Gulf oil corporation - the safest way to play coal cycle (forget about coal cycle)

Gulf oil corporation - the safest way to play coal cycle (forget about coal cycle)

Gulf oil corporation (current market cap) is a Hinduja group company that got split into

a) Gulf oil corporation : Mining, Explosive and Real estate. In my post I will be focussing on the real estate business. Mining and explosives will just be cursory.
b) Gulf oil lubricants: Lubricant business. Major generator of sales and profits.

Normally I hate/detest/dislike asset plays. My previous experience with some companies like Standard industries, Alfred Herbert etc. was bad. The land bank on books never made it to P&L.
But with Gulf oil the cash flows seem ready. To start with he company has huge land bank in following cities:

Reality division and other assets:

Mumbai: 80 acres near Mumbai. The promoters have shown their intent to start construction here in this year.
Hyderabad: 900 acres of land in Kukatpalli. 700 acres under litigation with SC. 200 acres owned no litigation. Company is exploring opportunities here, the real estate market is dull.
The company has sold 7 acres of land to Telangana govt for 90 crores for road construction.
Banglore: 40 Acres of land in Yelahanka under development. 1st phase of development of 10 lac sft is complete Total area after development will be 25L sft. The company has ownership of 30% of developed area.
Vizag: Multiple properties. Company is not exploring any opportunities here but the market is hot.

Other Assets:

10% stake in Houghton International: Hinduja group bought Houghton international in 2012 for around 1Billion dollars. Management is looking to exit in 2 to 3 years.The value is nearly 100 millions dollars. Nearly 250 crores in bank: The company provides guarantees for its subsidiary and receives interest at 11.25% on the same. This years interest income is around 24 crores.

Cash flow from real estate and other assets business for the next 2 years:

Banglore 1st phase ready to occupy: 300000 * 60 * 12 = 21 * 2 = 42 crores (60 Rs per sft rental)
Hyderabad govt. payment of 76 crores ( 14 crores have already been paid) = 76 crore
Interest income on deposits from bank = 24 * 2 = 48 crores
Total cash flows for next two years from real estate and other assets: 168 crores

The Banglore Yelahanka project is likely to be completed in next 2 years. The work on it has already begin. On completion an additional 5 lac sft will be owned by gulf oil corp.
So total share of 8.3 lac sft out of 25 lac sft in Phase 1 and Phase 2. Assuming nothing happens on other properties and houghton stake sale also does not materialize the cash flow
after two years would be:

Banglore SEZ: 8300000 * 65 * 12 = 65 crores (65 Rs per sft rental)
Interest income on deposits from bank = 24 crores
Total cash flows per year from real estate and other assets: 89 crores

Mining division:

The company had huge assets in this division and at one point of time the division had sales of 300 crores. The sales fell to 3 crores last year on account of UPA 2 policies. The company impaired all its assets mainly heavy machinery used for mining (160 crores) and was on the verge of closing out the division. With the arrival of NDA the demand start picking up and the company brought back most of these assets into action. The revival of coal and mining the mining development operators (MDOs) will have a huge role to play. I clearly foresee this segment doing well in the coming years.

FY Turnover Net Profit
2008-09 211 11.79
2009-10 194 -10.42
2010-11 126 -38.93
2011-12 51 -41.68
2012-13 28 -32.51
2013-14 3.0 -51.84
2014-15 19.1 5.6

Explosive Division:

Operationally this is the biggest division with the 100% subsidiary IDL Explosives generating bulk of the revenues and parent company manufacturing detonators and detonating wires (high margin products).
The subsidiary manufactures cartridges ANFO and NCN (bulk explosives). The margins of subsidiary are wafer thin but are likely to improve due to recent curbs on unorganized sector by the govt.
The parent company involved in detonators claim they are constantly innovating and are working on niche products with high margins.
These are the consolidated details of Explosive division:

FY Turnover Net Profit
2008-09 277 4.95
2009-10 308 26.76
2010-11 296 17.85
2011-12 311 -1.92
2012-13 271 9.43
2013-14 304 20.58
2014-15 359 24.9

I am currently working on understanding this division further and will update in posts later about the competitive landscape and other details.

The balance sheet looks healthy with the 160 crore write-off that happened. There is no long term debt. The promoters have recently bought 5% from the market in two block deals.


Management and Promoters: Hindujas have been highly controversial (not going into details). The management generally acts on behalf of majority shareholders. I have no explicit
opinion on management and cannot call them shady but it is certainly inefficient with a terrible capital allocation record. The mining division has beea a money sink. To their credit they did control capex
in later years and maintained dividend at 50%. The management does take questions in conf. calls but has been totally opaque about the houghton intl details. Further I could not understand the reason why company participated in the houghton international deal in the first place. As an investor I expect management to have an idea of their cash flows for at least next two to three years but that is totally missing. In the conf calls that I have Mr. Pramanik has never looked on top of things. THe company also did not disclose consolidate numbers for the first three qtrs.

Final Comments:
As I said above generally I dislike companies which are asset plays and with this kind of mgmt. In this case with the company MCAP being 750 crores and the clear visibility on upcoming cash flows from real estate division ( > 10% of the current mcap) have made me rethink. This combined with the upcoming coal and mining cycle makes it an interesting play.


Result press releases (Q1 and Q2 FY 14-15):

Management conf. call transcript (Q2 and Q3 FY 14-15):

For more details on coal sectors and upcoming investment you can read Edelweiss’s report.

Disl. Invested small position


That means approx. 32 lakhs per guntha (1089 sq fts). That is really too much sir. And that too gov. paying so much money when they pay gov. rates only.


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Here are some updates from the AGM which I attended this year

Bangalore property (rental) market is slow and the rental expected is around Rs 40 to 45 per sft vs Rs 50 expected earlier.
The management was categorical that they will go slow on property development incl Hyderabad till an uptick is seen in the property market. They do not want to be stuck with unsold/unleased property
I think the land in Hyderabad which is freehold is around 280 acres and the value should be around Rs 11 - 15 crores per acre at least. The rest around 600 acres belongs to a Sikh trust (99 years lease with the company) and case going on for many years in Supreme Court. I met one of the trustees in the AGM and he does not expect a resolution soon
The quality of earning of explosive/mine business is also not great …op profit was negative last year…However they said that it has turned positive in the current year.
I agree this company can be a multi bagger if the company shows some dynamism and gets its act together


I attended the AGM and came out highly unimpressed.The management’s lethargy was clearly indicated by statements such as “This business is in maintenance mode”. Further they harped upon their current state of affairs being an outcome of government policies totally discounting success of their competitors The real estate opportunity that I thought will play out looks delayed (Yelahanka/ Hyderabad land sale) and the explosive division might do better this year due to a strong order book. Further Hinduja Properties owns marketing/development right for Yelahanka project and also for other land banks with a no penalty clause (very much like a family affair). The attitude of Mr. Hinduja present in the AGM was also that of wishing awayinvestor concerns with motherhood statements like “We create wealth in long term and we move slowly.”. No clarity was provided on the investment in Houghton.

Disclosure: Not invested.