 "Lubricant firms: Better days ahead")
Continued strength in volume growth points to better days ahead for both Gulf Oil Lubricants and Castrol. The former has also seen market share gains in select segments.
The Street already seems to have got a whiff of these developments, with Gulf's stock up four per cent in this calendar year so far, compared to a 1.8 per cent fall in the benchmark S&P BSE Sensex. While Castrol’s share price is down six per cent, its performance has shown improvement in the March quarter.
The volume trend could improve for both. Castrol has reversed its record of falling volumes over years, with volume growth of nine per cent in the March quarter. This was Castrol's highest volume growth since the June 2010 quarter. Although the low base effect of the March 2015 quarter (when volumes fell 5.7 per cent) partly aided, the improvement also reflects a demand uptick in commercial vehicles (CVs) and in the industrial segment.
Castrol's latest annual report says it lost market share. Analysts at Kotak Institutional Equities estimate the 40 basis points loss here was largely in CVs. So, if the uptrend in CV industry volumes continues, both companies will gain, as this segment contributes about 45 per cent to each of their revenues.
The high-margin personal mobility space (20-30 per cent of revenue) also continues to grow at a steady pace.
While analysts are divided on the strength in volume trend for Castrol, part of this rebound can be attributed to falling realisations. Thanks to its leadership position in the lubricants market, Castrol has historically given lesser price discounts to channel partners, as compared to peers such as Gulf Oil or HP. On an average, the gap in the selling price between it and the others is 18-20 per cent, after factoring the discounts to dealers, estimate analysts.
Castrol's realisations fell by 1.7 per cent year-on-year in the March quarter and is the first such dip in recent quarters. While the growth in realisations has been decelerating in recent years, the fall could also be attributed to falling prices of inputs. Analysts had also noted earlier that the company’s pricing power seemed to be reducing. So, one has to wait and see if lower realisations is a one-off or a change of strategy.
Gulf Oil saw 10 per cent overall volume growth in the quarter, aided by an order from a large institutional client. The company had, thus, moved up to become the fourth largest in volumes, from sixth position earlier, and continues to grow at an industry-leading pace. Gulf said it had gained market share in the two-wheeler segment and seen an uptick in diesel engine oil.
In this backdrop, analysts remain positive on both companies. Their average target prices, though, imply higher upside potential for Gulf (18 per cent) than Castrol (eight per cent) from current levels. Higher competitive intensity, sharp rise in crude oil prices and delayed pick-up in CVs are key downside risks.
