Emkay Global Financial Services Ltd, a brokerage firm, has issued a buy call on Gulf Oil Lubricants Ltd's stock. The stock is now trading at a market price of Rs. 471.20 as of 3:30 p.m. IST on January 21st, and the brokerage anticipates it to meet a target price of Rs 820 in the next 12 months, implying a 74 percent growth. On March 3, 2021, the stock reached a 52-week high of Rs 827.60 and a 52-week low of Rs 425.00 on 20 December 2021, respectively. Currently, the stock is trading 43.06 percent below its 52-week high and 10.87 percent near to its 52-week low.
Investment rationale for Gulf Oil Lubricants Ltd (GOLI) according to the brokerage
According to the brokerage "Our Mar'24 DCF implies an Rs17bn net present value (NPV) of the explicit period (FY24-33) FCFF, while Mar'23E end adjusted net cash of Rs6.7bn gives a face value (FV) of Rs23.8bn (Rs474/sh - near the current market price-CMP). The 20% correction in the last two months without any negative triggers implies nil terminal value (TV) beyond FY33 (discounted cash flow period), which is unreasonable as we do not expect such a major impact from electric vehicles (EVs). In our view, certain segments, like M&HCV and industrial (~50% volume share for GOLI), will continue to grow post FY33 and even segments like 2W and 4W will not completely shift to EVs. The Internal Combustion Engine (ICE) vehicle universe would still be significant."
Emkay Global has said in a report that "Based on our analysis of the Indian vehicle parc, we expect the Indian lube industry to grow by 2%/1% during FY21-30/FY30+. Against this, we have built-in a 4% volume CAGR for GOLI during FY21-30E and 2% FCFF growth thereafter including terminal growth. GOLI's core business outlook is stable as base oil prices have cooled off by 8-9% from the peaks of Aug-Sep'21 on the back of higher refinery runs globally. Moreover, the full impact of retail price hikes taken in H1CY21 is expected to reflect from Q3FY22 onward, leading to EBITDA margin expansion. We expect margins to recover to 14-15%."
The brokerage has also claimed that "Though it is below the 16-18% range guided earlier, but due to higher realizations now. Corresponding EBITDA/ltr is estimated to be Rs23-24. In the past, GOLI had achieved Rs26-27 EBITDA/ltr. Our channel checks imply that the lube industry is expected to see a 3-4% CAGR in the next two years, and going by GOLI's target, it should record double-digit volume growth vs. our 6% estimate. Hence, our TP of Rs820 is built on conservative assumptions. We expect RoIC to touch 40% by FY24-25. The stock currently trades at less than 10x FY23E PE."
Buy With A Target Price of Rs. 820
The brokerage has highlighted in a report that "We reiterate our Buy rating on Gulf Oil Lubricants (GOLI) with a target price (TP) of Rs820 (rollover to Mar'24). The recent correction appears unwarranted as the stock seems to be pricing in nil terminal value (TV) beyond our discounted cash flow (DCF) period of up to FY33."
The stock has been picked from the brokerage report of Emkay Global. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.