Rising vehicle ownership levels, incorporation of advanced engines, continuous growth in investment in infrastructure projects, robust two-wheeler sales, increase in number of women driving scooters, etc are propelling demand for automotive lubricants in India.
While the auto industry has grown by close to 7% in the last five years, lubricants industry in India has been growing in high single-digit primarily due to enhanced oil drain intervals. Stronger gains in construction and agricultural activities are also boosting the demand for off-highway vehicles.
From a product business point of view, a lubricant is generally a fluidic material with the primary function of reducing friction between surfaces in contact. Lubricants minimises energy loss generated from friction and at the same time, it can also be very useful to clean, cool and prevent metal parts from corrosion and rust and many such challenges a machine faces during its operation.
For example, engine oil is a specific type of lubricant that is developed for application in engines. A good quality engine oil is very essential for the appropriate working of an engine; this helps to operate engine efficiently, prevents from damages and helps in extending the life of the engine.
The lube industry is characterised by brand building, innovation, and premiumisation, which aids market share gains and pricing power. New products are launched based on largely homogenous specifications (like viscosity), though branding helps to boost customer preference. Commercial vehicles (CV) customers, however, are value chasers seeking better economics (long drain, pricing, distribution reach etc).
At 2.7 billion litre p.a. (7.5% of world markets) India is the third largest market globally after US and China. The market growth at 3-4% is higher than the global average of 1-2% primarily led by APAC.
Automotive lubricants dominate the market in India, with applications for CV, passenger vehicles (PV) and two-wheelers. Diesel engine oils (DEOs) lead the automotive lubricant market as they form 45% of the total market, followed by motorcycle oils (MCOs) and passenger car motor oils (PCMOs).
The industrial lubricant segment comprises of hydraulic fluids, metal working fluids, greases and industrial gear oil. These products are used in the construction, manufacturing, textile, power generation, mining, food processing, light-heavy engineering, marine operations and metal working sectors.
The demand for automotive lubricants is a direct function of vehicle movement on the roads, as well as growth of vehicle population and automobile sales. The industrial lubricant segment comprises of sectors such as power, chemicals, metals, automotive manufacturing, mining, road construction and non‐road transportation.
In such a scenario, which are the companies which are likely to derive maximum benefit and grow significantly within the lubricants sector? One such company which is a dominant leader in the entire lubricants value chain is Gulf Oil Lubricants India Ltd which sells its lubricants products under the “Gulf” brand with sales largely to the automotive sector along with industrial users.
Gulf Oil operates mainly in the automotive and industrial segments with a leading presence as one of the top players in the open market (B2C/Bazaar channel) through the distributor network and also directly supplies to OEMs & other B2B customers (industries, infrastructure, mining and fleet customers, state transport and government undertakings).
The company has over 7% market share in the Bazaar/replacement market and an estimated 5% share in the overall auto and industrial lubricants market. Gulf Oil enjoys a pan-India network of 300+ auto distributors, 50+ industrial distributors and over 75,000 touch-points, 500+ marquee customers in B2B, infra, mining and fleet, backed by the logistics support of 30 depots, 4 regional offices and corporate office in Mumbai. At present, the product mix includes CV oils 45%, personal mobility oils 22-25% (motorcycle 18-20%, passenger car 4-5%), industrial 15% and other gear oils and greases 15%. Gulf Oil works in close coordination with several OEMs and has adopted and pioneered several go-to-market models in the automotive industry, including genuine oils, co-brand oils and approved oils.
Some of the company’s OEM partners include Ashok Leyland, Mahindra, Swaraj, Bharat Benz, Schwing Stetter, Tata Motors, Force Motors, Kobelco, Piaggio and Bajaj. Gulf Oil also provides customised service and technical solutions to its B2B customers and has thus built strong-long standing relationships with its customers in the infrastructure, mining and fleet segments.
It supplies lubricants to more than 300 prestigious B2B customers like L&T, JSW, etc. With 10-12% CAGR volume growth in the last decade, Gulf Oil has recorded more than 3x-4x times growth of the lube industry. Its strategy has helped it built a strong brand and increase its reach and offer products with differentiated value propositions to customers which has enabled the company to record one of the fastest volume growths amongst the top lube players. Besides leveraging, Gulf Oil International’s global motorsports associations in India, GOLIL built the Gulf brand in India around the cricketing platform – by sponsoring teams in the Indian Premier League and appointing the Indian team captain Mahindra Singh Dhoni as the brand ambassador. Consistent investment in the brand has resulted in strong brand awareness and usage of the Gulf brand in India.
While the lubricants market will continue to grow for at least next 15-20 years as explained above, GOLIL has also been focused on creating its foothold in the e-mobility space while looking at opportunities that synergise with its brand, distribution. The intention of the company is to stay ahead of the curve in order to cater to the evolving market and consumer requirements in this sector with very strong technology driven products.
At present, it has two tie-ups through equity stakes into Indra Renewable Technologies and ElectreeFi which has enabled it to provide superior solutions related to electric vehicle (EV) charging, EV fleet management and battery swapping.
Gulf Oil is the second largest player in the domestic lubricant market enjoying a strong presence in the automotive, industrial, infrastructure segments with around 55% of the revenue coming from the B2C segment and rest from the B2B segment where the company has built a strong domestic brand ‘GULF’ which believe has great potential and going ahead can be scaled up significantly.
However, for Gulf Oil, its key raw materials cost (base oil) is dependent on movement of crude oil prices and rupee against the US dollar. But despite this, the company was able to increase product prices by 6 times in the last 8 months of FY22 indicating strong pricing power in a very competitive market. This is the reason Gulf Oil is a solid cash generating machine with almost 7-8% of its revenues being spent on brands and promotions, and despite Covid, the company was able to sustain and manage its operations optimally.
More importantly, once the geo-political situation between Russia and Ukraine gets over in the near term, crude prices will correct sharply thereby leading to softer base oil prices which will benefit the company going ahead.
Hence, Gulf Oil is the best proxy to play the Lubricants theme which is likely to show strong growth over the next 3-5 years ahead as the company enjoys scale, a strong brand and a well-established infrastructure to benefit from this change. All this has got reflected in FY22 numbers with revenues at Rs 2,192 crore and a PAT of Rs 211 crore vis-a-vis Rs 200 crore last year with a net EPS of Rs 41 as compared to Rs 39 in FY21.
From a valuation perspective, the Gulf Oil stock has also corrected by almost 18% from its peak in last February and currently trades at Rs 420 levels at a PE multiple of 8xFY23E and 7xFY24E while EPS growth over the next 2 years is estimated at over 20% annually.
These valuations look attractive considering the fact that Gulf Oil enjoys healthy demand prospects across all its product segments, plus due to its asset light business model and low capital intensive business model, the company has potential to double its sales from existing setup which essentially puts Gulf Oil in a sweet spot.
(The author is the Head-Research at Profitmart Securities and a seasoned financial planner and equity researcher)