Maintain BUY on Gulf Oil Lubricants - Rising input cost impacts profitability - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Gulf Oil's 4QFY21 EBITDA margin at 15.1% (-220bp QoQ) was impacted by higher base oil prices. While it is taking price hikes to offset the same, the margins should remain impacted in the near term. The management is confident of outperforming the industry growth by 2-3x. We maintain BUY and revise the target price to INR 840, based on FY23E EPS. We now value the company at 19x forward PE (vs 20x earlier) to factor in the margin headwinds. Key risks: increased competition and a slower-than-anticipated recovery.

4QFY21 financials: Gulf Oil reported volumes of 35k KL in 4Q (+6% QoQ) while revenue grew 7% QoQ to INR 5.17bn. EBITDA margin at 15.1% (- 220bps QoQ) was impacted by higher base oil prices (RM cost at 57% of sales vs 52% QoQ). Owing to cost-cutting initiatives, other expenses ratio contracted 190bps QoQ to 22.4%, despite A&P spends coming in at 4% of sales due to IPL promotions. Reported PAT declined 7% QoQ to INR 598mn.

Key takeaways - (1) Demand outlook: The company witnessed improved demand conditions in 4Q, with volumes coming in at an all-time high of 35KL with all segments contributing to growth. As the state-wise lockdown is lifted, pent-up demand is expected from Jun-21 onwards. (2) Market share gains: Gulf's touchpoints have now crossed 70k. The share of rural has also gone up in the mix due to strong agri demand in FY21. Market share has grown across segments, as volumes have grown ahead of the industry. B2C's share in the mix remains unchanged at 60%. (3) Commodity cost pressure: In 4QFY21, gross margin contracted 670bps YoY due to a sharp rise in Brent crude prices. Against this, the company has taken several price hikes across segments, which will aid in absorbing the higher input costs. For the full year, the management has reiterated its earlier guidance of EBITDA margin of 16-18%. (4) Battery business: The segment reported a positive bottomline and INR 800mn revenue in FY21.

Shares of Gulf Oil Lubricants India Ltd was last trading in BSE at Rs.683 as compared to the previous close of Rs. 695.85. The total number of shares traded during the day was 4123 in over 874 trades.

The stock hit an intraday high of Rs. 704.95 and intraday low of 681.1. The net turnover during the day was Rs. 2848710.

Source : Equity Bulls

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