72.9 FIs & Local MFs 5.3 FPIs 9.0 Public & Others 12.8 Source : BSE Himanshu Shah himanshu.shah@hdfcsec.com +91-22-6171-7315 Good start to FY19 Gulf Oil Lubricants (Gulf Oil) 1QFY19 was healthy led by 33% YoY volume growth. Revenue at Rs 3.9bn in 1QFY19 grew by 39.4%. Gross margin declined by 136bps YoY to 46%. EBITDA grew by 31% to Rs 645mn. PAT at Rs 400mn was up by 17%. PAT lagged EBITDA on account of commissioning of Chennai plant and forex loss of Rs 20mn. Over the last two years (FY16-18), Gulf's volume/revenue/ebitda/pat has grown by 25/32/51/61% vs. market leader Castrol's 5.4/8.5/8.8/8.4%. Gulf s superior growth is led by low base (vs. market leader), increase in capacity (75 to 90mn KL p.a. in FY16 and 130mn KL in FY19), expansion in distribution reach by ~15% p.a. (~65k retailers vs. 105k for Castrol), and improving product and customer (B2C) mix. Its market share in B2C segment is ~8% vs. 22% for Castrol. We expect Gulf to continue registering 2-3x industry volume growth. Maintain BUY with TP of Rs 1,027 @ 25x FY20E EPS. RESULTS REVIEW 1QFY19 09 AUG 2018 Gulf Oil Lubricants BUY motor cycle engine oil; 30%+ in passenger car. Industrial segments showed even higher growth. This is led by Gulf s continues and aggressive investments in brands, product refresh and distribution. Concall highlights: (1) Gulf s management expects industry growth at 4-5% and theirs at 2-3x of industry. This is feasible in our view. We estimate 15% volume growth (110mn KL) for Gulf in FY19. It thus implies the avg volume run-rate for 2Q-4QFY19 similar to 1QFY19 (2) GM is likely to sustain at ~46-47% despite increase is base oil prices as well as rupee depreciation. This is led by price increases in Feb and Jul18 (~3-4% in B2C, 60-65% of mix) (3) Gulf is venturing into auto battery segment though refrained from providing more strategic insight on it. We will keep a close tab on the development as it can be a double edge sword. Near term outlook remains positive led by industry leading volume growth. However high base of 2HFY18 and YoY decline in GM, earnings to grow by modest 7% YoY over the rest of FY19. A positive surprise would be the key re-rating trigger. Key highlights 1QFY19 highlights: Gulf s 1QFY19 33% volume growth was across segments viz. more than 25% in diesel and Financial Summary (Rs mn) 1QFY19 1QFY18 % chg YoY 4QFY18 % chg QoQ FY16 FY17 FY18 FY19E FY20E Net Revenues 3,904 2,800 39.4 3,733 4.6 10,113 11,007 13,323 16,044 17,853 EBITDA 645 493 30.8 629 2.5 1,592 1,783 2,357 2,675 3,102 APAT 401 343 17.0 414 (3.0) 1,003 1,184 1,586 1,730 2,039 EPS (Rs) 8.1 6.9 17.7 8.3 (3.0) 20.2 23.8 31.9 34.8 41.0 P/E (x) 43.2 36.6 27.3 25.1 21.3 EV/EBITDA (x) 27.0 23.9 18.2 15.8 13.3 ROE (%) 46.0 39.3 38.6 33.4 32.6 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Healthy volume and revenue growth led by low base effect on account of GST led transition Increase in other expenses owing to commercialization of Chennai plant and higher A&P Decline in gross margin owing to increase in base oil prices Quarterly Operating Performance Particulars 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 % chg YoY % chg QoQ Volumes (Mn KL) 20.8 22.5 24.4 27.1 27.5 32.2 1.5 Realization (Rs/KL) 134.6 143.5 145.9 137.8 141.9 5.4 3.0 Gross Profit (Rs/KL) 63.8 70.6 70.4 63.2 65.3 2.4 3.4 Quarterly Financials Rs Mn 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 % chg YoY % chg QoQ Revenue 2,800 3,229 3,559 3,733 3,904 39.4 4.6 COGS 1,473 1,642 1,841 2,020 2,107 43.0 4.3 Gross profit 1,327 1,587 1,719 1,713 1,797 35.4 4.9 Staff cost 192 198 215 220 242 26.0 10.1 Other expenditure 641 770 887 864 909 41.8 5.3 Total Opex (excl COGS) 834 968 1,103 1,084 1,152 38.1 6.3 EBITDA 493 619 616 629 645 30.8 2.5 D&A 22 22 23 37 49 128.5 33.1 EBIT 472 597 592 592 596 26.3 0.6 Other income 80 38 72 71 66 (16.6) (6.3) Finance Costs 29 16 13 28 44 52.7 59.4 PBT 522 620 652 635 618 18.3 (2.7) Tax 179 215 227 221 217 20.7 (2.1) PAT 343 404 425 414 401 17.0 (3.0) % of Net Revenue 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 chg bps YoY chg bps QoQ COGS 52.6 50.8 51.7 54.1 54.0 136 (14) Gross profit 47.4 49.2 48.3 45.9 46.0 (136) 14 Staff cost 6.9 6.1 6.1 5.9 6.2 (66) 31 Other expenditure 22.9 23.9 24.9 23.1 23.3 39 15 Total Opex (excl COGS) 29.8 30.0 31.0 29.0 29.5 (27) 47 EBITDA 17.6 19.2 17.3 16.9 16.5 (109) (33) D&A 0.8 0.7 0.7 1.0 1.3 49 27 EBIT 16.8 18.5 16.6 15.9 15.3 (158) (60) Other income 2.8 1.2 2.0 1.9 1.7 (114) (20) Finance Costs 1.0 0.5 0.4 0.7 1.1 10 39 PBT 18.7 19.2 18.3 17.0 15.8 (282) (118) Tax 6.4 6.7 6.4 5.9 5.5 (86) (38) PAT 12.2 12.5 11.9 11.1 10.3 (196) (81) Tax as % of PBT 34.4 34.8 34.8 34.8 35.1 70 22 Page 2
Quarterly Volumes and Growth Trend Realisation/KL (Rs) Gulf s continues to gain market share and is one of the fastest growing lubricants Gulf s volume growth is 3-4 times industry growth during the quarter Passenger motor oil segment grew by more than 30%; management aims to double its market share in the PV space over the next couple of years (currently ~5%) Gulf was able to increase prices consistently over the last two quarters, supported by higher contribution from synthetic grade products Mn KL 30.0 27.0 24.0 21.0 18.0 15.0 30.2 1QFY17 Volumes (Mn KL) Volume growth YoY (%) 2QFY17 8.7 3.1 3QFY17 4QFY17 3.4 1QFY18-5.5 13.1 22.0 27.5 32.2 % 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0 Gross Margin decline due to increase in Crude prices 4,000 3,600 3,200 2,800 2,400 2,000 Net Revenues (Rs mn) - LHS 2QFY18 3QFY18 4QFY18 1QFY19 YoY Growth (%) - RHS 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0 v 150.0 143.5 145.9 145.0 140.7 141.9 140.0 137.5 135.0 132.4 132.4 134.6 130.0 125.0 124.0 120.0 115.0 110.0 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 YoY decline in GM due to higher base oil prices % 50.0 49.2 48.3 48.0 47.2 47.4 45.6 45.7 46.0 45.3 45.9 46.0 44.0 42.0 40.0 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Page 3
The new plant in Chennai soft launched in Dec17 and fully operational from May18 will contribute the volume growth in FY19/20E The Chennai plant will help to reduce freight costs, as South India accounts for ~30% of volumes Led by robust volumes in 1QFY19, we have increased our revenue and GP estimate. However our EBITDA increase is modest owing to higher other opex as Chennai plant stabilizes. Our PAT estimate trails EBITDA owing to higher depreciation Peer Set Comparison Company Mcap (Rs bn) CMP (Rs) Key Assumptions Particulars FY16 FY17 FY18 FY19E FY20E Volumes (Mn KL) 75.2 83.5 94.8 109.5 118.3 Realisation (Rs/KL) 134.4 131.9 140.5 146.5 151.0 GP (Rs/KL) 61.2 60.7 66.9 67.8 69.9 Revenue (Rs Mn) 10,113 11,007 13,323 16,044 17,853 Gross Profit (Rs Mn) 4,604 5,064 6,346 7,429 8,270 GP Margin (%) 45.5 46.0 47.6 46.3 46.3 EBITDA (Rs Mn) 1,592 1,783 2,357 2,675 3,102 EBITDA Margin (%) 15.7 16.2 17.7 16.7 17.4 Change YoY (%/bps) Volumes (Mn KL) 10.9 13.6 15.5 8.0 Realisation (Rs/KL) (1.9) 6.5 4.3 3.0 GP (Rs/KL) (0.8) 10.3 1.4 3.1 Revenue (Rs Mn) 8.8 21.0 20.4 11.3 Gross Profit (Rs Mn) 10.0 25.3 17.1 11.3 GP Margin (%) 48 163 (133) 2 EBITDA (Rs Mn) 12.0 32.2 13.5 16.0 EBITDA Margin (%) 46 149 (102) 70 Change In Estimates New Old Change % FY19 FY20 FY19 FY20 FY19 FY20 Volumes (Mn Kilo litre) 109.5 118.3 105.3 114.5 4.0 3.3 Realization (Rs) 146.5 151.0 146.1 150.5 0.3 0.3 Revenue (Rs Mn) 16,044 17,853 15,379 17,221 4.3 3.7 Gross Profit (Rs Mn) 7,429 8,270 7,075 7,921 5.0 4.4 EBITDA (Rs Mn) 2,675 3,102 2,688 3,045 (0.5) 1.9 PAT (Rs Mn) 1,730 2,039 1,802 2,043 (4.0) (0.2) Gross Margin (%) 46.3 46.3 46.0 46.0 31 32 EBITDA (%) 16.7 17.4 17.5 17.7 (81) (31) PAT (%) 10.8 11.4 11.7 11.9 (94) (44) Source: Company, HDFC Sec Inst Research Reco. TP (Rs) EPS (Rs) P/E (x) RoE (%) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E Gulf Oil 43 872 BUY 1,027 31.9 34.8 41.0 27.3 25.1 21.3 38.6 33.4 32.6 Castrol # 157 159 NA NA 7.0 7.2 7.5 22.7 22.1 21.3 69.1 66.0 61.1, # For Castrol FY is CY17, CY18 and CY19 respectively Page 4
Income Statement: Standalone Year ending March (Rs mn) FY16 FY17 FY18 FY19E FY20E Net Sales 10,113 11,007 13,323 16,044 17,853 Growth (%) 4.5 9.1 21.1 20.3 11.3 Material Expenses 5,509 5,943 6,976 8,615 9,583 Employee Expenses 574 703 826 1,006 1,111 Other Operating Expenses 2,438 2,578 3,163 3,748 4,057 EBIDTA 1,592 1,783 2,357 2,675 3,102 EBIDTA (%) 15.7 16.2 17.7 16.7 17.4 EBIDTA Growth (%) 23.0 12.0 32.2 13.5 16.0 Depreciation 60 72 104 204 221 EBIT 1,531 1,711 2,253 2,471 2,882 Other Income 179 215 261 278 313 Interest 178 105 85 118 104 PBT 1,533 1,822 2,429 2,630 3,090 Tax 530 637 843 901 1,051 PAT 1,003 1,184 1,586 1,730 2,039 PAT Growth (%) 29.6 18.1 33.9 9.1 17.9 EPS 20.2 23.8 31.9 34.8 41.0 EPS Growth (%) 29.6 18.1 33.9 9.1 17.9 Balance Sheet: Standalone Year ending March (Rs mn) FY16 FY17 FY18 FY19E FY20E Sh Capital 99 99 99 99 99 R&S 2,386 3,442 4,575 5,586 6,728 Shareholders Fund 2,485 3,541 4,674 5,686 6,827 Gross Debt (Short term) 1,953 2,094 2,923 2,480 2,108 Other Non Current Liabilities 59 72 149 179 214 TOTAL LIABILITIES 4,496 5,707 7,746 8,344 9,150 PPE 1,069 1,180 2,601 2,547 2,476 CWIP 19 292 60 60 60 Other Non Current assets 117 165 136 166 166 Non Current Assets 1,205 1,637 2,797 2,773 2,703 Inventories 1,569 1,499 2,368 2,509 2,799 Sundry Debtors 1,064 1,096 1,346 1,636 1,801 Other Current Assets 297 254 516 562 578 Current Assets 2,930 2,849 4,230 4,706 5,178 Trade Payables 1,310 1,331 2,229 2,234 2,544 Other Current Liabilities 679 344 314 406 506 Current Liabilities 1,989 1,675 2,543 2,640 3,050 Net Current Assets 941 1,174 1,687 2,066 2,127 C&CE 2,351 2,896 3,262 3,505 4,319 TOTAL ASSETS 4,496 5,707 7,746 8,344 9,150 Source: Company, HDFC Sec Inst Research Page 5
Cash Flow Statement: Standalone Year ending March (Rs mn) FY16 FY17 FY18E FY19E FY20E Reported PBT 1,533 1,822 2,429 2,630 3,090 Interest Expenses 178 105 85 118 104 Depreciation 60 72 104 204 221 Working Capital Change 266 (234) (513) (379) (61) Tax Paid (530) (637) (843) (901) (1,051) OPERATING CASH FLOW ( a ) 1,507 1,128 1,263 1,673 2,303 Capex (173) (456) (1,294) (150) (150) Free Cash Flow 1,335 672 (31) 1,523 2,153 Non-current investments (13) (35) 106 0 35 INVESTING CASH FLOW ( b ) (185) (491) (1,188) (150) (115) Debt Issuance / (Repaid) (209) 142 829 (443) (372) Interest Expenses (178) (105) (85) (118) (104) FCFE 948 709 713 961 1,677 Dividend (389) (128) (453) (718) (898) FINANCING CASH FLOW ( c ) (776) (91) 291 (1,280) (1,374) NET CASH FLOW (a+b+c) 546 545 366 243 815 Closing Cash & Equivalents 2,351 2,896 3,262 3,505 4,319 Key Ratios: Standalone FY16 FY17 FY18E FY19E FY20E PROFITABILITY (%) GPM 45.5 46.0 47.6 46.3 46.3 EBITDA Margin 15.7 16.2 17.7 16.7 17.4 EBIT Margin 15.1 15.5 16.9 15.4 16.1 APAT Margin 9.9 10.8 11.9 10.8 11.4 RoE 46.0 39.3 38.6 33.4 32.6 RoIC 45.3 44.9 40.3 34.9 39.3 RoCE 26.1 24.5 24.4 22.5 24.1 EFFICIENCY Tax Rate (%) 34.6 35.0 34.7 34.2 34.0 Asset Turnover (x) 9.5 9.3 5.1 6.3 7.2 Inventory (days) 57 50 65 57 57 Debtors (days) 38 36 37 37 37 Loans & Advances(No of days) 11 8 14 13 12 Payables (days) 47 44 61 51 52 Current Liabilities (No of days) 25 11 9 9 10 Cash Conversion Cycle (days) 34 39 46 47 43 Debt/EBITDA (x) (0.3) (0.4) (0.1) (0.4) (0.7) Net D/E (0.2) (0.2) (0.1) (0.2) (0.3) Interest Coverage 8.6 16.4 26.4 20.9 27.6 PER SHARE DATA (Rs) EPS 20.2 23.8 31.9 34.8 41.0 CEPS 21.5 25.3 34.0 38.9 45.5 BV 50.1 71.3 94.0 114.4 137.4 DPS 7.0 8.5 10.5 12.0 15.0 VALUATION P/E (x) 43.2 36.6 27.3 25.1 21.3 P/BV (x) 17.4 12.2 9.3 7.6 6.3 EV/EBITDA (x) 27.0 23.9 18.2 15.8 13.3 EV/Revenues (x) 4.2 3.9 3.2 2.6 2.3 OCF/EV (%) 3.5 2.7 2.9 4.0 5.6 FCFE/Mkt Cap (%) 2.2 1.6 1.6 2.2 3.9 FCF/EV (%) 3.1 1.6 (0.1) 3.6 5.2 Dividend Yield (%) 0.8 1.0 1.2 1.4 1.7 Page 6
RECOMMENDATION HISTORY 1,100 1,050 1,000 950 900 850 800 750 700 650 600 Aug-17 Sep-17 Oct-17 Nov-17 Gulf Oil Dec-17 Jan-18 Feb-18 Mar-18 TP Apr-18 May-18 Jun-18 Jul-18 Aug-18 Date CMP Reco Target 10-Oct-17 765 NEU 840 7-Nov-17 820 BUY 936 12-Jan-18 977 NEU 958 7-Feb-18 925 NEU 999 11-Apr-18 917 BUY 1,026 22-May-18 918 BUY 1,027 9-Jul-18 861 BUY 1,028 9-Aug-18 872 BUY 1,027 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period Page 7
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