Savita Oil Technologies: Undervalued midcap in a competitive space?

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Current Market cap: 1094 Crores
Revenues: 2258 crores
Gross Profit: 521 crores(implies EV:GP of 1094/521 ~ 2)
ROCE is approx 20% since last 3 years vs ROCE of Castrol ~ 100%

The’ve rebranded Savsol https://www.youtube.com/watch?v=Qi92TTIJnMY

Liquidity risk is the risk that the Company will not be able to meet its financial obligations on due date. The Company has a strong focus on effective management of its liquidity to ensure that all business and financial commitments are met on time

A new kid has come(Mr. Siddharth Mehra) to assist in handling the business

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Annual Report 2019: Savita Oil Technologies Limited (SAVITA or the
Company) is a home-grown specialty petroleum
products company established by the eminent late
Mr. N. K. Mehra in 1961. We have developed and
manufactured a wide range of products including
Transformer Oils, Liquid Paraffins, White Oils,
Automotive and Industrial Lubricants, Coolants and
Greases among others, in India. In the knowledge-centric world that we live in,
adapting to new technologies and embracing
change are essential for survival and growth.

With our comprehensive product portfolio, we serve
diverse industries such as Power Generation and
Distribution, Automotive, Thermoplastic Rubbers,
FMCG, Plastics, Pharmaceutical, Agriculture,
Refrigeration, Polymers, among others. In addition
to catering to a sizeable B2B clientele, our popular
range of lubricants, greases and coolants are sold to
retail customers under the brand SAVSOL.

From Annual Report 2015 - Company was going through a bad phase
(Your Company’s sales turnover during the year 2014-15 touched 2,03,982 lacs against 2,29,675 lacs in the year 2013-14, resulting in a decline of about 11%. The sales volume also declined marginally at 2,62,640 KLS/MTs during the year 2014-15 as against 2,72,805 KLs/MTs achieved in the year 2013-14. For the first time since listing, your Company suffered a loss of 127 lacs during the year under review as against a net profit of 8,974 lacs for the previous year. The loss incurred by your Company was due to extraordinary and unprecedented fall in the price of Crude Oil from USD 105 per barrel (NYMEX) in July, 2014 to USD 48 per barrel in March, 2015 resulting in unprecedented fall in the price of Base Oil resulting in high inventory losses to your Company. This adverse situation was worsened by the foreign exchange volatility, both resulting in uncertain/deferred demand for the products of your Company. The consistent fall in prices of Crude Oil and Base Oil especially in the second half of year 2014 finally started showing signs of
bottoming out in the first quarter of year 2015. Since then, these prices have shown a lot more stability which augurs well for your Company.

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Key risks include: Strong brands already present in the market, company may not be able to adapt to Electrical Vehicle launches etc, Increasing cash conversion cycle over the years.

Triggers include: If they can gain market share from other players.

Disclosure: No position, still tracking
Inviting views and opinions from senior members in the forum.

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Savita has had lots of positive developments in the recent couple of years.

  1. They have had two buybacks at a good price. Last one was at 1600. This has led to the stock turning illiquid with low volumes.
  2. They have recently tied up with Tata motors, Swaraj tractors and Aegis Logistics for supply. It is very tough to survive in the lubricant industry without backing of an OEM since major oil is consumed at workshops.
  3. They have taken the initiative to sell Farm based bio-degradable oils even though slightly expensive. I have used Savsol In my car and had no complaints. They also have a windmill business with lots of carbon credits surplus.

Unfortunately, they have not been able to improve Topline in the recent years. Also, they are still an insignificant player in the lubricant market with lots of new players entering due to high margins in the business.

Also, their brand lacks the strength of many competitors like Castrol, Mobil and even Veedol (which I also hold). Another drawback is their exit from merger with Idemitsu some years ago.

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The stock has gained momentum after the announcement of buyback at Rs.1400.00
The last date being march 5, 2021 for subscribing to the offer.
However, the stock is still available at a reasonable PE of 10, EPS (TTM) of 105, and a p/b of around 1.5.
Having said that, the business is debt free, with market cap of just Rs.1500 cr.
The business has been generating steady profit margins in early double digits…
Promoter holding is 71.5%
Almost all boxes ticked.

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Disclaimer: Invested

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What’s reason behind OP margin expansion to 20% in Q3 FY21 Vs prev 2-3 years avg. OP marging of 8-10%?

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Does any one have any idea What is the likely synergy which would be accrued by acquisition of Savita Polymers ( by the SOTL management) ? An extra ordinary general meeting is scheduled on 27 August for this purpose resulting in a unusual movement in the share price , yesterday.
Disc - Invested since few years.

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The synergy of Acquisition of Savita Polymers
Proposed acquisition of equity shares of SavitaPolymers.pdf (968.9 KB)

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Share purchase of Savita Polymers Limited has been Completed
Share Purchase.pdf (603.5 KB)

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AR 2021
The total remuneration of Key Managerial Personnel
increased by 32.41% from 626.94 lac in 2019-2020 to 830.14 lac in 2020-2021. The Company in
2020-2021 made a net profit of 22,396 lac (against 9,564 lac in 2019-2020).
Salary as a percentage of Net profit is approx 3.7%
8.30 cr/224 cr
AR 2020
The total remuneration of Key Managerial Personnel
increased by 1.95% from 626.23 lac in 2018-2019 to 638.47 lac in 2019-2020. Your Company in
2019-2020 made a net profit of 9,564 lac (against 11,427 lac in 2018-2019).
Salary as a percentage of Net profit is approx 6.67%
6.38 cr /95.64 cr
AR 2019
The total remuneration of Key Managerial Personnel
increased by 29.02% from 485.36 lac in 2017- 2018 to 626.23 lac in 2018-2019. Your Company in
2018-2019 made a net profit of 11,427 lac (against 12,620 lac in 2017-2018)
Salary as a percentage of Net profit is approx 5.47%
6.26cr/114.27cr

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What is the impact of crude oil price increase on this stock?

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Increase in top line n bottom line due to increase in closing stock.

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stock split…

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Hi All, I came across Savita Oil while scanning through power sector stocks. Contrary to my initial expectations, Savita seems to be a consumable business with revenues almost equally split between Power (transformer oils & cable filling compounds), FMCG & Pharma (paraffins, specialty waxes), Automobiles & Industrials (lubricants).

While scanning through its financials and presentations, a few doubts arose. The company doesn’t do concalls and brokerage coverage is limited, so would appreciate if any member is able to clarify these doubts:

  1. Company has zero debt on its balance sheet, yet paid 19Cr in interest costs in FY22 (Interest on customer advances could be an explanation, but that was only 14Cr in FY22 and interest on it would hardly be more than 1-2Cr). Interest expense continues to increase, its 18Cr already in H1 FY23. Borrowings continue to remain 0 on balance sheet. No explanation in FY22 AR notes. Can anybody help explain this?

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  1. Why does the company have 450Cr+ cash parked in equities (stocks, MFs) and debt funds instead of FDs? Isn’t this a very risky way of treating cash on the balance sheet, especially when both bond and equity markets are so volatile?

  2. The EBITDA per KL for Savita seems to have more than doubled in FY21 and FY22 from the levels of the previous 3 years in tandem with crude oil price rise. Does anybody understand how pricing works for Savita? Are they able to retain gross margin in % terms when prices increase? That would explain the > 2x rise in EBITDA per KL.

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  1. Related party transactions - I did not understand two huge transactions worth 115Cr involving KMP and their relatives. The transactions are tagged as purchase of shares (screenshot from AR below). What are these share purchases for which company seems to have paid out a huge sum of money to KMP?

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  1. Any corporate governance red flags apart from points 2 & 4 highlighted above? I did a quick check on the following:
  • Promoter ownership & pledge - OK
  • EBITDA to CFO conversion - OK. Over 5Y, 75% EBITDA converted to CFO
  • Contingent liabilities - OK (Negligible - 5% of net worth)
  • KMP remuneration as % of PAT - OK (4.2% in FY22 and 3.6% in FY21)
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  1. See Note 22 in the annual report for the breakdown (pg 130). Interest includes forex losses, bank charges, etc.

  2. My assumption is that these transactions are related to the acquisition of Savita Polymers in 21-22. Savita Polymers was a promotor controlled entity.

I have a long position in Savita OIl for some time. Most people assume that it is in the same area as Castrol in the competitive B2C engine oil markets whereas it is only a minor portion of its business. It has also done buybacks in the past and likely to do again.

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Hi @tankerooooo, thanks for your response.

  1. See Note 22 in the annual report for the breakdown (pg 130). Interest includes forex losses, bank charges, etc.

Actually I did look at this and it didn’t clarify much for me. If you look at the 3 items in Other borrowing costs

  1. Interest - On what? Doesn’t explain anything
  2. Net loss on currency fluctuation - For this to reflect as an interest cost there has to be some foreign currency denominated loans. There are no loans on the B/S
  3. Other borrowing costs & bank charges - There has been no borrowing in the last 3 years as per the balance sheet and cash flow statements. So what borrowing costs are they talking about?

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Let me try to get an answer from the IR team on this.

  1. My assumption is that these transactions are related to the acquisition of Savita Polymers in 21-22. Savita Polymers was a promotor controlled entity.

Thank you! This is the explanation. Acquisition was done at 1x Sales and ~13x P/E, on the face of it looks like it was done at arm’s length.

Since you are holding the stock and following the business for some time, can you throw some light on the following :

  1. Management quality and corporate governance - How have the promoters been in this regard?

  2. Management seems to be excited about the prospects of synthetic ester in the transformer oil business. Do you have any insights on this product’s potential in the future?

Stock price seems to be fairly correlated with crude oil movements as expected. Margins go up and down with crude prices.

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Do check out panama petrochemical as well in comparison to Savita. I feel its better placed than savita as it operates in B to B segment. Plus its increasing its capex by 60% over 3 years.

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https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/SavitaOilTechnologiesLimited_February%2007,%202023_RR_306174.html

The debt is shown as trade acceptance for raw material import.

Cash flow is really interesting with power transmission sector growth whether transmission oil sector can see growth is a wait and watch
Green energy revenue around 31 cr
No debt 450 cr investment and market cap of around 2000 cr
But highly competitive segment with no pricing power and cyclical but for transformer oil company do have approval and long term contract

Disc invested a tracking qty

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