Gulf Oil Corporation - Sanguine about volume growth - Nirmal Bang

As part of our continuous efforts to gauge the changing dynamics of the lubricants business in India by conducting meetings with several lube companies and dealer checks, we recently had a meeting with the management of Gulf Oil Corporation (GOCL). Unlike Castrol India which finds it tough to achieve volume growth, GOCL's lubricant volume has been growing by almost three times compared to that of the industry and it is still confident of maintaining the growth rate for the next three-four years. The key factors that are expected to push volume growth for Gulf Oil are: (1) Increased exposure to the personal mobility segment, (2) Extensive below-the-line efforts to make the company's products attractive for retailers and automobile mechanics, (3) Plan to add two-three automobile OEMs (original equipment manufacturers) every year, (4) Leveraging the ability to promote long-drain interval products across categories, and (5) Tapping more customers in the transport fleet and construction segments.

Volume growth likely to be 3x higher than that of the industry: GOCL's management is quite confident of achieving 3x higher volume growth compared to that of the industry over the next two-three years. Volume growth on YTD basis in FY13E is seen at 7% in the lubricants business compared to the industry's growth of ~2% - out of which~9%-10% growth is likely from the passenger car segment and the motorcycle segment accounting for 20%. The management stated that the company had about 4% market share in the passenger car segment compared to 17% of Castrol India (CIL) and 10% share in the motorcycle segment versus 17% of CIL. GOCL's lubricant volume is likely to grow 14.6% between FY10-FY13E, on the back of increased focus on the personal mobility segment from 2007.

Multi-pronged exercise to maintain volume growth: In order to maintain sustained volume growth, the company has initiated multi-pronged efforts such as: (1) Extensive below-the-line the exercise of increasing interactions with automobile mechanics and intermediaries, (2) Increasing the retail presence to 45,000 counters from 25,000 over the past three years, (3) Facilitation of automobile mechanics through programmes like 'Captain Clubs', (4) Adding more OEMs every year - the company recently added Mahindra & Mahindra as one of the OEMS; currently, ~10% of the company's volume is derived from OEMs, (5) Increasing the advertising expenditure to 5%-6% of lubricant sales over the next one-two years compared to the historical range of 3.5%-4.0%, (6) Developing more clients in the fleet/construction space; currently the company has about 200 clients in this space and has recently roped in Shapoorjee Pallonji, Oriental Construction and Simplex Concrete. This segment currently accounts for 5% of the company's volume.

More frequent change in product prices likely: The management expects the change in products prices to be more frequent than earlier due to: (1) Volatile base oil prices over the past two years, (2) Market leader turning more focused to achieve volume growth, and (3) Price differential between the market leader and key competitors likely to reduce. As per the management, in the passenger car mobility or PCMO segment, GOCL's products prices are at ~7%-8% discount to the market leader. In the super-fleet segment, the company's products are commanding a premium of 10%-15% over the market leader. GOCL intends to increase the EBITDA margin in lubes business by ~1% every year with rising operating leverage. Capex plan: With a current volume of ~65,000kl, likely volume growth at 3x the industry's growth, and full utilisation of existing capacity of 75,000-80,000kl expected in the next one-two years, GOCL intends to increase the capacity in South India by incurring a capex of Rs1.35bn-Rs1.50bn.

Source : Equity Bulls

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