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Policy&Politics

Strong lubricants play offering strong growth & deep value

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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)

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Policy&Politics

Govt extends date for submission of R&D proposals

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The Government has extended the deadline for submission of proposals related to R&D scheme under the National Green Hydrogen Mission. The R&D scheme seeks to make the production, storage, transportation and utilisation of green hydrogen more affordable. It also aims to improve the efficiency, safety and reliability of the relevant processes and technologies involved in the green hydrogen value chain. Subsequent to the issue of the guidelines, the Ministry of New & Renewable Energy issued a call for proposals on 16 March, 2024.

While the Call for Proposals is receiving encouraging response, some stakeholders have requested more time for submission of R&D proposals. In view of such requests and to allow sufficient time to the institutions for submitting good-quality proposals, the Ministry has extended the deadline for submission of proposals to 27th April, 2024.

The scheme also aims to foster partnerships among industry, academia and government in order to establish an innovation ecosystem for green hydrogen technologies. The scheme will also help the scaling up and commercialisation of green hydrogen technologies by providing the necessary policy and regulatory support.

The R&D scheme will be implemented with a total budgetary outlay of Rs 400 crore till the financial year 2025-26. The support under the R&D programme includes all components of the green hydrogen value chain, namely, production, storage, compression, transportation, and utilisation.

The R&D projects supported under the mission will be goal-oriented, time bound, and suitable to be scaled up. In addition to industrial and institutional research, innovative MSMEs and start-ups working on indigenous technology development will also be encouraged under the Scheme.

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Policy&Politics

India, Brazil, South Africa to press for labour & social issues, sustainability

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The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment.

India, on Thursday, joined the G20’s two-day 2nd Employment Working Group (EWG) meeting under the Brazilian Presidency which is all set to address labour, employment and social issues for strong, sustainable, balanced and job-rich growth for all. India is co-chairing the 2nd EWG meeting, along with Brazil and South Africa, and is represented by Sumita Dawra, Secretary, Labour & Employment.

The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment. India has pointed out that the priority areas of the 2nd EWG at Brasilia align with the priority areas and outcomes of previous G20 presidencies including Indian presidency, and commended the continuity in the multi-year agenda to create lasting positive change in the world of work. This not only sustains but also elevates the work initiated by the EWG during the Indian Presidency.

The focus areas for the 2nd EWG meeting are — creating quality employment and promoting decent labour, addressing a just transition amidst digital and energy transformations, leveraging technologies to enhance the quality of life for al and the emphasis on gender equity and promoting diversity in the world of employment for inclusivity, driving innovation and growth. On the first day of the meeting, deliberations were held on the over-arching theme of promotion of gender equality and promoting diversity in the workplace.

The Indian delegation emphasized the need for creating inclusive environments by ensuring equal representation and empowerment for all, irrespective of race, gender, ethnicity, or socio-economic background. To increase female labour force participation, India has enacted occupational safety health and working conditions code, 2020 which entitles women to be employed in all establishments for all types of work with their consent at night time. This provision has already been implemented in underground mines.

In 2017, the Government amended the Maternity Benefit Act of 1961, which increased the ‘maternity leave with pay protection’ from 12 weeks to 26 weeks for all women working in establishments employing 10 or more workers. This is expected to reduce the motherhood pay gap among the working mothers. To aid migrant workers, India’s innovative policy ‘One Nation, One Ration Card’ allows migrants to access their entitled food grains from anywhere in the Public Distribution System network in the country.

A landmark step in fostering inclusion in the workforce is the e-Shram portal, launched to create a national database of unorganized workers, especially migrant and construction workers. This initiative, providing the e-Shram card, enables access to benefits under various social security schemes.

The portal allows an unorganized worker to register himself or herself on the portal on self-declaration basis, under 400 occupations in 30 broad occupation sectors. More than 290 million unorganized workers have been registered on this portal so far.

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Policy&Politics

India to spend USD 3.7 billion to fence Myanmar border

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India plans to spend nearly $3.7 billion to fence its 1,610-km (1,000-mile) porous border with Myanmar within about a decade, said a source with direct knowledge of the matter, to prevent smuggling and other illegal activities. New Delhi said earlier this year it would fence the border and end a decades-old visa-free movement policy with coup-hit Myanmar for border citizens for reasons of national security and to maintain the demographic structure of its northeastern region.

A government committee earlier this month approved the cost for the fencing, which needs to be approved by Prime Minister Narendra Modi’s cabinet, said the source who declined to be named as they were not authorised to talk to the media. The prime minister’s office and the ministries of home, finance, foreign affairs and information and broadcasting did not immediately respond to an email seeking comment.

Myanmar has so far not commented on India’s fencing plans. Since a military coup in Myanmar in 2021, thousands of civilians and hundreds of troops have fled from there to Indian states where people on both sides share ethnic and familial ties. This has worried New Delhi because of risk of communal tensions spreading to India. Some members of the Indian government have also blamed the porous border for abetting the tense situation in the restive north-eastern Indian state of Manipur, abutting Myanmar.

For nearly a year, Manipur has been engulfed by a civil war-like situation between two ethnic groups, one of which shares lineage with Myanmar’s Chin tribe. The committee of senior Indian officials also agreed to build parallel roads along the fence and 1,700 km (1,050 miles) of feeder roads connecting military bases to the border, the source said.

The fence and the adjoining road will cost nearly 125 million rupees per km, more than double that of the 55 million per km cost for the border fence with Bangladesh built in 2020, the source said, because of the difficult hilly terrain and the use of technology to prevent intrusion and corrosion.

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Policy&Politics

ONLY 2-3% RECOVERED FROM $2-3 TN ANNUAL ILLEGAL TRADE THROUGH BANKING: INTERPOL

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However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity.

In a press briefing held on Wednesday, Interpol Secretary General Jurgen Stock unveiled alarming statistics regarding the extent of undetected money laundering and illegal trade transactions plaguing the global banking network. Stock revealed that over 96% of the money transacted through this network remains undetected, with only 2-3% of the estimated USD 2-3 trillion from illegal trade being tracked and returned to victims.

Interpol, working in conjunction with law enforcement agencies and private financial sectors across its 196 member countries, is committed to combating the rising tide of fraud perpetrated by illicit traders. These criminal activities encompass a wide spectrum, including drug trafficking, human trafficking, arms dealing, and the illicit movement of financial assets.

Stock emphasized the urgent need to establish mechanisms for monitoring transactions within the global banking network. Currently, efforts are underway to engage banking associations worldwide in setting up such a framework. However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity. The lack of real-time information sharing poses a significant obstacle to law enforcement agencies in their efforts to combat money laundering and illegal trade.

Stock underscored the role of Artificial Intelligence (AI) in exacerbating this problem, citing its use in voice cloning and other fraudulent activities. Criminal organizations are leveraging AI technologies to expand their operations and evade detection on a global scale. Stock emphasized the importance of enhanced cooperation between law enforcement agencies and private sector banking groups. Realtime information sharing is crucial in the fight against illegal wealth accumulation.

Drawing inspiration from initiatives such as the “Singapore Anti-Scam Centre,” Stock called for the adoption of similar models in other countries to strengthen the collective response to financial crimes. In conclusion, Stock’s revelations underscore the pressing need for concerted action to combat global financial crimes. Enhanced cooperation between public and private sectors, coupled with innovative strategies for monitoring and combating illicit transactions, is essential to safeguarding the integrity of the global financial system.

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Policy&Politics

FM defends Atal Pension Scheme, highlights guaranteed returns

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Finance Minister Nirmala Sitharaman defended the Atal Pension Yojana (APY) against Congress criticism, asserting its design based on choice architecture and a guaranteed minimum 8% return. She emphasized the scheme’s opt-out feature, facilitating automatic premium continuation unless subscribers choose otherwise, promoting retirement savings. Sitharaman countered Congress allegations of coercion, stating the APY’s guaranteed returns irrespective of market conditions, supplemented by government subsidies.

Responding to Congress’s claim of scheme misuse, Sitharaman highlighted its intended beneficiaries – the lower-income groups. She criticized Congress for its alleged elitist mindset and emphasized the scheme’s success in targeting the needy. Sitharaman accused Congress of exploiting vote bank politics and coercive tactics, contrasting it with the APY’s transparent framework. The exchange underscores the political debate surrounding social welfare schemes, with the government defending its approach while opposition parties raise concerns about implementation and efficacy.

Finance Minister Nirmala Sitharaman’s robust defense of the Atal Pension Yojana (APY) against Congress criticism highlights the ongoing debate over social welfare schemes in India. Sitharaman’s assertion of the APY’s design principles, including its opt-out feature and guaranteed minimum return, underscores the government’s commitment to promoting retirement savings among lower-income groups. The Atal Pension Yojana, named after former Prime Minister Atal Bihari Vajpayee, was launched in 2015 to provide pension benefits to workers in the unorganized sector. It aims to address the significant gap in pension coverage among India’s workforce, particularly those employed in informal and low-income sectors. The scheme offers subscribers fixed pension amounts ranging from Rs. 1,000 to Rs. 5,000 per month, depending on their contribution and age at entry, after attaining the age of 60. Sitharaman’s response comes after Congress criticism alleging the APY’s inefficacy and coercive tactics in enrolment.

Congress General Secretary Jairam Ramesh described the scheme as poorly designed, citing instances of subscribers dropping out due to unauthorized account openings. However, Sitharaman refuted these claims, emphasizing the APY’s transparent and beneficiary-oriented approach. The finance minister’s defense focuses on three key aspects of the APY: Choice Architecture: Sitharaman highlights the opt-out feature of the APY, which automatically continues premium payments unless subscribers choose to discontinue.

This design element aims to encourage long-term participation and ensure consistent retirement savings among subscribers. By simplifying the decision-making process, the scheme seeks to overcome inertia and promote financial discipline among participants. Guaranteed Minimum Return: Sitharaman underscores the APY’s guarantee of a minimum 8% return, irrespective of prevailing interest rates. This assurance provides subscribers with confidence in the scheme’s financial viability and incentivizes long-term savings.

The government’s commitment to subsidizing any shortfall in actual returns further strengthens the attractiveness of the APY as a retirement planning tool. Targeting the Needy: Sitharaman defends the predominance of pension accounts in lower income slabs, arguing that it reflects the scheme’s successful targeting of its intended beneficiaries – the poor and lower-middle class. She criticizes Congress for its alleged elitist mindset and suggests that the party’s opposition to welfare schemes like the APY stems from a disconnect with the needs of marginalized communities. Sitharaman’s rebuttal also addresses broader political narratives surrounding social welfare policies in India.

She accuses Congress of exploiting vote bank politics and coercive tactics, contrasting it with the transparent and inclusive framework of the APY. The exchange underscores the ideological differences between the ruling Bharatiya Janata Party (BJP) and the opposition Congress, with each side advocating for their vision of social welfare and economic development. In addition to defending the APY, Sitharaman’s remarks shed light on the broader challenges and opportunities facing India’s pension sector.

Despite significant progress in expanding pension coverage through schemes like the APY, the country still grapples with issues such as financial literacy, informal employment, and pension portability. Addressing these challenges requires a multifaceted approach involving government intervention, private sector participation, and civil society engagement.

As India strives to achieve its vision of inclusive and sustainable development, initiatives like the APY play a crucial role in promoting economic security and social equity. Sitharaman’s defense of the scheme underscores the government’s commitment to addressing the needs of vulnerable populations and ensuring their financial well-being in the long run.

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Economic

Regulatory steps will make financial sector strong, but raise cost of capital

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India’s financial system regulator, the Reserve Bank of India (RBI), is demonstrating a serious commitment to improving governance and transparency at finance companies and banks, with the RBI’s recent measures aimed at curtailing lenders’ overexuberance, enhancing compliance culture and safeguarding customers.

While the global ratings firm has appreciated the RBI’s “diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues”, it has cautioned that increased regulatory risk could impede growth and raise the cost of capital for financial institutions. “Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” says S&P Global Credit Analyst, Geeta Chugh. “India’s regulator has underscored its commitment to strengthening the financial sector. The drawback will be higher capital costs for institutions,” Chugh cautions.

The RBI measures include restraining IIFL Finance and JM Financial Products from disbursing gold loan and loans against shares respectively and asking Paytm Payments Bank (PPBL) to stop onboarding of new customers. Earlier in December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages. These actions are a departure from the historically nominal financial penalties imposed for breaches, S&P Global notes.

Besides, as the global agency points out, the RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities and become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors. “We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices,” adds Chugh. The global agency has also lauded the RBI’s recent actions demonstrating scant tolerance for any potential window-dressing of accounts.

These actions include the provisioning requirement on alternative investment funds that lend to the same borrower as the bank finance company. Amidst the possibility of some retail loans, such as personal loans, loans against property, and gold loans getting diverted to invest in stock markets and difficulty of ascertaining the end-use of money in these products, S&P Global underlines the faith of market participants that the RBI and market regulator, the Securities and Exchange Board of India, want to protect small investors by scrutinizing these activities more cautiously.

On the flip side, at a time of tight liquidity, the RBI’s new measures are likely to limit credit growth in fiscal 2025 (year ending March 2025). “We expect loan growth to decline to 14 per cent in fiscal 2025 from 16 per cent in fiscal 2024, reflecting the cumulative impact of all these actions,” says Chugh. The other side of the story is that stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities and the RBI’s decision to raise risk weights on unsecured personal loans and credit cards may constrain growth. Household debt to GDP in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24 per cent in March 2024 from 19 per cent in March 2019. Growth in unsecured loans has also been excessive and now forms close to 10 per cent of total banking sector loans.

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