I would like the opportunity to start a thread on the newly listed company - GULF OIL LUBRICANTS - this high quality business has recently been demerged from the erstwhile Gulf Oil Corp.
I came across an initiation note from Religare which was published just last Friday (unfortunately file size is large hence not able to share it here on this forum). However I was told about this interesting Company earlier last month - heard a few smart people have been accumulating the stock on the counter between 255-265 levels post the demerger.
On delving more into this Company, I believe that it has all the right characteristics of being an anchor in any long term value investor’s portfolio:
1). Strong Balance Sheet - High cash generation from the business - Net debt is @ ~60-80crs which is all primarily working capital - As per my calculations, the annual operating cash flow generation from this business is upwards of 50crs on the current revenue base which easily covers the debt and interest costs.
2). A large scalable opportunity with significant barriers to entry for any new entrant - the overall lube market in India is a valued at ~24,000cr growing @ 2.5-3% p.a over the past 2-3 years.
3). High asset turns as well as excellent return rations (ROE/ROCEs in excess of +30%)
4). Strong management focus on creating sustainable shareholder value by pursuing a clear market share growth strategy through visible brand building and regular capacity additions - Case in Point - they have increased their market share from 5% to 7% over the past 5 years. The Company is now spending close to 7-8% of topline on brand building (similar to the market leader, Castrol - whose market share has infact dipped over the same period)
5). Predictable, yet more importantly, sustainable revenue and earnings growth visibility - Case in Point - the Company has expanded margins by a whopping 700bps from 5% to 12% between 2008-2014 while growing revenues @ 15% CAGR between 2009-2014 which was a tough macro environment in India!
Given the space that the Company operates in, I believe that this stock could perhaps present the best opportunity there is available to value investors who are looking fora low risk way to play an anticipated turn in the economic cycle, .
After looking at how companies such as Motherson Sumi and Amara Raja in the auto comps space have scaled up over the past 5-10 years, believe that this company has the potential to show a similar performance pace and hence re-rate and trade at valuations equivalent to that of other high quality non-discretionary consumer companies.In terms of earnings, Gulf Oil Lubricants can probably do ~Rs.14-15 EPS in the current year - meaning that the business is available @ P/E of ~18-20x FY15 earnings which looks pretty reasonable. In terms of looking at other valuation parameters such as Mcap/Sales, Gulf is trading @ 1.3-1.4x FY15 sales - Compare this with the astronomical 5x for the industry leader Castrol (looked at the financials here - Castrol has clearly been struggling with revenue growth for the past 2-3 years now)
I would appreciate if VP veterans would contribute to this idea and share their thoughts.
Cheers!
Akshay
Disclaimer: I have built a small position in this stock and am currently in the process of doing more research on this story before committing more capital to the same.
Good initiation - I spoke to a couple of lubricant distributors and this is what I got :
1). Castrol is the undisputed leader - sells at a 20-25% premium to everyone else
2). lubricant is a sticky business - once a customer is in, he seldom changes unless there is a rationl reason - higher mileage, less maintenance, smoother engine.
3). gulf has zero presence in industrial lubes market
4). market believes that gulf is focussed only on CV OEMs and earth moving equipment OEM’s - which have huge volumes, but are cyclical but are sensitive to prices.
That;s not an easy market to compete in - in cars, for eg., valvoline and petronas are focussing on synthetic oils that have 3-4 x realizations and have incredible margins to counter castrol.
Gulf’s attitude, was one of zero push/minimal brand building and just relying on “push” - margins to distributors. He said, that may not sustain for too long.
I am confused, is worth taking the risk at this price ?
Any one from this industry who can throw insights ?
Thanks for your feedback. I will attempt to answer your questions as I’ve discussed many of these aspects with other market veterans and industry people while evaluating this investment opportunity:
1). Castrol being
premium - This is obviously true but multiples for Castrol are clearly higher which reflects that this is a fact. There is a potential for Gulf to bridge the gap vis-a-vis Castrol re: margins / market position over the long run - failing this there is absolutely no point in evaluating this opportunity further
2). Lubricants a sticky biz - Agree completely with this point. Leading players including gulf are focused on product refreshes / innovation / brand building and R&D spend. As an aside the principal reasons why Gulf pays royalty to parent is for brand usage and R&D support
4). Gulf focus only on CVs - This is partly correct - currently 2W+Passenger car segment account for 20% of auto lube sales for Gulf. But as I mentioned earlier, one is not paying top dollar on relative basis for this business. The company is actively working towards increasing presence in Consumer auto lube market (passenger cars and 2W). A recent success in this area has been achieving 2nd position in the lube market for 2W led by branding (with Dhoni as ambassador) and innovative product launches. So things are changing at the margin here. Also, when the cycle turns as it is now, you would rather have the Gulf business mix than a consumer business mix - they are possibly right at the sweet spot here in terms of changing business mix and turning industrial capex / auto cycle
5). Petronas has not yet commenced its blending unit in India (set to start in 2015) and I seriously doubt their distribution strength in the market to be a credible threat. Valvoline at 4% market share is smaller than Gulf. As for realizations, my read of the numbers shows that Gulf has improved realizations from 111/ltr in FY09 to 144/ltr in FY14 (CAGR of 5%, which will be partly from price hikes and partly from mix shift or increasing contribution from high value products). Gulf has launched fully synthetic oils too and hence don’t believe product innovation is a meaningful differentiator in this market so wouldn’t overplay this piece. Both
private and it would be great if you could share the margin numbers for these players since I haven’t seen them
In summary where I’m coming out is that the relative valuation is attractive and I like the asymmetric aspects of this opportunity (falling crude, rising market share, more focused organization post demerger). A lot can go right and should that not happen the downside is limited too.
Finally, I would say thata well run lubricants business is characterized by low capital intensity / high ROCE (and naturally capital / capacity cannot be a barrier to entry). Believe that 1) Brand 2) Distribution platform 3) Relationships with / incentive structures of channel partners 4) R&D / Product innovation, in that order are far more important drivers of long term value creation. It seems based on the available information that Gulf is well positioned to address these drivers post the demerger and is available at a decent price with a potentially asymmetric payoff. Would like to hear your / other members perspectives
Disclosure: I have now created a starter position in the stock and expect to allocate much more on declines as the risk reward looks to be very favorable here
I spoke to three distributors in chennai. One of them was very articulate and he knew a good deal about gulf and veedol and also castrol. His view was :
)- whatever traction gulf has got is primarily within the hinduja group. The industrial lubricants presence is also primarily on companies like ashok leyland etc.
-gulf is a brand that was great in the 80s, good in the 90s and semi-dead in 2000s. it is trying to make a come back. The trouble is that gulf has low POS presence on the highway pumps segment which is an important lever for truckers - oil PSU brands are strong in that segment - MAK etc. They do not have the same presence in OEMs in the mid market - where castrol is strong nor in high-end where petronas and valvoline are strong.
)- I looked at valvoline’s indian operations financials - they had Rs. 600 Cr. and a 15% EBITDA margin and ROE’s of 30% and ROCE of 45%
)- his view was that gulf’s customer service attitude was the worst (he said said castrol was like maruti - very very strong on customer service and gulf’s executives had a take it or leave it attitude) - could be sampling bias.
It could be best if you talk to 2-3 distributors in your region. Even I am on the fence on this - My sense is that over 4-5 years, castrol will come down from their 21% EBITDA margins to 17-18% whereas other more aggressive players like gulf (hopefully) and veedol.
I want to be sure that gulf can be a hyundai to castrol’s maruti and not a ford/fiat. We need more data points on the ground to be sure.
He said that
1). Castrol being the undisputed leader - sells at a
Also managed to speak to an ex-employee of castrol. He said something very valuable :
)- In the car OEM space, castrol is well entrenched. For high - end synthetic oil, there are other better F1 sponsors like petronas and valvoline. So, gulf is not even in the consideration list of car owners as neither OEMs nor authorized service centres support it
)- In the industrial segment, their service sucks - he said their ability to blend oils is much lower than others and that’s the reason except for hinduja group, they cannot get any presence outside.
)- on the CV space, servo and MAK are already present in all high way bunks and hence have good recognition by truck drivers. Gulf is practically a dead brand - he said burmah shell, IBP (which was aborbed by IOCL) and gulf have the same relevance as Rasna today. Great brands in the past but nothing as yet
)- that said, he said, they have been making all the right noises over the last 2 years or so but he is yet to come across any material events that can help gulf.
So, I am so - so on the stock - castrol is a much much better business than the rest and just price arbitrage alone does not seem a sufficient enough reason for me. case in point, is the EBITDA margins which are almost 900 bps lower than castrol with a SG & A that is much much lower than castrol - so clearly, at gross margin level they are 1200-1400 bps cheaper on average - that’s not the sign of a great brand.
Any counter views ?
Akshay
I spoke to three distributors in chennai. One of them was very articulate and he knew a good deal about gulf and veedol and also castrol. His view was :
)- whatever traction gulf has got is primarily within the hinduja group. The industrial lubricants presence is also primarily on companies like ashok leyland etc.
-gulf is a brand that was great in the 80s, good in the 90s and semi-dead in 2000s. it is trying to make a come back. The trouble is that gulf has low POS presence on the highway pumps segment which is an important lever for truckers - oil PSU brands are strong in that segment - MAK etc. They do not have the same presence in OEMs in the mid market - where castrol is strong nor in high-end where petronas and valvoline are strong.
)- I looked at valvoline’s indian operations financials - they had Rs. 600 Cr. and a 15% EBITDA margin and ROE’s of 30% and ROCE of 45%
)- his view was that gulf’s customer service attitude was the worst (he said said castrol was like maruti - very very strong on customer service and gulf’s executives had a take it or leave it attitude) - could be sampling bias.
It could be best if you talk to 2-3 distributors in your region. Even I am on the fence on this - My sense is that over 4-5 years, castrol will come down from their 21% EBITDA margins to 17-18% whereas other more aggressive players like gulf (hopefully) and veedol.
I want to be sure that gulf can be a hyundai to castrol’s maruti and not a ford/fiat. We need more data points on the ground to be sure.
He said that
Vardharajan,
1). Castrol being the undisputed leader - sells at a
**Highlights of the Concall by Capital Mkt;
**The company has achieved positive volume growths to drive up the quarter on quarter net revenues up by 19% at Rs. 243 crore as compared to previous year September quarter, when it was Rs. 204 crore. For the half year ended September, 2014, Net Revenues are up 15% at Rs. 473 crore as compared to previous year same period, when it was Rs. 411 crore.Volumes grew at a double digit. Volume growth contributed two-third growth in revenues while one-third was contributed by price hikes.Volume sales growth was aided by additional sales of tractor lubricants as the tie-up with Mahindra Tractors fructified, early signs of a revival in infra/personal mobility space, and higher channel sales.
Profit before Tax for the 2nd quarter has grown by 30.7% at Rs. 28.44 crore compared to Rs. 21.76 crore in the corresponding quarter of the previous year. Profit before Tax for H1 has also grown by 23.1% at Rs. 55.01 crore compared to Rs. 44.69 crore in the corresponding period of the previous year for Lubricants business.Company’s EBIDTA margins have shown sequential improvement of 25 bps for the quarter over June quarter on the back of improved topline performance.
Last quarter the company launched Gulf XHD M and XHD S engine oils in a tie-up with market leader Mahindra for the tractor segment. Continuing to leverage it’s position as pioneers of the long drain engine oils, the Gulf XHD M was launched with an enhanced 350 hrs drain interval.The personal mobility segments, namely two wheelers & cars of the automotive industry are showing signs of improvement. However the commercial vehicles segment (diesel engine oils) continues to pose a challenge. It is expected that the diesel engine oils segment will pick-up in the coming quarters & there will be an all round positive business impact of this on the lubricants business.
The overall economy revival & government actions on mining/infrastructure will hopefully augur well to stimulate the demand for lubricants in the coming months & the company is positive that this will enable improvement in sales/revenues.The company strategy is to grow 2-3 times of industry growth.Industry growth was flat during the quarter at about 2-3%. The company expects industry growth to reach 4-5% would take around one year.Volumes in FY’14 was 70000 KL while for H1FY’15 was around 35000 KL.Other expense forms 22.5% of sales. Break up of other income is: Distribution expenses forms 11%, Advertisement expenses forms 6%, and Administration expenses forms 3-3.5% and Royalty expenses forms 1-1.5%.
Since the listing of Gulf Oil Lubricants, price performance vs peers is as follows:
Gulf Oil +98%
Castrol +52%
Tide Water +56%
As I was at pains to explain to you above, the entire investment thesis was predicated upon:
1). The asymmetric nature of the bet
2). The stronger operating momentum in Gulf and obviously greater levers for improvement in operating margins vs Castrol, is what made it attractive in the first place
While it is true that Castrol is a superior business, it doesn’t lead to superior returns simply because an investor needs to take an informed guess as to what is in the price!
Also would like to pose this question to you now: In hindsight would a 50% differential stock price performance vs Castrol seem like reason enough to you now?
I got you - loud and clear. Do remember that this is a bull market - I’ve seen quite the opposite happen in a sideways market - the market leader gets disproportionate interest whereas the others lag.
I have to figure out a way to adjust my framework according to changing market realities.
There is no doubt that Castrol is a great company. Castrol OPM is 22% as compared to 13% of GOL. It is for that reason only Castrol commands a MCAP of around 14 times whereas sales is 3.5 times higher only than that of GOL. The real question is that can this gap be filled by GOL, at least to some extent. If this gap is going to be widened then Castrol is the obvious choice, and if this gap can be fulfilled a bit we have a multibagger in GOL.
Topline is Castrol is flattening with only 2% growth in FY 2014 but the growth has been decent 10% in H1 FY15. As compared to Castrol, GOL is showing higher growth rate. GOL has more space to grow than Castrol. On margin front also GOL is doing okay. GOL is a current spin off, and it shows greater focus of the management on the business. Recent Mahindra Tie Up is a great news. The Chairman says on their web site- “We are proud to be the fastest growing brand in terms of volume growth amongst the major players in India on a CAGR basis in recent times.” If they are garnering market share, GOL has great valuation advantage in terms of share price. They are expanding capacity in Silvasa plant by 25% volume which is starting. Further new facility is being created in Chennai which will start commercial production in 2016.
On absolute basis GOL appears to be a reasonably valued investment. It has its tail wind in terms of lower crude prices. Combine it with improving economic macros, and GOL can do well.
Net sales grew 13% to Rs 243 crore in Q3FY’15 compared to Q3FY’14 while PAT grew 9% to Rs 18.2 crore impacted partly by increase in finance cost on account of adverse movement of rupee in Q3FY’15.EBITDA margins grew 30 bps on a sequential basis to 13.6% on the back of improved topline performance.The channel sales got impacted during Q3FY’15 expecting the prices to come down resulting a softer sales in the channel but B2B did very well having positive double-digit growth in the OEM.
In OEM factory fill, the Mahindra volumes again which are roughly 3% of its growth have continued.Two-thirds of 13% growth in the Q3FY’15 is due to the volume growth and the balance coming from the margin enhancement which is also in terms of its both the cost and the mix.Q4FY’15 is normally the better quarter and the company expects things will look up further.The company is seeing a positive growth in passenger cars and, in scooters. These are again new vehicles not directly impacting Gulf oil lubricants, but again improving the sentiment in terms of the auto market
The reductions in crude oil prices and base oils will have a lag time impact as the company carries both finished goods and raw material stocks. The company carries roughly about close to 70 days stock combined of these two.Overall lubricants market seems to be still in a flat-to-negative kind of territory because of the commercial vehicle demand being lower. The Bazaar market where the company operates, which is basically the personal mobility of car and two-wheeler had a positive growth. The company expects its market share which is around 6.9% overall would be up maybe 0.1-0.2%.
Currently Base oil prices have further declined by around 5% from average of Q3FY’15. Base oil prices have decreased by around 25% from its peak level in August 2014.75% of the total sales of the company is through channel sales i.e. distributors and 25% is a mix of OEM factory fill and industrial and direct customers.The total domestic oil lubricant market is 2.2 million metric tonne.
Net debt of the company at the end of September quarter was around Rs.90 crore which during this quarter has come down to around Rs.75 crore.Gulf oil current expansion in Silvassa is likely to be over by March and the company has already incurred nearly Rs.44 crore. Further the company has acquired land for the second plant wherein it has incurred close to Rs. 35 crore on land and the next two years it will be building up the capacity, which we will be starting capacity of 42000 to 50000 KL and expect additional capex on that account to be in the range of around Rs. 100 crore
Highlights of the Concall by Capital Mkt
Gulf Oil Lubricantshas achieved a Gross turnover of Rs.265.6 crore and Profit after Tax of Rs. 20.5 crore. The company has achieved quarter on quarter growth of 1.9% in its net revenues at Rs. 230.4 crore as compared to previous year June quarter, when it was Rs. 226.1 crore, for the quarter.The Profit before tax has grown by 17% for the quarter ended 30th June 2015 as compared to previous year June quarter. Company’s EBIDTA for the quarter has also shown a healthy growth of 16% compared to previous year same period. Company’s EBIDTA margins at 15.1% have shown sequential improvement of nearly 180 bps for the quarter over previous year same period.The company reported positive growth in volumes & revenues but the recent price discounting to adjust to the competitive market scenario has resulted in lower growth in revenues this quarter. The company grew volumes in the Channel & key B2B segments in Q1.The company continued its brand visibility/product activations during Indian Premier League 2015 through its association with the Chennai Super Kings (CSK).
Volume growth has been positive at 4% (roughly 17,000 kl volume in this quarter )overall in this quarter and the channel sales which account for nearly 70% of sales has accounted for a 5% growth where it was flat last year. This has been led by a good movement in the motorcycle segments which has grown 15% plus in this quarter.
Automotive sector contributed 68.5% of total volumes while balance was industrial segment
The company has launched a new product for scooter which is now growing well.In terms of quarter ranking highest volume for Gulf oil lubricants is Q4 of thefinancial year(January-March) followed by Q3 (October-December) and thenQ1 (April-June) comes in.Silvassa capacity has gone up. Post expansion capacity at Silvassa is 90,000 (kl)The company is taking permissions for Chennai capacity expansion plan and the company expects it to be ready by 2017. Overallcapex including land will be roughly Rs150 crore.Base oil prices were correcting during Jan, Feb, and March 2015 but from April onwards base oil prices have started moving up and in last three months theprices have been up only. Even in the month of July the prices have been slightly going up only.Industry volume growth is about 2-3% overall. The company expects to grow at least two times of that.
Seems like good time to enter in GOL and Castrol and Tide Water . My intention is to park my money here till I discover better opportunities
GOL
CMP- 480 approx
Has seen some correction and consolidation happening
Fast growing private player in lubricants industry with reasonable sales share
Improving margins scenarios because of fall in crude prices.
4.Dividend paying.
Cons -
2. INR devaluation and volatile exchange rates.
3.High Competition from PSU’s and other private players like Castrol and Tide water
Factors that could add to improvement in margins and profitability further :-
1.Smart sourcing by company to decrease packaging costs.
2. Continued Growth in two wheelers and possible improvement in commercial vehicle segments
Discl - Invested in Castrol CMP -423 / GOL CMP - 480 / Tide Water Tide Water - 17380
Gulf oil Lubricants held conference call to discuss the performance for the quarter ended December 2015. Senior management of the company addressed the concall.
Highlights of the Concall
During the quarter the company achieved a gross turnover of Rs 299 crore and achieved a double-digit volume growth in regular business clocking around 19,000 kl in our volumes. Year-to-date volume growth is around 9% which is well ahead of the industry which the company estimates could be anything from 1% to 2% overall.
Channel business (B2C) has grown 2x to 3x,of the bazaar market at 6%
B2B has grown good double-digit at around 25%.
The proportion of channel to B2B is slightly different at 62:38, otherwise it was slightly more in favor of channel because B2B has grown much higher.
Double-digit growth in channel business is driven by 20% growth in PCMO ( passenger car motor oil ) business and double-digit growth in the motorcycle business. DEO segment, the Diesel Engine Oil segment which is actually negative in the industry, have seen a positive growth in diesel engine oil this quarter.
PAT has grown at 43.5% at Rs 26.2 crore for the quarter over last quarter.
The company estimates industry growth to grow from 1% to 3% this financial year, which it expects will pick up by at least 1% in FY’17
The company carries an inventory two to three months - around 70 to 75 days
In last 45 days there have been further reductions in base oil prices to the extent of $30 to $40 but at the same time there has been a counter rupee depreciation which is largely offsetting the downfall in base oil prices.
Other expenses were higher during the quarter due to higher advertisement and promotion expense.
Chennai expansion plan is progressing well. The company has received a clearance from single window which is a sort of CTE, Consent to Establish, and with that it will start the work on tendering and other things.
The company has become debt free with surplus cash of around 25 crore.
Then why the stock has been under-performer. Is it because of the sector as lubricants is not expected to grow more than 2% ? Or market will take time to realize the potential of this stock.
Volume growth of 10.3% in FY’16 compared to 6% in FY’15
Gulf oil Lubricants held conference call to discuss the performance for the quarter and year ended March 2016. Senior management of the company addressed the concall.
Highlights of the Concall
Q4FY’16 was a robust quarter achieving a PAT growth of 38.1% YoY at Rs. 30.04 crore and full year PAT growth is 29.6% at Rs. 100.31 crore.
EBITDA margins rose by 300bps YoY to 16.5%, led by gross margin expansion of 660 bps YoY to 46.8%.
Volumes for Q4FY16 stood at 20,000-21,000 kilo liters while for FY’16 it was 75000 kilo liters.
The company registered strong double-digit growth during the quarter while for FY16 it stood at 10.3% compared to 6% in FY’15. Volume growth for FY16 was led by double-digit growth in infra and OEM businesses.
The Company continued its volume and revenue growths led by growth across all key segments recording double digit volume growths in motorcycle oils, key OEM volumes and sale to direct customer in infrastructure & industrial segment.
There is also positive growth in diesel engine oil segment for the Company
Added to this, an Institutional order also enabled the company to clock an overall double digit growth in volumes. The company has secured tie-ups with Mahindra Swaraj and Mahindra Gujarat. Volume growth excluding institutional order stood at 7.5% YoY.
The company has gained further market share in MCO (2-wheeler) segment achieving double digit growth during the year, which is more than 2 times the market growth.
Company is also seeing a pickup in the commercial vehicles led DEO segment during the year.
During the year, GOLI launched Gulf Pride scooter oil catering to rising scooter sales. The company also launched new range of synthetic offerings for PCMO segment under the new brand, ‘Gulf Ultrasynth X’.
The company had net cash of Rs 40 crore in Q4FY’16 as compared to net debt of Rs 35 crore in Q4FY15.
Ad-spends stood at 6-7% of topline in FY’16, up by 90 bps YoY compared to FY’15.
The company highlighted its capex plans of setting up a new plant at Chennai is still on track and expected the unit to come on stream by Q2FY18. Capex incurred is expected to be Rs 1.4 billion.
The company expects margins to remain stable as management does not expect any significant volatility in raw material prices.
Base oil prices were down 26% YoY in 4QFY16, which aided in significant gains in gross margin. Base oil prices have increased by 15% since the start of April 2016. However, on YoY basis, they were still lower by 25%.
The company is confident of outpacing the industry volume growth by 2-3x going forward.
Seniors and members I need your help to analysze the below in light of Gulf Oil and Lubricant business…
Lubricant business in terms of volumes is stagnnant, in terms of vols it is expected to grow by just 2% in the near future
So assuming Gulf grows its vols 3X to say 6% (easy task given the historical numbers and pricing and brand position of Gulf) say they have new capacity coming up and assume vols grow by 10%
Since its highly competitive market pricing growth will not be more than 5%
So toal revenue growth 15% (optimistic scenario)
Since margins are already at historic highs there wont be any margin expansion
All things equal does this mean EBIT and PAT growth wont be more than 15% or say at best 20%?
More color to be added in con call today. I belive this story is under appreciated by the markets.It is one of the few more than 30% CAGR consumer type of story trading below 20PE (1 year) and at a steep discount to its MNC peer castrol. Its a cash flow generating business with focus on branding. One good example of buy raw material (commodity) and converting into a branded product.
Seems like this quarter too has been quite good for Gulf. This stock has to be re-rated in the light of continuous good performance, excellent balance sheet and return ratios.
