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Business News/ Market / Mark-to-market/  Lower crude oil price gives lubricants a smoother ride
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Lower crude oil price gives lubricants a smoother ride

Since crude oil prices have fallen in the current quarter, these companies should continue to benefit in FY16

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Oil producers will lose from the falling crude oil prices, but companies using oil as a raw material will be celebrating.

Take lubricant makers such as Gulf Oil Lubricants India Ltd (GOLIL) and Castrol India Ltd that use crude oil derivatives as key inputs (base oil and additives).

Castrol clocked an operating profit margin of as much as 30% in the June quarter, nearly 10 percentage points higher year-on-year. Its operating performance was also helped by a decline in advertising and sales promotion expenses. Of course, that also suggests Castrol chose not to pass on the full benefits from the declining input costs to end-users.

GOLIL clocked an operating margin of 15%, which was higher year-on-year and sequentially but it fell short of Street estimates. But revenue growth was really nothing to write home about for both firms.

Since crude oil prices have fallen in the current quarter, these companies should continue to benefit in FY16. Note that there is a lag in the fall in crude oil prices and that of base oil. In any case, despite the correction in stock prices in the past one month, investors are still making gains from a longer term perspective.

Castrol’s shares have increased 27% in the past one year, while GOLIL’s shares increased an impressive 75%. Investors appreciate GOLIL’s efforts to consistently grow volumes at a faster pace (two to three times more) than industry rate. That’s also the main reason the company has managed to increase its market share over a period of time. In the June quarter, GOLIL’s volumes increased about 4%, compared with last year, while that of Castrol increased 1%.

“The lubricant industry is facing a structural challenge on volumes due to increasing drain interval," pointed out a Dolat Capital Market Pvt. Ltd report.

That’s precisely the reason why GOLIL’s faster volume growth appears remarkable.

“We believe CIL (Castrol) would continue to maintain its leadership position although the volume growth rates would be lower than its nearest competitor, given the high base," added Dolat Capital in a report on 27 August. Comparatively, higher volume growth is expected to continue for GOLIL, driven by its distribution expansion, brand thrust and tie up with original equipment manufacturers (OEMs).

Competition is a worry though. Expecting the competitive scenario to continue, ICICI Securities Ltd lowered GOLIL’s Ebitda/litre growth in a report last month. “We expect the Ebitda (earnings before interest, taxes, depreciation and amortization) to increase from 18.9/litre in FY15 to 21.7/litre in FY17E, lower than our earlier estimate of 22.2/litre in FY17E," said the brokerage.

If crude falls further, the situation could eventually turn out better. Nevertheless, valuations suggest a good portion of the optimism from cost benefits is factored in. Currently, Castrol trades at 30 times estimated earnings for this fiscal (December ending for the company) while GOLIL trades at 26 times this year’s forecasted earnings.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 30 Aug 2015, 08:48 PM IST
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