Maintain BUY on Gulf Oil Lubricants - Recovery in sight - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

We reiterate our BUY rating on Gulf Oil as demand outlook has improved across segments, including the DEO segment. While 1Q volumes were weak (-40% YoY, -30% QoQ), management is witnessing encouraging recovery signs, led by the Agri and MCO segments. The company is expected to benefit from the shift towards personal mobility. The nascent battery business is scaling up and has witnessed growth in Jun-20 (albeit on a low base). Maintain BUY.

1QFY21 financials: Revenue declined 45/33% YoY/QoQ owing to 41/30% drop in volumes. Demand was affected owing to COVID-led lockdown, and lower factory fills volumes. Realisations at Rs 138/KL declined 8/4%. The company sustained a double-digit EBITDA margin at 10.5% (-700/-490bps YoY/QoQ), owing to lower variable costs. PAT declined 65% YoY to Rs 172mn.

Call and other takeaways: (1) On-ground situation improving: Towards the end of 1QFY21, a significant uptick in demand was witnessed across segments, including factory fills. MCO segment sales are stronger in Jul-20. Gulf is attempting to strengthen its presence in the PCO segment, where it has a limited presence. (1) Good demand in the agri segment: Sales from the agri segment were at an all-time high owing to good crop season and expectations of good monsoon. Rural channel sales have doubled in the quarter. Gulf Oil has tie-ups with leading OEMs including Mahindra and Swaraj. (3) Battery business: Battery volumes grew 30% YoY Jun-20 YTD. The company is looking at options for localisation. For setting up a new plant, greenfield Capex will be Rs 700-800mn. (4) Other highlights: DEO segment contributed 42% to overall volumes led ay Agri demand. PCMO segment accounted 20% (usually +25%), industrial 15% and others are 23%.

Maintain BUY: Our estimates are largely unchanged. We reiterate BUY with a target price of Rs 760 @ 20x Jun-22 EPS. Key risks: Delayed pick-up in the DEO segment and increased competition in the PCMO segment.

Shares of Gulf Oil Lubricants India Ltd was last trading in BSE at Rs.658 as compared to the previous close of Rs. 640.9. The total number of shares traded during the day was 1371 in over 353 trades.

The stock hit an intraday high of Rs. 661 and intraday low of 642.05. The net turnover during the day was Rs. 896700.

Source : Equity Bulls

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