GULFOILLUBNSEFebruary 10, 2023

Gulf Oil Lubricants India Limited

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92turns

13analyst exchanges

3executives

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Management on call

Ravi Chawla

MANAGING DIRECTOR – GULF OIL LUBRICANTS INDIA LIMITED

Manish Gangwal

CHIEF FINANCIAL OFFICER

Nitin Tiwari

YES SECURITIES

Key numbers — 40 extracted

30%

Y2023 and many milestones achieved. But let me start with revenue which has grown year-on-year by 30%. We've also seen EBITDA crossing INR 90 crore for the first time with a 17% growth and also we

INR 90 crore

let me start with revenue which has grown year-on-year by 30%. We've also seen EBITDA crossing INR 90 crore for the first time with a 17% growth and also we have seen a double-digit 10% growth in volumes,

17%

grown year-on-year by 30%. We've also seen EBITDA crossing INR 90 crore for the first time with a 17% growth and also we have seen a double-digit 10% growth in volumes, which definitely for us has be

10%

A crossing INR 90 crore for the first time with a 17% growth and also we have seen a double-digit 10% growth in volumes, which definitely for us has been a good achievement from the team. We saw an e

nd which really shows that we have a strong brand and business model. We continue to deliver 3 to 4x the market growth, and definitely, we are gaining market share and our distribution is growing we

rs,

can supply EV fluids. We have looked at certain things in the EV value chain like our Indra chargers, which we are now piloting to see how we can localize it, and working with our partner, ElectreeFi,

37%

rgins as well. During the quarter, we have seen that gross margins also have stabilized at around 37% Q-o-Q, in spite of a higher AdBlue offtake during the quarter and that's also giving us a signal

INR 180 crore

provement, I would say. And with that, our cash flow from operations for the 9-month period is at INR 180 crore, so which a fantastic sign is, I would say. Overall, finance cost continues to remain high becaus

INR 10 crore

port lot of raw material which are in -- dollar- denominated. So during the quarter, also out of INR 10 crore of finance cost, nearly INR 4.5 crore is the forex impact of mark-to-market. But other than that,

INR 4.5 crore

-- dollar- denominated. So during the quarter, also out of INR 10 crore of finance cost, nearly INR 4.5 crore is the forex impact of mark-to-market. But other than that, I would say, overall, we have seen an

42%

at PAT, PBT level also. Overall, for the 9-month period also, we have -- our revenue has grown at 42%, EBITDA growth at 30% and PAT growth at 15%. So, overall, these are good numbers. I would say a

15%

onth period also, we have -- our revenue has grown at 42%, EBITDA growth at 30% and PAT growth at 15%. So, overall, these are good numbers. I would say also during the quarter, and recently, last 1

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Guidance — 20 items

Ravi Chawla

“So the consumption is much lower than what an IC engine has, but they would require fluids for transmission, brake or cooling, and those kind of fuels will be required, grease, et cetera.”

Manish Gangwal

“In this quarter, our battery turnover is around INR 20 crore, and YTD, we will be at around INR 60 – 61crore in terms of our battery business.”

Manish Gangwal

“like As long as there is no dramatic movement in crude or rupee, we should see stability in the input cost going forward, which we have seen already partly coming in Q3-FY2023 as well.”

Ravi Chawla

“Roughly 3% to 4% of the diesel consumption is used here, and our estimate is that in 2023, it will be around 500 million litres and there's an increase happening -- probably 30%-40% increase every year which will happen, and that's the volume this market will have.”

Ravi Chawla

“We continue to grow on this and we would expect a 30%-35% increase of the market size every year.”

Keshav Garg

“Sir, I wanted to understand that, as the drain interval of new engines keep on increasing, so the first fill keeps on getting more and more important, and maybe eventually a stage will come where it will be only first fill, and it might last almost for the whole life of the vehicle.”

Keshav Garg

“So in that case, the industry is basically shifting from B2C to B2B, and since B2B margins will be a fraction of the margins in B2C, sir so, then how do we deal with this adverse situation?”

Keshav Garg

“Sir, I'm saying, let's say, for an INR 10 lakh passenger vehicle, if it's a IC vehicle and we are selling INR 100 worth of lubricant for that, instead of that, to a INR 10 lakh EV of the same segment, how much will be the value of the fluid that we are selling?”

Ravi Chawla

“As I told you, engine oil will be roughly 55% plus.”

Keshav Garg

“Sir, so, instead of the generous dividend that you are distributing, if that funds can be diverted towards the share buyback, so, shareholders will gain a lot, and also it will be far more tax efficient.”

Risks & concerns — 10 flagged

Overall, finance cost continues to remain high because of the volatile INR versus dollar, because we import lot of raw material which are in -- dollar- denominated.

— Manish Gangwal

So during the quarter, also out of INR 10 crore of finance cost, nearly INR 4.5 crore is the forex impact of mark-to-market.

— Manish Gangwal

So I would like to understand what would be the impact of EVs on the company in the long term into the lubricants space?

— Gunit Singh

But overall, because of the slowdown in retail -- in rural and certain segments like agri and motorcycle, we have a scope to further improve our B2C ratios back to 60% in the coming quarters.

— Manish Gangwal

While we remain cognizant of the competitive pressure as well, because, in a competitive environment, we have to be pragmatic in terms of our margin management.

— Manish Gangwal

Have we ever -- is that even in the ballpark that it's weak for competitive pressure of anything, given our volume and balance strategy?

— Hemal

I mean, in terms of margin, basically meeting up with whatever the volume decline could be because of long drain.

— Sabri Hazarika

And on the open portion, whatever is the impact of rupee movement during the quarter, is accounted accordingly.

— Manish Gangwal

AdBlue again is supplied through various channels so it will be very difficult to give you a number on the revenue.

— Manish Gangwal

It's very difficult because, again, there are different type of additives, and going into diesel engine oil will have a different additive composition versus a motorcycle oil or a high-end passenger car oil so it's very difficult to give you a percentage.

— Manish Gangwal

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Q&A — 13 exchanges

I have a couple of questions. So firstly, I'm a bit new to the company. So I would like to understand what would be the impact of EVs on the company in the long term into the lubricants space? So what would be impact of EV? Secondly, I would like to know if we would be having any buybacks in the future, in the coming quarters or maybe next financial year. And thirdly, in view of this EV impact, what are the diversification plans of the company? Are we planning to take over some other firms, or are we planning to diversify into new EV specific products or anything like that? So these are my thr

Ravi Chawla

Basically, as we've been briefing all of you, the lubricants, as we look at it and also the experts, which is Kline and others have seen, India is the third largest market of lubricants and as we see the penetration of vehicles is still going up, whether you take 2-wheelers, commercial vehicles, tractors. And of course, industrial segment is also going up. So with the growth that we have, and the anticipated EV penetration, which will happen mainly in 2 and 3 wheelers, in buses, cars the data that we have and we estimate based on all this, for the next 10 to 15 years, we see the lubricant dema

I might have two basic questions because I'm attending this call for the first time, as I have recently started tracking your company. Sir, my first question is, if you could give us the revenue and the volume breakup segment wise [inaudible 0:13:55]? And my second question is, if you could help us understand the margin. So I needed the revenue breakup and the volume breakup segment-wise, Q3 and 9 months. Then, if you could help us understand the margins that we have in B2B and B2C, and if you could give us the cash and the receivables number for December? And my last question is, sir, you men

Manish Gangwal

Yes. So maybe I will start with the revenue breakup and all. So, if you've seen our press release, we have achieved close to INR 2,200 crore of top line for the 9M FY2023, and for Q3-FY2023, it was INR 781 crore. Typically, our ratio of B2C, B2B sales is 60:40 which means60% is B2C and 40% is B2B but in this quarter, it was 58% for B2C and 42% for B2B, versus last quarter, 57:43 so there is a slight improvement in the B2C versus last quarter. But overall, because of the slowdown in retail -- in rural and certain segments like agri and motorcycle, we have a scope to further improve our B2C rati

I had a question with respect to the volume. If you can give a breakup with respect to the B2B and B2C? And -- so yes, AdBlue, you have already given, so, if you can, please?

Manish Gangwal

So Ms. Aditi, I think, we have mentioned already that overall lubricant volume is 34,000 kl for the quarter and 21,000 kl is AdBlue. And within that, roughly 40% is diesel engine oils, and the personal mobility is around 20% to 22%. Industrial oils are around 15% and others are around 25%. So that's our usual break up. And can we know the percentage of ASPs in terms of the turnover? And battery turnover as of now? In this quarter, our battery turnover is around INR 20 crore, and YTD, we will be at around INR 60 – 61crore in terms of our battery business. Rest all is lubricants and AdBlue.

Sir, my question is on AdBlue. So what do we see the addressable market size for AdBlue, and what is our outlook for FY '24? So that would be my first question. And the other is, have we seen translation of cool off in base oil as well as additive prices like improving margins for the current quarter? Is that like trend of cost prices cooling off reflecting in the margins, if you can throw some light on that?

Manish Gangwal

So we'll take the second question first. Basically, we have seen some sort of stability in the base oil pricing, which is a key raw material for us in line with crude but this has been partly offset by the depreciating rupee. As you see every quarter, the rupee has been on a depreciating mode. If the rupee continues to remain in this range, which is there today, and crude also is in the range of around $85, we see stability in the input cost. Although the additive costs, which are another key critical components of the entire process, continue to remain very high. And other inputs costs like p

Sir, I wanted to understand that, as the drain interval of new engines keep on increasing, so the first fill keeps on getting more and more important, and maybe eventually a stage will come where it will be only first fill, and it might last almost for the whole life of the vehicle. So in that case, the industry is basically shifting from B2C to B2B, and since B2B margins will be a fraction of the margins in B2C, sir so, then how do we deal with this adverse situation?

Ravi Chawla

Yes. So, Mr. Garg, it is not like that because a lot of the vehicles, whether you take trucks, cars, 2-wheelers, tractors, the factory fill what you have is generally based on a period and kilometres, after which it has to be changed. So what you're talking about is highly synthetic lubricants which go into some special applications, which are lifetime. In certain cases, you do have products which are very expensive products. So I would say 98% of the market is still going to be lubricants, which will require chain based on the kilometres used and the period of use. You will continue seeing th

I have actually -- you mentioned gross working cycle. If you can provide some basic on net working -- What is the net working -- is it also close to 90, 80 days or 100 days or what is the...?

Manish Gangwal

Net working capital usually is around 55 to 60 days. Now I have another question basically on this cost. I think you -- cost of raw material. You did mention if everything remains as -- this $80 or $82, $85 oil and the cost pressures are out, and for moment, if you remove AdBlue, right, for whatever reasons that's a single margin, are we expecting the margins to be back to the normalized 15% of the last time, as you had mentioned 12% to 14% is what we should look at overall. But if you remove these AdBlue volumes that are increasing, are we back to the normalized? Do you expect this quarter 4

So I just have a conceptual question. So regarding your long drain interval oils that you keep launching, so the net value of these oils, they are like overall accretive for the company. I mean, in terms of margin, basically meeting up with whatever the volume decline could be because of long drain. Is that the right way to assess this?

Ravi Chawla

So we have been pioneering long drain oil since more than 15 years, in commercial vehicles, we give double drain interval and that helps us to get customers to see more value in Gulf, and definitely, we get a good price for that. We've moved our price positioning also up due to these impact in some of these products. I think that is where we believe that in certain segments, long drain is an important delivery like -- especially diesel engine oils. Even in our motorcycle we've had products which signal quality based on the drain interval. These are some of the segments we have chosen where we

Just two questions. One, could you just help us understand the interest cost component? I believe there is an FX mark-to-market on that. Just help us understand the movement of that a little bit more and also, is there any ability for you to sort of guide us on what that would look like in the future? And for the 9 months, if possible, could you share an advertising spend number as a broad percentage of sales or a number? It would be very helpful.

Manish Gangwal

As I mentioned in the opening remarks, out of the INR 10 crore of finance costs, nearly INR 4.5 crore is to our forex impact for the quarter, I mentioned, we have been importing our base oils and some of the additives and other input costs on which we follow a hedging strategy, which is to the tune of 50% to 75% depending on the market. And on the open portion, whatever is the impact of rupee movement during the quarter, is accounted accordingly. So that's on the forex side. And what was the second question -- can you repeat the second question, please? That was on advertising, but I'll just c

I would like to congratulate management for an achieving EBITDA of INR 90 crore. I have 2 questions. First is, I would like to understand what is the current capacity utilization? And is there any capex plan that you would like to share with us? And the second question is regarding -- like you said, your lubricant growth is 2% to 3% in medium to long term. I would like to understand what kind of sales growth we can assume in long term because we are now taking -- talking about market share gain? So, what kind of growth we should expect? Thank you.

Manish Gangwal

Our capacity utilization, for both plants put together is around 90%but when we say this, we usually mean on 2 shift basis. We can always increase the number of shifts and increase the capacity in terms of our actual production. Capex guidance, we have given in the past and we continue to remain in the same trajectory that, annually, our capex spend is in the range of around INR 20 crore to INR 25 crore because we need to keep augmenting the new filling lines, keep adding some tankages, keep investing in IT and digitization initiatives. Overall, our capex is usually in the range of INR 20 cror

Thanks Sir. I just have a follow-up question. Just wanted to understand, what kind of quarterly run rate in terms of revenue for next 6 to 8 quarters? And what kind of margins would you like or would you suggest or give guidance to for the next 6 to 8 quarters? I mean, are margins likely to move up to 13%, 14%, 15% kind of a band or they would remain in 11% to 12% kind of a band for 6 to 8 quarters? Just how do you think about it?

Manish Gangwal

We just answered this question. We gave a volume guidance that we will be growing, 2 to 3x the market growth rate, which translate to roughly double digit in the coming quarter and year. And in terms of EBITDA percentage and margins also, we have mentioned that depending on the market scenario, the competition, the input cost, crude movement, there are many variables in terms of gross margin and EBITDA margin but as a trajectory, we always look forward to going up to our previous band of 14%-16% but before that, we have to move to the next trajectory of 12% to 14%, and then we will look for fu

So, I just had one question. So, we have heard a lot about the revenue. But on the cost of materials, or the COGS as we say, what are the three major components? And are you -- is the company also impacted by the rising inflation in those? And what would be the percentage in terms of the cost proportion? And how are we coping up with the rising inflation in those as well? Like base oil has been on a declining trend in this quarter, but how have the other components performed?

Manish Gangwal

We have, again, answered this question earlier that base oil, while it has been stable to downward trajectory following crude, other input costs like additives, et cetera, are still at a very high level and rupee also is in a band of 81 to 83, which is a higher band of nearly 10%,-11% depreciation during the last 9 months or a year so all these have impacted the input costs. Inflation linked costs are more, I would say, from trade perspective, which are not very significant proportion of overall cost, but these also do impact overall numbers. The major impact is always from base oil, additives

Hello. Yes. This is Rahul and congratulations for the good set of numbers. Sir, I have two questions majorly. Can you give the revenue percentage of AdBlue? Because, see, I'll try to link the question, which is, like your raw material cost per litre on the basis of the volume has significantly decreased on a quarter-on-quarter basis, around 8%. So I feel that your increasing percentage in revenue of AdBlue is impacting your realization per litre. So, can you guide me like what percentage of the revenue would be AdBlue? And relating to AdBlue, do you need any additional capex in terms of plants

Manish Gangwal

We have mentioned, the AdBlue volumes have been 21,000 kl during the quarter. We usually do not give the revenue guidance on the AdBlue separately. No, I don't want revenue guidance, but I want the revenue breakup of AdBlue as a percentage? AdBlue again is supplied through various channels so it will be very difficult to give you a number on the revenue. But overall, it's a low realization product, as you have rightly picked up and accordingly, the cost also is very low compared to the normal lubricants so because of combined effect, you see the realization as well as the cost of goods sold, b

Yes. Thank you. I think we've tried our best to answer most of your questions and share with you what we've been, in terms of the details. I would like to leave you with is that, definitely, we are seeing good momentum in the business. Our business model is surely giving us market share gains. We are focused on automotive and also looking at improving our market share in industrial, in passenger car, motor oils, and hoping that rural demand will pick up with the budget and the things we have seen overall in the macro environment. Margin management remains a key focus area. We believe, our reta

Management

Speaking time

Manish Gangwal

Ravi Chawla

Moderator

Keshav Garg

Rahul Chandra

Hemal

Sabri Hazarika

Swechha Jain

Aditi Chaturvedi

Chirag

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Opening remarks

Nitin Tiwari

Thank you, Mike. Good day, ladies and gentlemen. On behalf of YES Securities, I welcome everyone to Gulf Oil Lubricants India Limited's third quarter FY '23 Earnings Call. We have the pleasure of having with us today the Mr. Ravi Chawla – MD & CEO and Mr. Manish Gangwal CFO. I will now hand over the call to Mr. Chawla for his opening remarks, which shall be followed by a question-and-answer session. Over to you, sir.

Ravi Chawla

Yes. Thanks, Nitin. Good day. Good evening to all of you. Let me start by wishing all of you a very Happy New Year since the first time I'm meeting in the New Year, and hope all of you are well. This is the quarter 3 call for the investors. I'd like to start off by sharing our delight that we've had an all-round good Q3-FY2023 and many milestones achieved. But let me start with revenue which has grown year-on-year by 30%. We've also seen EBITDA crossing INR 90 crore for the first time with a 17% growth and also we have seen a double-digit 10% growth in volumes, which definitely for us has been a good achievement from the team. We saw an environment where we had some subdued demand from the rural, especially motorcycle segment, there were continued cost pressures in some of the key inputs and the INR was depreciating. We've seen excellent all-round efforts and which really shows that we have a strong brand and business model. We continue to deliver 3 to 4x the market growth, and definit

Manish Gangwal

Thanks, Ravi. So, yes, I think, as Ravi mentioned, it was a very good quarter in terms of overall profitability, with EBITDA crossing INR 90 crore, and we have seen a slight sequential improvement in the EBITDA margins as well. During the quarter, we have seen that gross margins also have stabilized at around 37% Q-o-Q, in spite of a higher AdBlue offtake during the quarter and that's also giving us a signal that the input cost side pressures are stabilizing We would like to highlight that during the quarter, we have done good improvement on the working capital side, and our overall working capital has improved by nearly 10 days in the gross working capital cycle. In last September, 2022 quarter, it stood at 114 days which is now at 100 days which is a very good improvement, I would say. And with that, our cash flow from operations for the 9-month period is at INR 180 crore, so which a fantastic sign is, I would say. Overall, finance cost continues to remain high because of the volatil

Ravi Chawla

Yes. So, as we have seen the motorcycle segment, which I mentioned, is seeing sometimes different demand coming in rural, we've seen consumers shifting to brands which are definitely at the lower end and to address this, we revamped our economy segment brand called GulfZipp, and we have had two offerings which have been launched at different price points which will help us to cater to the rural markets and some of the lower end market. So two brands like GulfZipp Smart and GulfZipp Plus hopefully, will help us to definitely get the growth back. Rural demand, which has also been subdued -- the company believes in long drain oils, as we've been talking about. Our flagship brand, Gulf XHD Supreme+, has been now improved further, and we have launched it with a longer drain interval with a campaign with M.S. Dhoni. Basically, the industry-leading benchmark has been set by this XHD Supreme+ at 1,000 hours, which is the drain interval claim on this product, and that is the highest in the indu

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