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

Good day, ladies and gentlemen, and a very warm welcome to the Gulf Oil Lubricants Limited Q1 FY '22 Earnings Conference Call hosted by Yes Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Tiwari from Yes Securities. Thank you, and over to you, Nitin.

Thank you, Ajid. Good day, ladies and gentlemen. On behalf of Yes Securities, I welcome everyone to Gulf Oil Lubricant India Limited's 1Q FY '22 Earnings Call. Today, we have the pleasure of having with us Mr. Ravi Chawla, CEO and MD of Gulf Oil; and Mr. Manish Gangwal, CFO of Gulf Oil India Limited. I shall now hand over the call to the management for their opening remarks, which shall be followed by a question-and-answer session. Over to you, sir.

Thank you, Nitin. Good day, ladies and gentlemen. Welcome to the -- our quarter earnings call for Gulf Oil Lubricants India Limited. On the outset, I'd like to wish all of you that you are safe and sound, and of course, we are getting out of the difficult situation of the pandemic with the vaccinations going up. Coming to the results. We are happy to share that in spite of the market closures in April and May, which impacted the retail market, we have notched up our revenue of INR 417 crores, which is 73% growth over last year. And the profit figures, if you take the PAT figures, it also had a 77% growth over last year's same quarter at INR 30.35. So happy to share that this trend has continued. Last 3 quarters of last financial year, we saw the volumes doing well. The performance was good. Of course, April and May, we saw the retail markets, which is part of our business, impacted by about 40%, 50% in terms of partial closure. But happy to also report in June, we are back to normal. And the April, May deficit, of course, showed in the volumes where we did 57% growth over last year quarter. So overall, we have done 27,500 KL versus last year's same quarter at 17,500. But again, as I mentioned to you, the June figure shows that we are back. The demand has gone up. The challenge is, of course, in addition to the market closure was related to the cost, and we managed that price increases that have gone in place will get us back to the margin that we expect going forward. But this quarter, of course, the third element which impacted the margin was the B2C and B2B mix. Because of the market closure, the channel retail -- channel sales were lower, which were expected because of the market is not picking up stocks, [ secondary tier ] resales getting impacted. So normally, our ratio B2C to B2B is 60-40, but this quarter, it was 50-50. That also impacted the margin delivery. But was also ideal that industrial and the other businesses we have on infrastructure, B2B did very well. And again, the rebound is very strong this time. The difference between last year and this year has been that last year, the rural part really picked up. But this time, I think in the second wave, the rural has got impacted both in terms of opening of the outlets, and also agri production last year boomed a lot. It was going very well. And it's just a bit of a stop in this April, May. But again, agri is also rebounding back very well. The company continues to actually focus on cost and margin management. Of course, Manish will talk a bit later on input cost. But we have seen that now with the price increases that we have put in place, 4 of them in the channel retail and also the B2P and OEM prices have now been set up, and that will appear well for us back in our normal margin range. Some of the other highlights of the quarter I'd like to mention is that definitely we have seen that the brand investments which we were making, they have come back with the IPL coming, the brand visibility. We had a special campaign on talking about our new revamped motorcycle oil Pride 4T Plus, which we bought in with another benefit of consistency, more protection, more performance and that we have built to a campaign with Dhoni and the Chennai Super Kings. So that was building our brand again. We also highlighted in terms of the input costs, which started going up in the fourth quarter, so our margin management strategies are initiated. We're well in place on that. The battery business also maintained its performance and continuous profitable growth. And of course, other parameters, Manish will cover. I'd just like to mention that some of the campaigns we have done recently, because we are having now the Raksha Bandhan festival coming, so Gulf is the first company which has taken on the cause vaccinating of truck drivers. So we'll be vaccinating 10,000 truck drivers, already started some days ago and we'll complete it in the following weeks. Also, in terms of our employee safety, the second vaccination is the priority so that we can all be safe. And we also have getting back to work, our plants at [ Silvassa ] are operating as we were also last year. So this is really an update on the last quarter. I hand over now Manish to cover some of the other highlights. Manish, over to you.

Yes. Thanks, Ravi. I think it's mostly covered. But just to add that the rising input costs or the base oil going up has been a very unprecedented scenario. And the cost of base oil moved up very, very sharply over the last 7 to 8 months. And as Ravi mentioned, the 4 price increases taken in span of 6 months in retail is also unprecedented. But to maintain our margin management strategy, we have done it, last 1 of that being in June for the full effect of all that will start flowing in from this quarter. And OEM pricing is also a quarterly valuation based on the historical -- based on global indices. So that also keeps in at every quarter, up or down. So the major factor of -- in addition to that, the cost of rates have gone up recently, like all-time high packaging cost has gone up. So all those factors were there in the quarter. Third point, which is there is an operating usage because if we do a certain volume, which is certain -- below a certain threshold, then obviously, the overall EBITDA level impact comes in because fixed costs continue in terms of employee costs and other fixed costs. So that -- the incremental volumes from here onwards, straight away are to the bottom line and without much variables in there. So all those factors have played in, but as we have been highlighting, June has been -- we were back to normalcy and continue to do that. And overall, things are coming to quite a good shape again. That's what we are trying to highlight. Over to now, I think, Nitin, for question answers. Nitin?

[Operator Instructions] The first question is from the line of [ Hemel ], an individual investor.

I have a very quick question for you. Can you repeat the amount of liters you sold this quarter? And when you say it's got more normal this quarter back, what are your expectations for Q2?

So we have done 27,500 kl volume in the quarter.

Okay. And when you say it's getting normal in Q2, what are you -- is it -- what run rate are you expecting now?

So April and May, the market was affected due to the closure of retail markets in India. So the retail, channel retail and the franchisee workshops, they were closed. So I would say April than May that, that part of our business was probably -- 40%, 50% was closed in places. So when we look at June, whatever we have seen in June and also continued, we are back to a normal level, which we have been doing in the previous -- the last 3 quarters of last financial year. So that's -- the normalcy which is coming except in the OEM factory fill, which is 5% of our volume. And that is based on new vehicle production, mainly commercial vehicles. We have some OEMs. That is still to pick up. Otherwise, 95% of the business we are seeing it's tracking back to the normal level, which happened in the last 3 financial quarters of last financial year.

And is it a fair assumption to have now that you are back to your 15% to 18% guidance for your EBITDA margin? Is that guidance still existing now for the remaining part of the year to catch up to? Or are you changing guidance on that at all?

Manish?

The aim has always been to deliver that margin line, which we have been tracking over the last many years now. And as I mentioned, the price increases take a bit of time to pass on because there is a pipeline inventory in the channel. There is distributor inventory, which they carry. There is inventory at the plant and depot level. So when we actually mean price changes, it means an MRP change for the end consumer. For the oldest stock in the pipeline, they're still sold at the old rate. So that takes a bit of little time in terms of overall -- but, yes, overall direction we are tracking is still the -- with a little support, of course, we are saying now that the input cost has stabilized over the -- at these higher levels and is not going up further. For the last 1.5 months, we are not seeing further increases in this one. And so that also [ bodes ] over well overall.

Okay. Can I ask 1 more? Or -- I mean is it okay to ask one more?

Yes, please.

Yes. I think the only other question I had is that I saw in the notes that you have done some amendments to your clauses that to get into more EV space and infrastructure space on the EV side and battery charging. What's the thought process out there? I know you have some investments in U.K. that you did recently. But where are you going as of...

So you see, we've -- as you know, we have made the investment, along with our parent company, Gulf Oil International, in a company called, Indra Renewable, which is into charging for the U.K. market. And also, of course, we are testing the products here. So in terms of the EV value chain and mobility, we are actually looking at how our brand, our distribution, and of course, we also want to look at, in the value chain, there's an opportunity for us. So with this amendment, obviously, the focus is there. We want to make it more sharper. There are studies on to look at where our brand distribution. And obviously, looking at electric vehicles will be coming in various segments, what can Gulf do. And chargers, we're already trying to see if the chargers, we can get in. Also with this, we are being approached by various people because we have a very good distribution network in terms of our buy stocks, our outlets, our relationships. And our brand is also very strong, for example, not only in the motorcycle segment where we are #2 in the bazaar overall as a brand in the mobility segment and so on. So some of these things we are going to think about. And once we are clear on where we are going and the Board approves, we will, of course, share with everyone.

Okay. So no CapEx as of now, right? No specific CapEx for plan this -- in this year?

Right now, the studies are on. So once we get them to some sort of planning and proposals, then obviously we would table all those in due course.

[Operator Instructions] The next question is from the line of Nitin Tiwari from Yes Securities.

Yes. I'm taking the opportunity to ask a question because I just want stay on that point on EV that you just mentioned. So if you can just help us understand in terms of opportunities that is there, other than EVs, perhaps let us know what we are looking at in next decade in terms 2-wheeler and 4-wheeler vehicle power. And what is the facility size over there? And how are we gearing up to prepare for that?

Manish, you want to take that?

So Nitin, thank you for this. I think we have done a lot of internal estimates and we -- all the default and other things which are talking about the EV penetration in certain segments, we are still of the firm belief that the lubricant market is going to grow for the next 10, 15 years in India. It's not going to start regrowing tomorrow or in 5 years' time or in 10 years' time. This is going to grow because there is a large vehicle part. And there is a newer vehicle part which is being added every day. Even in the month of July, 11 lakh new IT motorcycles have been sold, 2-wheelers have been sold, including scooters and motorcycles. So India sales, nearly 15 million new motorcycles 2-wheelers every year. It's only one segment. And similarly in the other segments, car and trucks, scrappage policy has been allowed so that [indiscernible] a lot of vehicle scrappage which will happen with the old vehicle, which will be replaced by the new fleet, which is hovering well for the lubricant players like us who are into advanced lubricants. So all these factors make us to believe that the lubricant market is going to grow. And we -- while this is being -- continue to get our aggressive stand on the market share gains in the lubricant space. The object [ law ] change, what we are looking at here and because we want to also participate in the EV value chain. And there are a lot of components around that in addition to launching definitely a complete trend of EV fluid which is part and parcel of any lubricant company. We'll be looking at how to explore more about our distribution, our brand play and our OEM relationships in that area as well. So overall, I think we are at looking at both the sides, rather, this as an additional opportunity to play in certain fields.

Yes. Just to add to here, Nitin, to what Manish has said, which is we have got our 95% share is for replacement lubricants. Once the vehicle is there, they would be running the truck, running the tractor, running the equipment, running the bike. So the penetration of vehicles per se in India is growing. And of course, we have seen a couple of difficult years for various reasons, with COVID being one. Now when you look at -- obviously, electric vehicles coming, that will impact the factory fill, the first fill. And of course, it will take time for that population to grow. But there is a large enough penetration and growth that is going happen with the conventional vehicles. And of course, you will see that India being the third largest lubricant market all across various industries, it's automotive, it's the other sectors, the lubricants demand is even the experts predict that there will be a 2% to 3% demand, which today, 2% to 3% is there. Obviously, that is because lubricants are getting better in terms of quality and then there are higher-end lubricants. So all this augurs well. We believe, in the next 10 to 15 years which will continue to grow. Of course, EV, we will see that. And as Manish mentioned, we're looking at where the value chain will give us opportunities. And hopefully, some of these will also fortify for us.

Sure, sir. And correct me if I'm wrong, we have a high proportion of CV volumes as well in our portfolio. So I suppose most of that segment will be insulated from EV? Is my understanding correct?

Yes. Typically, if you take the automotive market, 40%, 45% is diesel engine oils will go into commercial vehicles and tractors. So there is a similar mix we have. And that continues to obviously grow as tractors are growing. Commercial vehicles, they're expected to grow. So you're right, about 40%, 45% in that segment is diesel engine oils.

That's the industrial oils, which are around 20% of the market. So close to 65% of the market in any way is insulated from the overall EV penetrations.

Right, sir. And sir, moving from a longer-term growth perspective to a more near-term concern of rising base oil prices. So are you seeing any more vision in base oil price as we move into July and August? And what's the outlook for the rest of year, if you can help us understand a little bit of that?

So I think as we mentioned, the base oil prices have not further gone up for the last 1.5 months. They are not coming down as sharply also. But they have at least stabilized at that level, which had downward bias downward as we speak. So we are not expecting a very sharp correction in the base oil prices as of now. Also for the -- till the time the global supply chain improves in terms of overall -- the COVID impact and the economy -- it's mainly going to now the air turbine fuel also. Because if the airlines are flying, the air turbines fuel which is the first in refining process, then the things, the refineries will increase their output of overall crude processing and then base oil supply will improve as well. So until the time we see that happens, we are not seeing a very, very sharp correction. But we are expecting also it is fairly stabilized or certainly not going down.

Sure, sir. Sir, lastly, if you can just give some color in terms of our retail network, let us know where we stand in the March quarter and in terms of retail touch points and distributors?

Manish, you want to?

We are at a similar level because the quarter has not given us opportunity to go -- for the sales team to go in market. The retail activities are mostly closed because safety of our employees is of paramount importance. But as soon as people start traveling, the numbers, again, we will focus on. But as of now, the object has been to submit the demand, which was coming in.

[Operator Instructions] Next question is from the line of [ Mike Shati ] from Finserv.

Yes. My question is more on the financials. I see your finance cost has gone up this quarter. When I looked at your previous month, I believe in the last quarter, you had a cash surplus of around INR 490 crores. So just wanted a recent number.

Finance cost for us also includes the foreign exchange fluctuation. During the quarter, the rupee has adversely moved. If I remember, the March quarter closing was around [ 72 50 ]. And this quarter, it was at roughly [ 74 50 ]. So that had some mark-to-market losses on the foreign exchange that led to the finance of -- that are also part of finance cost. So amount is roughly around INR 2.5 crores for the quarter.

The next question is from the line of Ravin, an individual investor.

I have 2 questions here sir. I'd just like to understand what is the broad split that we have with respect to the auto and the non-auto space with respect to industrial lubricant in our revenue mix? And within the auto space, do we have a percentage split of how much we cater to the scooters market? Because I understand that the EVs primarily are the scooter market, right? So the motorcycle is mature, stable, is what the studies are saying. I'd just like to understand that point.

As we mentioned, in a normal quarter, we have 60% of our sales is B2C and 40% B2B. This quarter was 50-50. So the split was B2C. And B2C is towards the retail side of it and B2B is where we direct supply. That is on the route-to-market side. On the product side, we have close to -- in a normal -- again, in a normal quarter, roughly 85% of the sales were automotive products and 15% around industrial products. And within automotive, we have around 36% diesel engine oil, 36% to 40% depending on the quarter and every season, it varies slightly more. So personal mobility is roughly around 32%. Then we have other gear oil, cooling, brake fluid, all those put together are as the rest. But this quarter was slightly lower because, as I said, these are retail-oriented products where diesel engine oil and the personal mobility, both put together, we are roughly around 49%, 50% as against the usual around 60% plus. So that's one of the reasons why we highlighted that the margin for the quarter also are looking lower. But as the market has started opening in June and onwards, we should be treating the same old ratio which we have.

So Manish, if I can add. I think, Pravin, you were asking a question on motorcycle oil, it's 22%. Manish, you mentioned, right, personal mobility?

Yes. Personal mobility.

Personal mobility, 18% is motorcycle, out of the 22%. But 4%, right, Manish, roughly 3%, 4% will be the passenger car for us? So 18% is the motorcycle. And from the motorcycles, the scooters which are gearless is probably 5% of that. So not 5% out of 18,% but 5% out of the total motorcycles. So the scooters, mopeds, because they require different lubricant, that is a very small proportion currently for us. And in fact, we don't do much of our lubricant to the 3-wheeler automotive -- auto retail segment. So just to give you a little bit of granularity, but some of these segments like the 3-wheel auto retail is going a lot into lead-acid electric or lithium-ion electric, that kind of thing, battery. So a small proportion of our motorcycle sales into the scooter. You wanted to know that detail, that's why I just gave a little more.

Definitely. That helps. And I just want to understand your outlook for the battery business, right? So are we looking at scaling it up by manufacturing a plant or something? Or is there -- the current trading will continue?

Manish, you want to?

Yes. So we have looked at localizing the product. Of course, I'm not trying to pick up a greenfield plant for that. But we'll be certainly manufacturing it within India as we move forward. And when ready, we will do a contract manufacturing in India with some players. But until the time, the import continues. Overall, the trajectory for this is definitely that we want to grow this business to a very, very decent level.

Okay. So when you say contract manufacturing, there will still be the [indiscernible] batteries, right?

Yes. That is because these are starting the [indiscernible] factories for 2-wheelers and not for running of the vehicle. So these are basically the start-up bikes.

Okay, okay. But there are no other plans with respect to...

You see, we have a brand. We have a brand of motorcycle oils called Gulf Pride. That is -- we roughly have a good market share and the brand is quite strong. So the Gulf Pride brand is also used for our motorcycle oil and our motorcycle battery. So we can use this brand later on for any type of battery. So that's one of the areas where we'll be also exploring it. If you have the future batteries, the Gulf Pride brand then can come into play.

The next question is from the line of [indiscernible] from Yes Securities.

I just have 1 question. So what would be the revenue and EBITDA breakup for the battery segment currently?