Maintain BUY on Gulf Oil Lubricants – Rising input cost affects profitability – HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Gulf Oil’s 4TFY21 EBITDA margin of 15.1% (-220 bps QT) was impacted by higher base oil prices. Even if price increases are needed to compensate, margins should remain impacted in the short term. Management is confident to outperform the growth of the sector by 2-3 times. We maintain BUY and revise the target price to INR 840, based on EPS FY23E. We now value the company at 19x the forward PE (against 20x previously) to take account of headwinds on margins. Main risks: increased competition and slower-than-expected recovery.

Financial data 4QFY21: Gulf Oil announced volumes of 35,000 KL at 4T (+ 6% QoT) while revenues increased by 7% QoQ to INR 5.17bn. The EBITDA margin at 15.1% (- 220bps QoT) was impacted by the increase in base oil prices (RM cost at 57% of sales vs 52% QoT). Due to cost reduction initiatives, the other expense ratio contracted 190bp in QoQ to 22.4%, despite A&P spend representing 4% of sales due to IPL promotions. The declared PAT fell by 7% QoQ to INR 598mn.

Key Takeaways – (1) Demand Outlook: The company saw improving demand conditions in the fourth quarter, with volumes reaching a record high of 35KL, with all segments contributing to growth. As the state lockdown is lifted, a pent-up demand is expected from June 21. (2) Market share gains: Gulf’s contact points have now exceeded 70,000. The share of rural people has also increased in the mix due to strong agricultural demand in fiscal year 21. The share of Market grew in all segments as volumes grew ahead of the industry. The share of B2C in the mix remains unchanged at 60%. (3) Pressure on raw material costs: In 4TFY21, gross margin contracted 670 basis points year-on-year due to a sharp rise in Brent crude prices. Against this, the company has taken several price hikes across all segments, which will help absorb the higher input costs. For the full year, management reiterated its earlier guidance for an EBITDA margin of 16-18%. (4) Battery activity: The segment recorded positive net income and sales of INR 800 million during FY21.

Shares of Gulf Oil Lubricants India Ltd were last trading on BSE at Rs. 683 from the previous close of Rs. 695.85. The total number of shares traded during the day was 4,123 in more than 874 trades.

The stock hit an intraday high of Rs. 704.95 and an intraday low of 681.1. The net turnover during the day was Rs. 2,848,710.

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