Buy Gulf Oil Lubricants; target of Rs 1800: Emkay Global Financial

Emkay Global Financial' research report on Gulf Oil Lubricants

The strategic review and potential sale by BP Plc of its lubricant arm, Castrol Ltd, marks a major global corporate development in the otherwise quiet lubricant sector. Financial investors view the space cautiously, given potential long-term EV risks, though this deal could improve market sentiment. BP management has cited strong interest in Castrol, with recent media reports naming marquee players like Saudi Aramco and Reliance Industries (RIL), besides several PE and investment firms as interested parties, valuing Castrol at USD8-10bn. At USD10bn, Castrol Ltd’s implied market-cap/CY24 EBIT is 12x, while Castrol India’s is at 14x. The Indian business accounts for ~20% of Castrol’s global earnings and enjoys a healthier outlook than other countries. We believe a change in ownership of Castrol, which holds 51% stake in Castrol India (not rated), could trigger a mandatory open offer for the Indian entity. HPCL’s lube carve out and monetization is another event (which is, albeit, progressing slowly) that is eagerly awaited. Nevertheless, we find Gulf Oil Lubricants India (GOLI)’s valuation attractive at 11x CY24 EBIT. Even Veedol (not rated), which is putting forward 2% promoter OFS, is trading at 14x.

Outlook

We reiterate BUY on GOLI, with TP of Rs 1,800. A stable currency and oil price scenario, and expected decline in base oil costs could expand EBITDA margin to 14-16% compared with the current guidance of 12-14%.