Gulf Oil Lubricants India Ltd. share price target

The strategic review and potential sale by BP Plc of its lubricant arm, Castrol Ltd, marks a major global corporate development in the otherwise quiet lubricant sector.

Company Update

GOLI’s Q3FY25 core lube volumes grew 7% YoY (in line), while AdBlue was up 16% YoY (recovery QoQ, a 9% beat). EBITDA was slightly 1% below estimate on higher opex, while APAT was 4% lower due to higher finance cost from forex losses.

Gulf Oil (GOLI) delivered a relatively strong Q3FY25 with 10%/21.6% YoY growth in EBITDA/PAT to INR 1.2bn/INR 0.98bn (ISec: EBITDA/PAT INR 1.1bn/INR 0.87bn).

We reiterate our positive stance on GOLI, led by steady core volume growth (8% core volume CAGR over FY24-27E, over 2x of industry growth), and a 13-14% EBITDA margin profile supported by premiumization efforts, brand building, input cost management, and dedicated marketing initiatives.

Gulf Oil (GOLI) delivered a stellar performance in the preceding 5–6 quarters – consistent YoY revenue/EBITDA/PAT growth driven by industry leading volume growth in lubricants and sharply higher growth for the Adblue segment.

Gulf Oil (GOLI) reported another stellar set of results in Q1FY25, with EBITDA/PAT growth of 25.3%/28.9% YoY, its second-best in the last eight quarters.

We retain our constructive outlook on GOLI, driven by steady core volume
growth (7% core volume CAGR over FY24-26E, >2x of the industry growth),
and a stable 13-14% EBITDA margin profile supported by focus on
premiumization.

Gulf Oil Lubricants (GOLI) hosted its FY24 analyst meet, reiterating core (exAdBlue) volume CAGR at 2-3x of industry growth (Kline estimates the Indian
lubricant industry to clock 3% volume CAGR and 6% value CAGR over 2022-
32).

Gulf Oil (GOLI) reported a stellar set of Q4 numbers with EBITDA/PAT growth of 31%/37% YoY, its second-best in the last eight quarters (barring the low base driven growth seen in Q1FY23)

We reiterate our positive stance on GOLI, led by steady core volume growth
(7% core volume CAGR over FY24-26E, >2x of the industry growth), and a 13-
14% EBITDA margin profile supported by input cost management, strategic
pricing, and marketing efforts.

We visited GOLI’s state-of-the-art Chennai facility, which can handle 50/18mn- ltr p.a. of core lubricant/AdBlue volumes (~35% of GOLI’s core lubes installed capacity), assuming double shifts. GOLI has deployed automatic batch blending technology from ABB, France to optimize lead time in operations.

Lubricating a healthy growth trajectory

Alternate Stock Idea: Besides Gulf Oil, in our oil & gas coverage we also like IGL. Indraprastha Gas (IGL) is one of India's leading CGD companies, which primarily operates in NCT of Delhi and will benefit from stricter environmental regulations in Delhi. Continued capex, newer areas and CNG...

Gulf Oil's raw materials cost (base oil prices) is highly dependent on the movement of crude oil prices. While the rupee has weakened, crude oil prices have fallen sharply compared to Q3CY20, which led to a drop in base oil costs YoY. However, realisation was down | 2/litre to | 146/litre. As a result, gross margins registered a fall of | 4.4/litre YoY to | 70.1/litre. Subsequently, EBITDA was down 7.1% YoY to | 25.3/litre. GOL has hiked prices across segments on account of increase in crude oil prices over past few months. The competition has also increased prices which gives visibility...

We reiterate BUY and expect Gulf Oil to outperform industry leader Castrol. However, we believe that the co's performance is now impacted by the slowing industry scenario and moderating growth rates (volumes have declined over Jun-Dec19). We trim down our earnings by ~6% over FY20-22E and reduce our target multiple to 20x (vs. 22x earlier) to factor in the above. Also, the recovery in factory fill volumes is likely to be delayed. Key risk: Faster than expected adoption of EVs. Gulf Oils 3QFY20 adj. volumes declined 2% YoY amidst the downturn in the auto industry. However, EBITDA margin surprised at 18.4% (+260bps YoY) owing to stable input costs. Maintain BUY with a revised TP of Rs 995 based on Dec-21 EPS.

Maintain BUY as (1) Gulf Oil is significantly outgrowing the industry leader Castrol (over FY16-19 Gulf's vols have risen 17% vs. 3% for the latter) and is expected to grow ahead of the industry over FY20-21 (2) New capacities, expanding distribution network and improving product/customer mix will help from hereon and (3) Diversification into the battery segment will drive growth in the medium term. Despite weak macros in 2QFY20, stable input costs and improving realizations (due to changing product mix) has helped Gulf Oil to deliver EBITDA margin of 18% (+90bps YoY, vs. our estimate of 17%). We expect the co to deliver 3x the industry growth as it expands into new segments and ramps up its distribution reach. Maintain BUY with a TP of Rs 1,145 (@22x Sep-21 EPS).

We reiterate BUY as (1) After significantly outgrowing the industry leader Castrol (over FY16-19 Gulf's vols have risen 17% vs. 3% for the latter), we expect Gulf to grow ahead of the industry over FY20-21. Growth will be driven by increased capacity (new capacity of 150mn KL p.a. in 19), expanding distribution network (~70k retailers vs. 150k for Castrol) and improving product/customer mix (2) Gulf is diversifying its portfolio by entering the battery segment which will drive growth in the medium term (3) The co enjoys robust return ratios with ROEs in excess of 30%. (4) Faster than expected adoption of EVs will be a key risk to our thesis. 1QFY20 operating performance was healthy as EBITDA margins expanded ~120/70bp YoY/QoQ to 17.7% driven by an improved product mix. We expect Gulf Oil to deliver 3-4x the industry growth as the co expands into new segments and ramps up its distribution reach. We have a TP of Rs 1,050 based on 22x FY21 EPS.