This Oil Lubricants Stock Could Jump 46%, “Buy” Says Emkay Global

Broking firm, Emkay Global has a "buy" call on the stock of Gulf Oil and sees a potential upside of almost 46% from current levels to Rs 620, as against the CMP of Rs 419. According to the brokerage valuations of the stock continue to be attractive, which has resulted in a significant potential for upside.

How the shares of the company have moved?

The stock had hit a 52-week high of Rs 615 in November last year and has fallen to Rs 419 since. This leaves an opportunity for the stock to rally. In fact, Emkay Global has set a price target of Rs 620, which is very close to its 52-week high.

According to Emkay Global, the management of Gulf Oil has indicated market share gains in the passenger car motor oils segment. Q2 saw sustained cost pressures due to rising input costs, currency depreciation, and demand slowdown in certain segments. "Demand growth in rural (esp. agri) is likely to pick up going ahead. AdBlue product saw a spurt in its quarterly volumes from Q1FY23 at a run-rate of 14.0-14.5mn ltr vs. 3-5mn ltr in the past. This has led to volume expansion; however, it is a lower single-digit unit EBITDA business," Emkay Global has said in its report.

Quarterly numbers see a miss

According to the brokerage firm, Gulf Oil reported Q2FY23 EBITDA/PAT of Rs 802mn/521mn, up 4%/down 11% YoY and down 6% QoQ each. "EBITDA missed our estimate by 8% due to 7% lower gross profit, led by higher base oil and additive costs. PAT was a 10% miss due to higher finance costs," it added.

B2C comprised 57% of the sales mix and saw flat growth due to a seasonal slowdown in agri demand and motorcycle demand affected by price hikes. Out of 43% B2B mix, all sub-segments witnessed growth, while PCMO saw strong growth on a low base. Exports constitute ~5% of volumes currently.

Valuations and view

According to Emkay Global Gulf Oil management reiterated its volume guidance of 2-3x over the industry's 3-4% CAGR in the medium term. Gulf Oil plans to expand its distribution outlets in double digits annually. Capex guidance continues to be Rs150-200mn p.a., with plant expansion on the anvil in the next 2-3 years along with cash preservation for new ventures.

"Gulf Oil took price hike in Sep-22 and has guided for gradual margin improvement while maintaining long-term guidance of 14-16%. Our Sep-23 DCF-based target price implies a target PE multiple of 12 times," the brokerage has added.