This Hinduja Group company is on solid growth trajectory; stock expected to rise 100% in 24 months

Rising demand for lubricants and oil from original equipment manufacturers (OEMs), given an upswing in the commercial vehicle cycle and an increase in freight movement on national highways bodes well for the Hinduja Group company - Gulf Oil Lubricants (GOLIL). Besides, GOLIL is making strategic inroads into the battery business and during FY24, the company is planning to localise production to boost battery availability in the B2C market. This expansion is expected to fortify GOLIL's position in the battery industry and drive growth in the coming years, analysts at Ventura Securities note, who recently initiated the coverage on the stock.

Further, changing consumer preference from small cars to hatchbacks and utility vehicles (UVs), as per analysts, is proving to be a boon for the lubricants industry. This is because upgraded PVs require premium lubricants in larger quantities compared to small cars. Additionally, a shift in two-wheeler volumes from entry-level to mid-to-premium segments is expected to further bolster demand for premium lubricants, the brokerage further said in its report dated May 1. 

Taking these multiple positive triggers into consideration, Ventura Securities has assigned a "BUY" rating to the stock with a target price of Rs 813 for the next 24 months - implying an upside potential of 99.2 per cent as compared to Friday's (April 28, 2023) closing price of Rs 408. 

FINANCIALS AND OUTLOOK

Over FY23-26E, Gulf Oil's lubricant & oil volumes are estimated to grow at a compound annual growth rate (CAGR) of 11 per cent, while the company’s Valve-Regulated Lead–Acid battery volumes are expected to grow at a CAGR of 20 per cent. The company’s revenue/ EBITDA/ PAT is expected to grow at a CAGR of 10.9 per cent/ 17.5 per cent/ 20.6 per cent to Rs  4,016 crore/ Rs 550 crore/ Rs 409 crore, respectively by FY26, while  EBITDA and PAT margins are expected to improve by 219 bps to 13.7 per cent and 226 bps to 10.2 per cent, respectively, the brokerage said. 

Net cash balance sheet, industry-leading revenue growth, margin expansion and lower capex requirement is expected to generate strong free cash flow (FCF) in the coming years. As a result, return ratios – RoE and RoIC – are expected to improve by 157bps to 20.4 per cent and 773bps to 36.4 per cent, respectively, analysts at the brokerage note. 

YES Securities, in its report on the stock, dated February 9, 2023, had written that markets have heavily discounted Gulf Lubricant's growth potential and its ability for cashflow generation in light of the EV narrative, and a disconnect exists to that extent, between perceived and intrinsic valuations. It had assigned "BUY" to the stock with a target price of Rs 660 for 12 months. 

WATCH | Ravi Chawla, MD & CEO, Gulf Oil Lubricants India Ltd. In Conversation With Zee Business

Sabri Hazarika and Harsh Maru, the research analysts at Emkay Global, too echoed similar views in their report issued on February 21, 2023. The report noted that the company has launched EV fluids globally as well as in India in CY21, and enjoys OEM relationships with the likes of Piaggio, Altigreen, Switch, etc. Besides, analysts opined that AdBlue, a diesel exhaust fluid, has significant upside potential; while its EBITDA margin is in the single-digit, it is a complementary product and earnings-accretive whose penetration would increase exponentially. 

Gulf Oil is one of the top-three players in the oil lubricants industry and is likely to log 30 per cent CAGR ahead. The battery would also expand. Its balance sheet would remain healthy, with reasonable capex requirements and gross WC likely to be range-bound at 100 days, Emkay Global said further. It had maintained "BUY" on the stock with a 12-month target of Rs 625. 

STOCK PERFORMANCE

The stock has remained flat in the last 12 months as compared to a 9.4 per cent jump in the benchmark Nifty. Gulf Oil Lubricants had hit a 52-week high of Rs 499.95 on the NSE on September 2, 2022, and a 52-week low of Rs 377.60 on May 12, 2022.