Dolat Capital feels that, Lubricant industry being a low capital intensive business, can generate good cash flows. The quantum of cash generation and profitability however will depend on the proportion of Retail / Bazar trade in the total business.
Dolat Capital's report on Indian Lubricant Sector
We believe that Lubricant industry continues to witness a structural shift of volume growth to value growth and gaining market share. The thrust of lubricant companies remains on the Bazar trade due to better profitability as compared to the B2B segment. Lubricant business is divided in 2 segments - Automotive and Industrial. Industrial is completely B2B segment, whereas automotive segment has significant proportion of retail (Bazar Trade). This makes automotive segment more profitable.
Lubricant industry business model is driven by 3 key parameters - Distribution Channel, Brand Pull and Product innovation.
We feel that industry being a low capital intensive business, can generate good cash flows. The quantum of cash generation and profitability however will depend on the proportion of Retail / Bazar trade in the total business.
We like in order of preference:
Gulf Oil Corporation (GOCL) - With the demerger of lubricant business taking place, we expect a re-rating of the stock. GOCL valuations are dragged due to its other two businesses - Property Development and Mining (Detonators and Consulting) and buy out of Houghton International. The restructuring shall remove all draggers and a pure Lubricant play will be listed.
GOCL has been doing well in Lubricant segment and is constantly gaining market share along with expansion in margin profile. Focus is on expanding Bazar trade. Higher capacity utilization has also resulted in ROCE improvement. Balance sheet will be lighter and dividend payout can improve.
We recommend BUY with a target price of Rs 153. We have valued the lubricant business at 18x FY16E PAT culminating in a value of Rs 153. This is at a discount of 40% to Castrol CY15E valuations. We have not assigned any value to the other businesses of Gulf Oil.
Castrol India (CIL) - Would continue to be the leader in Bazar trade and command the strongest brand pull amongst all players. Valuations appear to be expensive but would remain so considering the strong dividend payout and CIL being the market leader in Retail / Bazar trade. CIL is likely to underperform in a rising market, but can be an outperformer in falling markets. At CMP, stock trades at 30.6 CY13E and 29.4x CY14E earnings. We recommend Accumulate with a target price of Rs 327. We have valued CIL at 30x CY15E earnings.
Tide Water Oil (India) - Neutral as the company appears to be contented with its focus on B2B and its current level of penetration in Bazar trade.
Savita Oil Technologies (SOTL) - Neutral. SOTL's 2 out of the 3 business segments are purely B2B. In Lubricant space also, Savita Oil is not a player to reckon from Retail / Bazar trade perspective. SOTL had a tie up with Idemitsu, a Japanese lubricant company, which was terminated earlier this year.
PSU Companies - IOCL, BPCL and HPCL are also major players in the lubricant industry and command nearly 70% market share. The Lubricant segment for them is very small but they are running it with dedicated teams due to its profit potential. Due to their inherent issues, they have not scale up on creating brand pull and product innovation. In terms of distribution channel, they are well entrenched across the country.
MNC Companies - Companies like Exxon Mobil, Total, Shell and others have entered the Indian Lubricant market due to its vast potential. Most of them are currently present in pockets (region specific players) rather than being a pan India player. Though they have product innovation strength, they have not been able to increase brand pull.
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