Trading near its 52-week low, buy this stock for 74% upside
Investment justification for Gulf Oil Lubricants Ltd (GOLI) according to the brokerage
According to the brokerage, “our March 24 DCF implies a net present value (NPV) of Rs17bn from the explicit period (FY24-33) FCFF, while the adjusted net cash from the end of March 23 of Rs6.7bn gives a face value (FV) of Rs23.8bn (Rs474/sh – close to current market price-CMP). The 20% correction over the past two months without any negative trigger implies zero terminal value (TV) beyond of FY33 (discounted cash flow period), which is unreasonable as we do not expect such a large impact from electric vehicles (EVs) In our view, some segments, such as M&HCV and Industrial (~50% volume share for GOLI), will continue to grow after FY33 and even segments like 2W and 4W will not fully transition to electric vehicles.The universe of internal combustion engine (ICE) vehicles would still be large.
Emkay Global said in a report that “Based on our analysis of the Indian vehicle fleet, we expect the Indian lubricants industry to grow by 2%/1% in FY21-30/30+. To this, we have factored in a 4% CAGR in volume for GOLI in FY21-30E and 2% FCFF growth thereafter, including terminal growth. are stable as base oil prices have cooled 8-9% from August-September highs 21 thanks to more refineries operating globally.In addition, the full impact of price increases retail sales taken during S1CY21 should reflect from Q3FY22, leading to EBITDA margin expansion. We expect margins to recover to 14-15%.”
The brokerage also claimed that “although it is below the 16-18% range guided earlier, but due to higher realizations now. Corresponding EBITDA/ltr is estimated at Rs23-24. In the past, GOLI had achieved Rs26-27 EBITDA/ltr Our channel audits imply that the lubricants industry is expected to experience a CAGR of 3-4% over the next two years, and according to GOLI’s target, it is expected to see double-digit volume growth from our estimate of 6%.Our TP of Rs820 is built on conservative assumptions.We expect ROIC to reach 40% by FY24-25.The stock is currently trading at less than 10x FY23E PE.
Buy with a target price of Rs. 820
The brokerage highlighted in a report that “We reiterate our buy rating on Gulf Oil Lubricants (GOLI) with a target price (TP) of Rs820 (postponed until March 24). The recent correction seems unwarranted as the action appears to have zero terminal value (TV) price beyond our discounted cash flow (DCF) period to FY33.”
The stock was selected in Emkay Global’s brokerage report. Investing in stocks presents a risk of financial loss. Investors should therefore exercise caution. Greynium Information Technologies, the author, and the brokerage are not responsible for any losses caused as a result of decisions based on the article.