Buy Tide water oil - Microsec

We rate Tide water oil Ltd (TIDEWATER) a BUY. Tide Water which is a part of the multi divisional Andrew Yule group has been a pioneer of Automotive and Industrial lubricants in India since 1928 and has five plants at Howrah, Oragadam, Turbhe, Silvassa and Faridabad. Its repertoire of automotive products includes engine oils for trucks, tractors, commercial vehicles, passenger cars and two/three wheelers. It has a popular Veedol range of products, widely accepted for their quality and excellence. The company also has technical collaboration with JX Nippon Oil & Energy Corporation, the No.1 petroleum conglomerate in Japan. Superior quality lubricants under the brand name Eneos are manufactured and marketed in India by Tide Water Oil. Its revenue & net profit grew at a CAGR of 13.61% & 21% respectively over FY09-12.

Tide Water has created an enduring brand: Despite intense competition in the lubricants industry in the last decade, Tide Water has been able to successfully create and appropriate value through adept market segmentation. Its primary market is the premium mobility automobile segment, where it is able to leverage its trusted brand, product performance track record and unique service attributes.

Strategy to maintain competitive edge: Tide Water maintains its competitive edge by: (1) leveraging its technological strength and product development capabilities by working closely with global OEMs, (2) working closely with mechanics, who play a key role in the final decision making, and (3) by expanding distribution reach in semi-urban and rural areas, where future growth is anticipated.

To benefit from industry transition: During the last decade, the distribution channel for automotive lubricants (lubes) witnessed a major transition from the traditional public sector petrol pumps to bazzar trade, which was positive for private sector players such as trade water oil. The distribution channel is now undergoing another transition. With engine technology advancing and maintenance becoming more sophisticated, the workshop channel is gaining traction at the cost of other distribution formats. This is likely to lead to further polarization in the industry and benefit players that have strong/established relationships with original equipment manufacturers (OEMs).

Valuation

At the CMP of INR 7822, the stock trades at a P/E and EV/EBIDTA of 11.87x and 6.59x, its FY12 earnings. Its relative inexpensive valuation & flexibility to withstand business cycles makes it an attractive pick.

Key Concerns

Volatile raw material prices: Most of Company's raw materials such as base oil and additives are crude oil derivatives. As such, raw material price volatility is a key risk. However, given low price sensitivity of lubricant demand and endogenous demand, Tide water has historically been able to successfully deal with this challenge.

OEMs introducing own brands: Some OEMs have introduced their own brands. However, for these OEMs, lubricants are not a core business, and they do not have an addressable market beyond their immediate requirements.

Source : Equity Bulls

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