Shares of Gulf Oil Lubricant IndiaIndia’s second-largest lubricants company after Castrol, is likely to grow by 96 percent in the next two years, forecast brokerage Ventura Securities in its recent report.
The brokerage has initiated coverage of the stock with a price target of ₹813, indicating the aforementioned upside potential.
“At CMP of INR 408, Gulf Oil’s valuation at 0.3X FY26 PEG is one of the lowest among its global peers and has the highest RoIC (36.4% FY26) along with the best growth potential of domestic revenue. This makes it a very attractive business. with a substantial margin of safety. The company recently initiated a buyback program, and the superlative forward-looking FCF (free cash flow) generation bodes well for more enhanced dividend rewards/payouts It is pertinent to mention that its current dividend yield of 1.23 percent also makes it a lucrative proposition,” the brokerage reasoned.
Stock price trend
The stock has been completely flat in the past year and is down 2 percent in 2023, despite posting positive returns in 3 of the 5 months so far in the current calendar year. The stock has advanced 1.8 percent in May so far after a 0.88 percent gain in April. However, it fell 2.5% and 4.2% in March and February, respectively. In January, the stock rose 2.4 percent.
Since reaching its all-time high of ₹1,025 in November 2017, the stock has been on a continuous downward trend and has lost around 60 percent of its investment wealth so far.
The evolution of the share price of Gulf Oil Lubricant
Earnings
In the December quarter, the company’s net profit rose 7 percent year-on-year ₹62.63 million against ₹58.63 million in the period of one year. Meanwhile, its revenue rose 30 percent year-on-year ₹781.10 cr against ₹601.82 in the same quarter last year.
Commenting on the performance, Ravi Chawla, Managing Director and CEO, Gulf Oil Lubricants India said, “The continuous and overall growth we achieved in the third quarter, where the company has crossed. ₹90cr quarterly EBITDA mark for the first time in an environment of continued cost pressures for some of its key inputs and INR depreciation is due to excellent team efforts and strong model of brand and business we have implemented. We have delivered 3-4 times the market growth rate in terms of volumes when demand conditions for rural-related segments like agriculture and 2W oils eased.”
Investment justification
– Ventura noted that Gulf Oil has impressively gained market share and shown resilience during the tumultuous past three years. It believes that the demand for lubricants is expected to increase due to the increase in commercial vehicle (CV) cycle, improved movement of goods on national roads, increased industrial production and increased sales of utility vehicles (UV). These factors are expected to drive strong demand for lubricants from the B2B segment, which is responsible for generating 35 to 40 percent of Gulf Oil’s lubricant and oil volumes, Ventura explained.
– In addition, the brokerage stated that Guld Oil is proactively expanding its dealer network in new geographies to improve the reach of its B2C lubricants business, which generates 60-65 percent of its volumes of lubricants and oil with better margins compared to their B2B business.
– Overall, Gulf Oil’s strategic efforts are expected to positively impact its market share and financial performance, further consolidating its position as a leading player in the Indian lubricants industry, he added.
– Along with its impressive growth in the lubricants industry, the company is also making progress in its battery business.
– For the year 28E, the company aims for an income of ₹200 cr, representing a remarkable increase of 2.3 times over FY23 revenue, the report noted. The company plans to achieve this ambitious target primarily through cross-selling through its existing network of lubricant distributors.
– Also, its launch of electric vehicle fluids is proving to be a smart move as the company is reaping the benefits of the high-growth electric vehicle market, Ventura said.
– In addition, the recent acquisitions of Indra Renewable Technologies and “ElectreeFi” have opened new doors for growth in the rapidly evolving electric vehicle charging space and its related ecosystem, he added.
estimates
During FY23-26E, Gulf Oil’s lubricants and oil volumes are estimated to grow at a CAGR of 11 percent, while the company’s VRLA battery volumes are expected to grow at a CAGR of 20 percent, predicted the brokerage.
The company’s revenue, EBITDA and PAT are estimated to grow at a CAGR of 10.9 percent, 17.5 percent and 20.6 percent, respectively. Meanwhile, its EBITDA and PAT margins are expected to improve by 219 bps to 13.7 percent and 226 bps to 10.2 percent, it added.
The clean cash balance, industry-leading revenue growth, expanding margins and lower capex requirement are expected to generate strong FCF in the coming years. As a result, profitability ratios (RoE and RoIC) are expected to improve by 157 bps to 20.4 percent and 773 bps to 36.4 percent, respectively, Ventura predicted.
“The company is in a high-growth phase and the steep >30 percent valuation discount to Castrol is not justified. We believe as this growth story unfolds, the valuation discount will narrow,” he said the brokerage
Disclaimer: The above opinions and recommendations are those of individual analysts or brokerage firms, and not of MintGenie.
Source: Report Ventura
