Weathering The Downturn Well

With expansion of its distribution network, the firm’s strong growth should continue

- Anand Kalyanaraman

Lubricant maker Gulf Oil Lubricants India has managed to hold its own despite the downturn in the automotive sector — its key customer base that accounts for more than three-fourth of its business. The company’s net profit in the recent September 2019 quarter was up 54 per cent yo-y at ₹62 crore, aided by better margins that offset weakness in volumes, and the recent corporate tax rate cuts.

Excluding the tax rate cut benefit, the company’s profit before tax was up about 11.5 per cent to ₹69 crore. In the June 2019 quarter, too, Gulf Oil Lubricants’ net profit grew about 21 per cent y-o-y to ₹49 crore, aided by higher volumes and better margins.

The good show in the bottom line in the first half of FY2020 follows the nearly 12 per cent y-o-y growth in the company’s net profit in FY2019 to about ₹178 crore that was driven by good volume growth.

Meanwhile, the Gulf Oil Lubricants stock has fallen about 20 per cent from its highs in early 2018, dragged down by concerns about the slowdown in the auto industry and the volatile market conditions that have hurt smaller stocks more. The dip though presents a good buying opportunity for investors with a high-risk appetite and a long-term perspective.

One, the stock’s valuation seems attractive. At ₹813, it trades at about 19 times its trailing 12month earnings, lower than the average of about 27 times over the past three years. Next, the company seems well-positioned to tide over the troubles in the auto industry. That said, exposure to the Gulf Oil Lubricants stock may be limited; it is a smallcap stock with a market capitalization of about ₹4,000 crore. Market uncertainties tend to take a bigger toll on such stocks.