Gulf Oil Lubricants India Limited (GULFOILLUB) Earnings Call Transcript & Summary

Good evening, everyone. I hope this call finds you and your family in the best of health. At the outset, I would like to congratulate the management team of Gulf oil Lubricants, very strong performance amidst these tough times. From the management, we have Mr. Ravi Chawla, managing Director and CEO; and Mr. Manish Gangwal, who is the CFO. We thank the management for providing us the opportunity to host the call. I can now hand over the call to the management for opening comments, post, which we will open the floor for Q&A. Over to you, sir.

Thank you, Prayesh. Good afternoon, good evening, good morning to all of you attending this Q3 call. Let me start by wishing all of you a Happy New Year and hope you are all safe. And on behalf of the GOLIL management, I'm delighted to share with you that quarter 3 has seen a significant improvement overall in terms of the Gulf and industry demand. And we are very happy to share, as we have announced, that this is another record quarter in terms of our parameters of the business compared to Q2, where there were also record created. Q3 has been a very, very good quarter. As I mentioned, the Gulf demand products, the range, the segments, we have seen a very good performance, which has enabled us to increase our volumes by 16%, and we have clocked in 33,000 KL this quarter. And as you have seen in the results, our revenues are up 14%. And similarly, PBT is up 16% -- 16.5% and PAT at 14.5%. Definitely, we have seen that all our segment-wise strategy and the response to the segments has improved, and 16% growth is certainly 3 to 4x the industry growth from what we are gauging. And revenue realization, the product mix has also had a positive trend. There is definitely some segments like the passenger car, which will definitely improve, but we have seen motorcycle and commercial vehicle is doing very well, where we have got -- if we take personal mobilities, close to a 20% growth in our volumes. There has also been a very good all-around, segment-wise improvement right across from our bazaar to our industrial to the infrastructure segment. I'm happy to also share that OEM factory fill volumes, where we mainly have commercial vehicles, has also increased to cross nearly 35%, 40% growth over even last year level, so that is very good for us. The channel business, which is one of the key pillars, recorded also the highest ever secondary sales and in the quarter. And we have also seen other segments, which are the franchisee workshops, the industrial distributors, which are very strong in December and also the highest quarter. Again, I must commend the teams, our distributors who have really worked very hard to ensure that Gulf is growing much faster than the market and competition. We have spoken of a lot of cost optimization. We continued that on all major line items, but we also invested in our brand in terms of the IPL brand promotions, social media campaigns, and these continued. In fact, lowered as a percentage is looking lower. The last quarter, we invested behind a lot of retailer and consumer-led campaigns, mainly IPL. We had a campaign called Gulf Patrol. And for retailers and trade, we had special offers, which helped. We have also seen that collection has picked up very well. Manish will talk about that later. The -- there has been some increase in the raw material cost, but we are happy to share that not only Gulf was -- announced the price increases in the bazaar market, competition also has started following that and announced their increases. And given the challenges we have on the cost, of course, B2C will have a discipline, B2B is more formula-led, and that will happen. It is also at the back of -- looking at the demand conditions improving. [Foreign Language] Hello?

Apologies. Sir, you may go ahead.

So at the back of the demand conditions improving and looking at the budget, where infrastructure and certain other announcements have been made, we think that setting up the double-digit growth that is going to come in the next fiscal. We will continue to see strong volume growth coming into the next quarter and, of course, try to manage the band of margin that we have always targeted. So all in all, I think it's been a very good quarter, again, to end with the note that it's been a record quarter for the company. We have always followed the philosophy that we try to make up and come back strongly as the demand conditions, especially this unique year that we have had. So it's been really gratifying for us, and we would like to thank you all for the support. I will hand over now to Manish to take us through some of the financial and other highlights, which I may have missed. Manish, you can also cover the battery part. I think we'll leave it for you to cover these parts. Thank you.

Yes. Thanks, Ravi. Good afternoon, everyone, and Happy New Year to all of you who have joined this call. And I hope -- I also hope that you are all keeping safe. And as Ravi mentioned, it was a very strong quarter for us and overall from the business point of view. Also from the other financial parameters point of view, I would like to highlight that it was a strong quarter from improving our balance sheet further, and we are at an all-time high net cash position of more than INR 350 crores now. And I'm sure you will remember that when the year started, we were at around INR 200 crores of net debt, and now it's around INR 350 crores. So we have -- from a working capital management side, at the end of this quarter, we were at one of the lowest points of working capital overall, around 85 gross days of working capital, which is again a very healthy sign that collections are -- have improved significantly across sectors. And overall, also, considering this, the Board was happy to recommend the same dividend as it was last year as an interim dividend of INR 7, which is 350%, and that shows the confidence of the Board on the business going forward. I would also like to highlight, as Ravi mentioned, that our battery segment, which we have been nurturing over the years, and it was doing very well. But this quarter and these 9 months have been a very good growth for our battery business also. And they have, again, broken many records and have become net cash positive -- net bottom line positive for us after nurturing them for many years. So that's also a very healthy sign. And I think now we will take questions, Prayesh.

[Operator Instructions] Our first question is from the line of Ronak Sarda from Systematix Shares.

Hello? Hello?

Yes. Yes, we can hear you, Ronak.

Congrats on good set of numbers. Sir, 2 questions. One, I mean I realized, I mean, obviously, your PE is active filling and all will inch up -- has already started in Q3 and will inch up further in Q4. So how should we look at capacity utilization currently and its effect on the operating leverage plays out? So because I also understand gross margins will be under pressured to increase in base oil. So over the next few quarters, how should we see the impact of gross margin contraction and the operating leverage?

Manish, you want to go?

Yes. So we have sufficient capacity as far as we have built in the new plants. And in total, we have 140,000 KL of capacity. And obviously, if the demand conditions are good, we will continue to get that operating leverage. We have to also appreciate that as the economy opens up and the market opens up, travel opens up, we'll have to spend more also in terms of reaching to the market and doing the activities, some of the activities which were not being done because of COVID. Overall, we have been always saying that while you are right that base oil is inching up and there is an input cost rising scenario for base oil, packaging material, everything, but we have taken price increases also to partly set up that. Plus, we will continue overall cost consciousness, which is there in terms of all our A&P and other expenses, et cetera. We also will not be fully increasing. So we are quite hopeful that we'll be able to maintain our guidance band of EBITDA, what we say 16% to 18% EBITDA margin. We should be in that band.

Sure, sure. So sir, how has -- what has been the price increase across different segments, if you can share that?

So it is market linked. And depending on, as you rightly said, different product categories based on the competitive scenario, price increase has been taken to offset part of the cost increases.

Sure. Okay. And sir, the usual breakup which you shared between the B2B, B2C business and overall CV engine -- CV mix -- personal mobility mix?

Yes. So on B2C, B2B ratio has -- in this quarter has improved to 55, 35 because the retail sales have been very good. And we would like to add that while the primary sales are very good, the secondary sale in B2C, our channel business, has been even better. So to that extent, there is a demand from the ground, which is coming up, which is a very good sign. And product mix-wise, our -- more or less product mix has remained similar to Q2, which is the diesel engine oil has become 37%, a 1% increase here and there. And personal mobility is in same 24%, and industrial is 15%, others at 24%. So nearly some plus/minus 1%, 2% here and there, more or less the mix has remained similar. Within that, of course, the motorcycle has done very well. Passenger car is slightly not done well. I mean it's still to pick up because metros have not fully opened, functioning yet.

Our next question is from the line of Sabri Hazarika from Emkay Global.

Congratulations on a good set of numbers. So I have 3 questions. The first one is if I look into your volume trajectory these 9 months and considering the fact that last year, Q4 itself was like affected by COVID during the month of March, it looks like that you would be probably ending this year flat in terms of volumes, FY '21 versus FY '20. So you mentioned that you were kind of optimistic on a double-digit volume growth. So on this base, probably if I consider FY '21 to be flat compared to FY '20, then also do you mean to say that you'd be able to do a double-digit volume growth in this base for FY '21 -- for FY '22 as a whole? Is that right assessment?

Ravi, you want to take that? Or...

So we -- as you know, in the past years, before you take COVID year and earlier years, we have been growing double digit anyway. You know that in volumes. So obviously, the base for the industry is going to be lower. We anticipate whatever estimates we have on the segments. We are in the -- the industry would be de-growing in the full year to the extent of 10%, 12%. That's our estimate, which I know everybody believe to say. So if the industry has grown minus 10%, 11%, 12%, obviously, for us next year, we are obviously making -- the quarters have improved the performance. Quarter 4 is still to go, so we have to wait and watch. But we are seeing strong demand conditions for Gulf, and most of the players are -- there is a volume demand. And sectors are opening up, as you rightly said, OEM. So I think our endeavor has always been to look at 2 to 3x the industry growth rate. Sabri, you know that. So based on the normal trend, if the industry is going to grow, maybe 4%, 5% next year, so we would definitely look at maintaining our 2 to 3x. But we'll have to wait and watch if there are more opportunities. And of course, there will be challenges. So we are -- definitely, our strategies and our plans are to ensure that we are 2 to 3x the industry growth rate.

Right. Second question is on, of course, on the margin front. So you have been maintaining the 16% to 18% EBITDA margin guidance. So looking at the revenue growth, I think the margin trajectory -- overall, the EBITDA trajectory also looks optimistic. I just wanted to know if -- from a pricing perspective, I mean, you mentioned that you've taken a price hike recently. And I guess one of your competitors also mentioned that across the board, there has been price hike to the extent of like 3% to 5%, I guess. So your price hike was also similar if we consider it on a company level?

Manish, you want to go on this?

Yes. So as I mentioned in my previous question that depending on product to product and segment to segment, depending on our strength, we have also taken a price increase and ahead of many of the competition. Sometimes the price increase was taken in the mid of December. And of course, we have to -- this takes some time to realize fully because there is a pipeline inventory within our warehouses and also in a distributor end. But as a trajectory, yes, we want to maintain our margin management strategy. That's what we aim at. And we have to really see how much the base oil -- how base oil pans out going forward also. That's a critical variable which we do not know how far that is going to happen. About margin management, the strategy continues.

Right. I mean if I look into the base oil market, so the base oil market started tightening, I think, somewhere from September, October onwards. And there was like broad-based increase in all kind of, you could say, in specialty chemicals, which in -- probably clubbing base oil together with it. So there has been increase everywhere. But one school of thought is that once my GRMs broadly, the refinery margins recover, then the refinery utilization globally would go up and base oil prices should not go much as high as like in tandem with crude oil, there could be some softening of base oil prices. So do you agree that, that can be the scenario over the next 5, 6 months considering that GRMs and global refinery utilization improves? Or do you think that with crude oil also now reaching 60% and probably it might go even higher then base oil will also continue to grow? So what is your internal assessment on base oil pricing?

We have been highlighting this that while over a longer period on -- if you chart a multiyear, the chart of the crude and base oil, there is a symmetry. But in short-term demand/supply condition of individual players or base oil players, they have more pivotal role in base oil pricing. Right now, there is a sort of supply constraint in base oil, which is leading to base oil actually going up even before crude started moving. So for this situation, we do not know, yes. But as you rightly mentioned, as the refineries opened up, many of them have taken shutdowns in these times to just do their maintenance shutdown to use this period. As and when that capacity comes up, we are -- we also believe that the prices should stabilize at some point in time. But this is a question mark as to when and how. But depending on various rates of base oil, there is always, to that extent, a dealing from crude always. So it's not like in the short term, it's following crude. It is over a longer period, it follows through.

[Operator Instructions] We'll take a next question from the line of Manikantha Garre from Axis Capital.

Congratulations on great set of numbers, sir. So just have 2, 3 questions. First one is on the A&P. You mentioned that you had to increase the promotion cost because the market was opening up and all. So can you please provide what percentage of sales has been spent in Q3 and 9 months?

Manish, you want to cover the percentage? Then I'll give a little more information.

Yes. So this quarter, we have ended up around 4% as A&P costs, which used to be usually around 6%. But this quarter, it was 4%, up from what we have spent in quarter 2 and, obviously, from quarter 1.

So directionally, this 4% will move towards 6% as market further opens up. Is that the right assumption, sir, that Q4 and early quarters of FY '22 will be moving towards 6% then?

It depends on many factors. And again, as I mentioned, competitive spend and the share of oils. Of course, the market has to open up. A lot of part of it is BTL activities. It's not only about the ATL. So a large part of it is also BTL, and we have to really see when the market opens up or travel is freely done. Obviously, the BTL part of it will definitely go up.

Just to add here, you see in the beginning 2020, we had got our brand track, where actually we had shared with, I think, the investors that our brand has moved to a good #2 position in terms of overall recall and consideration. So as the Gulf brand has gained, obviously, we have to do a lot of activations, a lot of below the line, above the line. We have not only the India assets and the India below-the-line activations to do product-wise, segment-wise. We also have global associations, which we have with Manchester United and with McLaren. Recently, we signed with McLaren at the global level. So I think it is a pragmatic use of investing in your brand. And as Manish mentioned, the share of voice, what other people are doing in this industry and how do we get our -- both our brand image and our messaging around our value propositions, also segment-wise. And if you look at the overall use of media today. What has happened now is you see social media assets are the more important. So we will be looking at that. In fact, we do it every quarter. So based on whatever is required, obviously, Manish mentioned that there have been -- the activations have not been very high because of travel constraints and other safety parameters. But as we see the economy opening up, we continue to backing our brand in the best way that we have been doing over the last decade or so. So this will continue as a strategy for us, a key strategy in the brand.

Understand. My second question is on the battery business. So if you can please provide the revenues, EBITDA in Q3 and as well as throw some color on the new acquisitions that you have done?

Manish, you want to go?

So as I mentioned, the battery business has clocked in more than INR 25 crores for the quarter, which is a very positive sign. And this is nearly giving us -- of course, on a Y-o-Y basis, it's nearly 40%, 50% growth. So in these COVID times, this is really, I think, a positive sign for us in terms of overall our battery strategy, which is working out. We are now quite happy to say that our battery strategy, which we started 5, 6 years ago, is working out well. So -- and as I mentioned, we have become net profit positive for the battery business and the segment. And for your second point, Manikantha?

Acquisition, the new acquisition.

Acquisition.

Yes. So I'm sure you've seen the announcement that we have taken a small minority stake in a U.K. company, which is Indra Renewable Technologies. And they are into smart charging, EV charging, smart charging and mainly primarily focused on home charging solutions. They also have a technology, which is V2G, which is for vehicle to green, which is another facet of it. But primarily, they are having a strong presence in, I would say, U.K. market. They have nearly 5% market share there. And with this, we are getting an exclusive tie-up for India, where we will be -- whenever the opportunity is, of course, we know that the opportunity right now in India is not there too much. But as and when the opportunity comes in, we will be happy to distribute and play in this sector of providing EV infrastructure. And of course, we have our own distribution strength in India, which is a very positive. And we can leverage the brand and distribution strength to market and install these EV charges, which are primarily home chargers. And home chargers in India will be a significant component of the overall EV charging space because we believe that public charging will be more used as a top-up and vehicles will be charged more at home in night and then they will be used for the next days and next runs. So home charging is a very interesting space, and therefore, these people have a very smart technology, and they have 5% market share in U.K. So that's in the beginning we have done, and I think we are to keep exploring this sector as we move forward.

We'll take our next question from the line of Aditya Makharia from HDFC.

Yes, sir, congrats on a good set of numbers. I have maybe had a longer-term question. We've obviously got into the battery segment about 3, 5 years ago. Now we are buying maybe small stakes in not start-ups, but EV chargers, which is a relatively new concept. So how do we really think of our business from a medium-term point of view? How much do we want to derisk away from the oil? This is the engine oil. Is there a number you could give us? Or is there a thought process within the organization on the same?

Yes. So Aditya, the thing is that we have shared this in the past also, the demand for lubricants as for what we have estimated overall and whatever you have the experts estimating, given the penetration of vehicles and of course, there are conversion of EVs coming in different forms of predictions. We have said that over the next 15, 20 years, the demand is not going to come down for lubricants in India, okay, in terms of replacement and the vehicle park and whatever estimates are there. So we will obviously continue growing our market share in that and various segments. And certainly, as and when the EV value chain evolves, we are looking at opportunities And the Allied Business for us, which is batteries, also looking at some adjacent areas there. And this would be the strategy and thought process. Obviously, Manish, would you like to add? Directionally, that would be our thought process, yes.

Yes. No, no, so I think you are well covered. Everything is as a part of a longer-term strategy, all these investments and Allied Business development. But we are -- we continue to believe that for the next 15, 20 years, the overall lubricant market in India is continuing going to go up only.

Okay. Great. And just maybe another related question. In terms of an M&A opportunity, what kind of size would you be open to looking at a very large acquisition? Or would you just want to take minor steps or limited steps, let's put it that way, where maybe you do not want to stretch the balance sheet a lot? So how would you approach the future opportunities?

You are talking of M&A in the lubricant space or in the...?

Non-lubricant space, essentially.

No, no, so we are open, but we are open to the M&A opportunities. We have a net cash position, which we want to gainfully deploy in the company back. But we are a consumer company. And obviously, we would not like to dilute significantly our ROE and ROCE ratios. So keeping that in mind, we will be always looking at the opportunities, both in lubricant space also and also in the adjacent space like coolants, et cetera, plus if anything is in the battery or in the EV space. But overall philosophy remains the same.

Got it. Congrats.

We'll take our next question from the line of Abhisar Jain from Monarch AIF.

Sir, congratulations for very good performance on Q3. Sir, my question is on the capacity expansion going forward in the lubricant space. I believe there is a debottlenecking opportunity in the Chennai plant. So when are we expected to take that call as we, on a quarterly basis, continue to do a very good run rate in the volumes?