INSTITUTIONALEQUITYRESEARCH

IndianLubricantsSector

Theroadtorecovery

20September2016
INDIA|OIL&GAS|Sector&Initiating

Readthisreport: Companies
Tounderstandwhytherecentrecoveryinlubricantsvolumeissustainable
Howabenignrawmaterialenvironmentwillkeepcostsundercontrol CastrolIndiaLtd
Howpremiumisationwouldleadtostructuralgrowthinmargins Reco Buy
CMP,Rs 423
Afteryearsoftepidvolumegrowth,theIndianlubricantsspacehasseentractioninCY16.
TargetPrice,Rs 550
CorevolumesofmajorlistedentitiesCastrolIndiaandGulfOilLubricantshavegrown
by7%/13%yoyinCY16YTD,versusa5yearCAGRof3%/+7%.Recentgrowthwasdriven GulfOilLubricantsIndiaLtd
by continued momentum in personal mobility space coupled with some recovery in Reco Buy
commercialvehicleandindustrialsegments.Weseesteadymarginsandvolumerecovery CMP,Rs 705
based on a benign oil price environment, strong auto and industrial fuel consumption, TargetPrice,Rs 950
slowing drain interval growth and push towards premiumisation. We expect lubricant
marketers to see better profitability and initiate coverage on Castrol India/Gulf Oil with
BuyratingsandtargetpricesofRs550/950.

VolumeaccelerationonsteadypersonalmobilityplusCVandindustrialrecovery
Ourindustryanalysisandchannelchecksimplyindustryvolumegrowthrecoveringfroma
past5yearCAGRof23%to56%inCY16,drivenbyhealthypersonalmobilitysalesdueto
10%+ petrol consumption implying more frequent oil changes. CV/diesel engine oils have
also seen traction, indicated by diesel demand improvement since FY14 and ~17% yoy
growthinCVsalesin1HCY16(M&HCVat20%+).Industrialfuelslikebitumenandfurnaceoil
have also seen 1518% demand growth in FY1617, which should push lube sales.
Accelerationinminingandroadconstructionactivitycanbefurtherdriversgoingforward.
Companieshaveindicatedsignsofrecoveryfrom1QCY16;bothCastrolandGulfOilsaw9
10%growthduringthatquarter.

Comfortablerawmaterialenvironmentwouldalleviatepressureonmargins
The50%declineinoilpricesinthelasttwoyearshasloweredrawmaterialbaseoilpricesby
3040%. Additive prices have also dropped by ~5% in CY15 despite otherwise being
inflationaryinnature.ThishaseasedcostpressuressignificantlyandhelpedCastrol/GulfOil
Lubricants record ~30%/15% gross margin expansion during this period. We build a Brent
price of US$ 45/50 per barrel in FY17/18 and expect unit base oil costs to remain under
controlandinlinewithoilprices.Baseoil/additives/packagingforms~50/35/15%oftheraw
material mix. An appreciating currency is also positive for the sector. We build in Rs 66
67/USDinourCY16FY18estimates.

Premiumisationandpowerbrandstodriverealisationsandmargins
Thelubeindustryischaracterisedbybrandbuilding,innovation,andpremiumisation,which
aids market share gains and pricing power. New products are launched based on largely
homogenous specifications (like viscosity), though branding helps to boost customer
preference.CVcustomershoweverarevaluechasersseekingbettereconomics(longdrain,
pricing,distributionreachetc).CastrolisatthehelmofbrandrecallandGulfOilLubricantis
inthetop3intermsofbrandpositioning.Inthelast5years,realisationsroseby57%CAGR
andfellonlylastyear(only0.3%forCastrol)duetosharpdeclineinoilpricesresultingin
schemes/discounts.Weexpectblendedrealisationtokeeponincreasing,drivingmargins.

InitiatecoverageonCastrolandGulfOilLubricantwithBuyratings
WeestimateCastrol/GOLItorecord6%/12%volumegrowth,8%eachEBITDA/litregrowth,
and 16%/25% EPS CAGR from CY15/FY16 to CY17/FY18. We value them at 33x/30x,
CY17/FY18EPSofRs16.7/31.7toarriveatourtargetpricesofRs550/950,whichprovides SabriHazarika(+912266679756)
[email protected]
30%/35% upside. We initiate coverage with Buy ratings. Spike in oil prices, destructive
competition/pricing,andadversecurrencyarekeyrisks.

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TableofContents

InvestmentArguments 3

VolumeaccelerationonsteadypersonalmobilityandCV/industrialsrecovery 3

Comfortablerawmaterialenvironmenttoalleviatemarginpressure 8

Premiumisationandpowerbrandstodriverealisationsandmargins 11

Takeawaysfromourinteractionwithalubricantsectorexpert 21

Indianlubricantssector 24

Companies

CastrolIndiaLtd 34

GulfOilLubricantsIndia 38

Note: Certain data and information in this report are derived through channel checks and interaction with industry participants. In
absenceofacommonindustrydataplatform,figuresmaynotbefullyaccurateormatchbetweendifferentsources.

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InvestmentArguments

Volume acceleration on steady personal mobility and CV/industrials

recovery

Lubricantdemandvolumegrowthsloweddowninthelast56years
Industryestimates(thoughvarying)suggestthatagainstanannualgrowthof45%in
CY10,itwasflattoslightlynegativeinCY12/13,followedbysomerecovery(13%)in
CY14/15, which was still weak. The deceleration was both in automotive and
industrialsegments.

LubricantvolumegrowthinIndia DrainintervalofCVsoverthelast910years
Totallubricantsvolumegrowth CVDrainIntervals(Engineoilchangeafterkms)
6% 40,000
5% Automotivelubricantsvolumegrowth
5% 35,000

36,000
4% 4% 4%

33,000
4% 30,000
3% 3%

30,000
3% 3% 25,000

26,000
2% 2%
2% 2% 20,000

22,000
19,000
1% 15,000

17,000
0%

12,500
10,000 11,000
10,000

1% 1% 5,000
1%
2%
FY11 FY12 FY13 FY14 FY15 FY16 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source:Industry,PhillipCapitalIndiaResearch

Dieselandpetrolconsumptiongrowth,whichisanindicatorofautomotivelubricant
demand, slowed down to 1%+5% in FY1314. New automobile sales and vehicle
populationgrowthinthecountryremaineddull.

Additionally,theintroductionofsmaller,moreefficientengines,anddurableengine Lubricantvolumestookabeatingdueto
oils led to the drain intervals lengthening, resulting in a structural decline in per dullvehiclesalesandtheintroductionof
vehicle lube consumption a trend particularly seen in the sensitive CV segment, smaller,moreefficientengines,and
where transporters and fleet operators are quick to shift to valuebased/cheaper durableengineoilswhichledtothe
options. Although realisations of longdrain oils were better, headline volume drainintervalslengthening
numbersweakened.

Demandgrowthscenarioofmajorautoandindustrialfuels
mmt FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17YTD
Diesel 42.9 47.7 51.7 56.2 60.1 64.8 69.1 68.4 69.4 74.6 32.1
Growth 7% 11% 8% 9% 7% 8% 7% 1% 2% 8% 6%
Petrol 9.3 10.3 11.3 12.8 14.2 15.0 15.7 17.1 19.1 21.8 10.0
Growth 7% 11% 9% 14% 11% 6% 5% 9% 11% 15% 14%
FO/LSHS 12.6 12.7 12.6 11.6 10.8 9.3 7.7 6.2 6.0 6.7 3.1
Growth 2% 1% 1% 8% 7% 14% 18% 19% 4% 12% 18%
Bitumen 3.8 4.5 4.7 4.9 4.5 4.6 4.7 5.0 5.1 5.8 2.4
Growth 9% 18% 5% 4% 8% 2% 1% 7% 1% 15% 15%
Total 120.7 128.9 133.6 137.8 141.0 148.1 157.1 158.4 165.5 183.5 80.4
Growth 6.7% 6.8% 3.6% 3.2% 2.3% 5.0% 6.0% 0.9% 4.5% 10.9% 9.3%
Source:PPAC,PhillipCapitalIndiaResearch

During this period, nonautomotive segment (industrial) was also weak due to
mining, infrastructure, and general economic slowdown. The mining sector, an
intensive lubricant user (8% target market in industrial lubricants), saw bans in
eastern India (Odisha, Bihar) which led to considerable demand weakness.

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INDIANLUBRICANTS SECTORANDINITIATING

Industrial indicatorfuels such as furnace oil and bitumen also saw weaker demand
duringthisperiod.

IIPdata:Stabilising
20 IIP Mining Manufacturing

15
YoYgrowth(%)

10

Source:MOSPI,PhillipCapitalIndiaResearch

LubricantsshowingsignsofrecoveryinCY16,justifiedbycosheadlinenumbers
CY16 is seeing traction in lubricants consumption. Major listed pureplay entities SignsofrecoverybellwetherCastrol
Castrol/Gulf Oil Lubricants (GOLI) have recorded 7%/13% yoy headline volume hasseen7%growthinvolumesCY16
growth in CY16 YTD versus a fiveyear CAGR of 3%/+7%. Castrols numbers are YTD
particularly important its dominant position in the crucially profitable bazaar
segmentwithahighvolumebasemakesitthebellwethertotheindustry.

Castrolhadseen3%CAGRoverthelast510years,partlyduetoitsdeliberatefocus
onthehighmarginpersonalmobility(PM)segment(13%CAGRinthelast10years)
atthecostofthelesslucrativeCVandindustrialsegments(5%negativeCAGReach).
Marketsharegainsbysmallerplayersandtechnologicalprogressalsocontributedto
thedecline.

Castrolsvolumesgrew7%in1HCY16firsttimeinfiveyears GOLIalsooutperformed
Castrolyoyvolumegrowth(%) 35% GOLIyoyvolumegrowth(%)
7.1% 7.1% 32%
8%
30%
6%
25%
4%
20%
2% 15%
15%
0%
10%
0.3% 0.5% 10% 7%
2% 6%

2.6% 2.5% 2.3% 2.5% 5%

4%
3.5%
4.7% 0%
6% 4.8%
1%
CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

1HCY16

5%
FY12 FY13 FY14 FY15 FY16 Q1FY17

Source:Company,PhillipCapitalIndiaResearch

SharpvolumejumpsinCY16weredrivenbycontinuedmomentuminthePMspace
coupled with a recovery in CV and industrial segments. The traction in the PM Thereisareversaloffactorsthathad
dampenedlubricantsgrowthearlier
segment(industrywide)isduetoareversaloffactorsthathaddampenedlubricants
growth earlier; higher petrol and diesel consumption are now leading to more
frequentengineoilchangecyclesandthereisanincreaseinvehiclepopulationand
newvehiclesales.

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WhilesmallerprivateplayerslikeGOLIwillcontinuetooutperformbiggerentitieslike
Castrol, industry momentum would help Castrol retain its 20%+ market share and
increasevolumes.

NewvehiclesalesinIndiamarkedimprovementin2016almostacrosstheboard
Growth CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 1HCY16
AllVehicles 30% 10% 28% 0% 50% 6% 1% 9% 1% 12%
PVs 54% 12% 34% 4% 38% 10% 8% 1% 8% 4%
CVs 48% 16% 11% 12% 54% 5% 16% 12% 7% 17%
LCVs 57% 9% 30% 4% 64% 19% 8% 17% 5% 13%
M&HCVs 42% 21% 7% 22% 43% 12% 29% 0% 30% 23%
3W 27% 16% 28% 4% 33% 1% 6% 6% 3% 22%
2W 25% 9% 28% 1% 53% 6% 4% 12% 0% 12%
Source:AceEquity,PhillipCapitalIndiaResearch

TheCVsegmentrecoveryislargelyduetorisingeconomicandlogisticactivity,which
has particularly driven the replacement market. New vehicle sales have also picked Newvehiclesalesarerecoveringwhile
up considerably, especially in CY16, with LCVs rebounding from 5% yoy in CY15 to thesearegenerallylowmargin,they
+13% in 1HCY16; M&HCVs have been strong at 23% vs. 30% in CY15. 3Ws have pushoutabatchtothelucrative
clockedasharp22%recovery(vs3%)while2Wsareupfromflatto+12%.OnlyPV replacementmarket(bazaartrade
sales have slowed down to 4% from 8%. New vehicles are part of the lowmargin segment)
OEMbusiness;however,theypushoutabatchtothereplacementmarketwhichis
essentiallythelucrativebazaartrade.

Miningrecovery,roadinfracanboostindustriallubevolumessignificantly
The industrial lubricant segment comprises of sectors such as power, chemicals,
metals, automotive manufacturing, mining, road construction, and nonroad
transportation. The ballpark indicator for industrial lubes growth is the IIP Index,
which has seen stabilisation in FY17. Strengthening of the industrial recovery from
campaigns like Make in India and Smart Cities could result in improved lube
demand. However, mining (which has target volume share of 8% of the industrial
segmentbutiscurrentlyconsumingverylowvolume)androadinfrastructuresector
(expected share at 10%+) could see a revival (specifically due to new government
policies)therebyboostingindustriallubedemand.

Targetsectoralvolumeshareofindustriallubricants

Others
18% Power
24%

Rail/Air/Marine
7%

Mining
8%
Chemicals
20%
Auto
11%
Metals
12%

Source:Industry,PhillipCapitalIndiaResearch

Industrialrecoverytendstopercolateintohigherlogisticsactivity,therebydrivingCV
automotivelubedemandindirectly.Aspercompanymanagementsandourindustry
sources, such a trend is already visible in CY16, which aided Castrol/GOLIs 1HCY16
numbers.

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Specialised industrial oils such as cutting oils, chain oils, cleaners, corrosion
preventives, and heat treaters are lucrative industrial subsegments with better DuetoitsglobalOEMapprovalsCastrol
prices and margins. These are mostly used by manufacturing sectors such as iswellplacedtotapopportunitiesin
specialisedindustrialoilsusedby
automobiles, machinery, and metals. Due to its global OEM approvals and market
manufacturingsectorssuchas
leadership,Castroliswellplacedtotapopportunitiesinthisspacethecompanyhas
automobiles,machinery,andmetals
alreadyreneweditsfocusonsuchcategories.OtherplayersincludingGOLIarealso
pursuingentry,whichgenerallytakes~2yearsforOEMapprovals.
Overalllubricantsvolumegrowthtorecoverto~6%ahead
Ourchannelchecksandindustryanalysissuggestvolumegrowthrecoveringto56%
inCY16(fromafiveyearCAGRof23%)andcontinueatthisrateahead,withhealthy
PMsalesand10%+petrolconsumptiondrivingmorefrequentoilchangecycles.

Automotivelubricantsindustrydemandmodel
CY13 CY14 CY15 CY16E CY17E CY18E
2W
Population(mn) 80.0 87.2 95.0 101.7 109.8 118.6
DrainInterval(kms) 2,000 2,100 2,300 2,450 2,622 2,779
EngineTankSize(litre) 1.0 1.0 1.0 1.0 1.0 1.0
AnnualRun(kms) 10,000 10,500 11,130 11,909 12,743 13,507
AnnualLubeConsumption(mn.litre) 400 436 460 494 534 577
MCOGrowth 9% 5% 7% 8% 8%
Cars
Population(mn) 20.0 21.6 23.3 25.0 27.0 29.1
DrainInterval(kms) 5,000 5,500 6,000 6,500 6,955 7,372
EngineTankSize(litre) 4.0 4.0 4.0 4.0 4.0 4.0
AnnualRun(kms) 12,000 12,600 13,356 14,291 15,291 16,362
AnnualLubeConsumption(mn.litre) 192 198 208 220 237 258
PCMOGrowth 3% 5% 6% 8% 9%
NewGenerationTrucks
Population(mn) 5.2 5.4 5.6 5.9 6.2 6.5
DrainInterval(kms) 30,000 32,000 35,000 36,000 37,800 39,690
EngineTankSize(litre) 15.0 15.0 15.0 15.0 15.0 15.0
AnnualRun(kms) 90,000 94,500 98,280 1,03,194 1,08,354 1,13,771
AnnualLubeConsumption(mn.litre) 234 237 237 254 267 280
CVO/DEOGrowth 1% 0% 7% 5% 5%
OldGenerationTrucks/Buses
Population(mn) 3.0 3.1 3.1 3.2 3.2 3.3
DrainInterval(kms) 15,000 16,000 17,000 17,500 18,025 18,566
EngineTankSize(litre) 18.0 18.0 18.0 18.0 18.0 18.0
AnnualRun(kms) 60,000 60,600 61,206 61,818 62,436 63,061
AnnualLubeConsumption(mn.litre) 216 209 202 202 202 201
CVO/DEOGrowth 3% 3% 0% 0% 1%
Tractors
Population(mn) 4.5 5.0 5.2 5.8 6.2 6.6
DrainInterval(kms) 15,000 17,000 19,000 20,000 21,000 22,050
EngineTankSize(litre) 15.0 15.0 15.0 15.0 15.0 15.0
AnnualRun(kms) 20,000 20,400 20,808 21,848 22,941 24,088
AnnualLubeConsumption(mn.litre) 90 90 86 95 102 108
CVO/DEOGrowth 0% 4% 10% 8% 6%
TotalLubeConsumption(mn.litre) 1,132 1,170 1,193 1,265 1,342 1,424
yoyGrowth 3% 3% 2% 6% 6% 6%
Source:Company,Industry,PhillipCapitalIndiaResearch,Note:WeareusingalowerdrainintervalinPMsegment
asuserstendtochangeearlier.5,000/10,000kmsisclaimedbytheindustryasdrainintervalsfor2W/PVs

CV/diesel engine oils (CVO/DEO) have seen traction indicated by diesel demand
improvement since FY14 and 1520% growth in new CV sales, including 20%+ for
M&HCV.Ourchannelchecksleadustobelievethattheincreaseindrainintervalswill
taperoffacrosscategories(inthelastfiveyearsitdoubledforCVs).Industrialfuels
(furnace oil and bitumen) saw 1518% demand growth in FY1617, which implies
higher lube sales, which could also receive a boost with acceleration in mining and
roadconstructionactivity.

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Castrolssalesvolumetrendandoutlook GOLIssalesvolumetrendandoutlook
Salesvolume(mn.ltr) yoygrowth(%) Salesvolume(mn.ltr) yoygrowth(%)
230 8% 100 16%
7% 7%
15% 13%
6%
220 6%
80 12% 12%
4%
210 10%
2% 60 8%
200 7% 6%
0% 0%
0% 5%
190 40 4%
2% 2%
3% 2% 2%
180 3%
4% 20 0%
5% 5% 191 216 1%
170 6%
0 4%
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Source:Company,PhillipCapitalIndiaResearch

ForCastrol,webuildin6%/7%yoyvolumegrowthinCY16/17totouch216mnlitres
in CY17. With its smaller size, GOLI should post higher growth as seen in the past;
besides,themanagementhasalwaystargeted23xtheindustrygrowth.Therefore,
we build in 12%/13% yoy volume growth in FY17/18 to 95mn litres by FY18.
Automotivecomprise85%ofCastrolstotalvolumesand67%ofGOLIs(thoughGOLI
classifiesfactoryfillsasindustrial).

PPAClubesandgreaseconsumptioninIndia
IndianLube+GreaseConsumption(mmt) yoyGrowth
4.0 60%
3.5
3.5 3.2 3.3 3.3 3.2 50%

3.0 40%
2.5 2.4 2.6
2.5 2.3 30%
2.1 2.0
1.9
2.0 20%
1.4 1.3
1.5 1.3 10%
1.0 1.1
1.0 0%

0.5 10%

20%

Source:PPAC,PhillipCapitalIndiaResearch

Government data on domestic lube consumption implies gross lubes and grease
demand has also seen traction in FY17 with YTD growth at over 9% versus almost
stagnantaveragevolumesinthelastthreeyears.

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Comfortablerawmaterialenvironmenttoalleviatemarginpressure

Sharpdropinoilpricesloweredrawmaterialcosts
The50%crashinoilpricesinthelasttwoyearsloweredrawmaterialbaseoilprices The50%crashinoilpricesinthelast
by 3040%. The benchmark baseoil price has reduced to ~US$ 700/mt in CY1516 twoyearsloweredrawmaterialbase
fromUS$1,100/mtinCY1213asBrentpricesfelltolessthanUS$50/bblfromUS$ oilpricesby3040%.
110/bbl.Consequently,CastrolsperlitrebaseoilcosthasreducedtoRs45fromRs
65,despitetherupeedepreciatingto67fromfrom50(perUSD).

Castrol/GOLI recorded ~30%/15% gross margin expansion between CY1213 and Webelieveabenignoilprice
CY1516. Additionally, additive costs fell by 5% for Castrol in CY15 against a environmentwouldkeepvariousraw
continuous growth since CY03. Additives include base oils as a key ingredient. materialheadsundercontrol,thereby
Packagingcostsalsofell6%yoyinCY16.Webelieveabenignoilpriceenvironment benefitinglubricantplayers.
would keep various raw material heads under control, thereby benefiting lubricant
players.

Crudeoilandbaseoilprices INR/USDmovementcurrentlystable
Baseoilprice(US$/mt) Brentoilprice(US$/bbl) Rs/US$
111 112 80
1600 109 120
99 70
1400
100
1200 80 60 67.0 66.5
64.2
80 61.0
50 58.5
1000
53.5
800 52 50 60 40 46.7
45.7
43
600 30
40
400 20
20
200 10
1000 1400 1150 1080 1030 760 625 682
0 0
0
CY10 CY11 CY12 CY13 CY14 CY15 CY16E CY17E
CY10 CY11 CY12 CY13 CY14 CY15 CY16E CY17E
Source:Industry,Bloomberg,PhillipCapitalIndiaResearch

BaseoilmarketdynamicstoremainunchangedforCastrol/GOLI
In India, against a total lubricantdemand of ~2.80mmtpa, domestic base oil (LOBS)
Indiameetsabout37%ofitsbaseoil
production is~1.04mmtpa. Imports aregenerally fromthe US and the Middle East,
demandof2.80mmtpathrough
though in recent times South Korea has started exporting Group3 grades. domesticproduction;hugecapacity
Domestically,HPCLMumbaiRefineryisthelargestproducerat0.42mmtpafollowed expansionsinproductionseemunlikely
byBPCLMumbaiRefineryat0.27mmtpaandIOCLsChennaiandHaldiarefineriesat
0.20mmtpaand0.15mmtpa.

Overthelast10years,baseoilproductionhasremainedunchangedinIndia,except
for upgradation to Group2 and 3 types from Group1. HPCL Mumbai can now
produce0.23mmtpaofGroup2/3.Newrefineryexpansionplansbycompanieshave
not indicated any major baseoil capacities, but our channel checks suggest some
capacityexpansioninHaldiarefineryandMumbairefineriescoupledwithmoreup
gradationtoGroup2/3.

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Indiasbaseoilproduction BaseoilproductionbyIndiancompanies
IndianLOBSproduction(mmt) mmt
1.2
1.0 1.0
1.0 1.0 0.9 0.9 0.9
1.0
0.9 0.9 0.9 BPCL,0.3

0.8 HPCL,0.4

0.6

0.4
IOCL,0.2
0.2

CPCL,0.2

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source:Company,PPAC,PhillipCapitalIndiaResearch

WeexpectbaseoildynamicsofprivatelubeplayerslikeCastrolandGOLItoremain
unchanged with share of imports likely to remain at 5560% as (1) OMCs
themselves are aggressive about their lube marketing plans, and (2) incremental
capacity,atbest,wouldbeequivalentlydistributed.

Globalbaseoiloutlookisstableforlubricantblendersandmarketers
Globally, baseoil supply is likely to remain comfortable with capacity expansions
outstripping demand growth and resulting in a surplus market. Hence, we do not
TheglobalbaseoildemandinCY15was
expect base oil cracks to deviate from current levels and can actually decline if oil
~38mmtpa(withGroup1at~20mmtpa,
pricesspike. Group2at~10mmtpa,Group3at
~4mmtpa,andnaphthenicsat
The global baseoil demand in CY15 was ~38mmtpa (with Group1 at ~20mmtpa, ~3mmtpa)whileproductioncapacity
Group2 at ~10mmtpa, Group3 at ~4mmtpa, and naphthenics at ~3mmtpa) while wasabove50mmtpa,implyingan
productioncapacitywasabove50mmtpa,implyinganoversuppliedmarket.Group1 oversuppliedmarket.
volumes are gradually declining due to substitution with better quality and
environmentalfriendlyGroup2and3grades.

GloballubricantsandbaseoildemandsupplyforCY16andaheadTotalsview
GloballubricantsdemandtomoderatelydeclineinCY15/16;itshouldeaseinCY17withweakexpansionthereafterhenceoutlookis
stable
OECD Europe and North America would see demand declines of 1.01.5% yoy. Robust growth seen in emerging economies of Asia,
MiddleEastandAfrica,butnotSouthAmerica.
~1.5mmtpa of lube capacity has closed over CY1415 and 1.1mmtpa is likely to have shut in 1HCY16. A large number of previously
announcedprojectshavebeenpostponedtoCY20+,orcancelledaltogether.
Thelargeoversupplyofbaseoilsshowslittlesignofabatingintheneartomediumterm.USrefinershavebeenaffectedbydepressed
pricesandmargins,especiallyforGroup1and2lightneutrals.
Over the past two years, 4mmtpa of previously announced capacity additions have been delayed, some indefinitely, or cancelled
altogether.Only0.87mmtpaofthosemaystillcomeaboutbeforetheendofthedecade.Another0.65mmtpaofprojectsthatwereto
upgradetoGroup2and3havebeenpushedbackbyacoupleofyears,possiblylonger.Latestforecastsshowamarkedreductionof
capacityadditionsfromjusttwoyearsago.
Nevertheless,17majorcapacityadditionsarestillpossiblebyCY20ofwhichfivestartedinCY15,representing1.2mmtpaandfivemore
areawaitingstartuporareunderconstructionforstreaminginCY16,totalling2.2mmtpa;fouradditionalcapacitiesmayadd0.8mmtpa
inCY1819whilethreewereannouncedforlateinthedecade,representing2.5mmtpa.
Adding PAOs (synthetics), naphthenics, some smaller projects and the retrofit grade shifts, coupled with normal capacity creeping
expansion,byCY20,therecouldbe9.5mmtpaofadditionsagainstabackdropoflittleornoincreaseindemand.
CY16 would see 2.7mmtpa capacity additions. While CY17 would be quiet, CY18 could see another surge. Additions will be mainly
Group3inAsiaandEurope.
Currentlythesurplusis~5mmtpaandthelosshasbeenlimitedonlybyfiverecentclosuresandanindustryplantutilisationofabout70
75%.Bytheendofthedecade,surpluscouldgrowby6mmtpa+,necessitatingfurtherclosures.
Migration from Group1 to Group2 is active. By CY20, Asia will be the largest producer of all Groups (1, 2, and 3). Middle East and
EuropewillseehigherproductionofGroup2,thoughGroup3productionwillremainrangebound.
Source:Total

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BuildinUS$45/50BrentinFY17/18;expectbenignrawmaterialcostenvironment
Base oils comprise ~50% ofraw material cost, additives ~35%, andpackaging ~15%
based on latest runrate. We build in US$ 45/50 per barrel Brent price for FY17/18
and stable base oil cracks for Castrol and GOLI. In India, additives are supplied by
three players Chevron, Afton, and Lubrizol. We expect additives prices to remain
weakinCY16,similartobaseoilprices,butweassumea34%yoygrowththereafter.
Weseesimilartrendsforpackaging.

We build in currency (INR/USD) at 67.0/66.5 for the next two years. Any rupee
appreciation is positive for players as raw materials are priced in USD and retail
productsinINR.

Castrolsbaseoilcostandbaseoiltocrudecracks Castrolsadditivesandpackagingcostcalculation
Baseoilcost(Rs/ltr) Baseoilcracks(US$/bbl) Additivecost(Rs/ltr) Packagingcost(Rs/ltr)
200 12
70 64.8 63.2 66.3 120 10.5
61.8 9.7 9.8
9.4 9.4
60 100 8.6 10
160
48.7 47.7 45.9 48.1 7.5
50 46.0
80 6.8 8
40.7
36.6 120
40 35.9
60 6
4.4
30 80 3.9 4.2
3.4
40 4
20
20 40
10 2
80 87 97 104 112 132 154 175 184 175 170 177
0 0 0

Source:Company,PhillipCapitalIndiaResearch

Weexpectrawmaterialcoststoremainundercontrolaheadandrealisationstobea
major driver of gross margins. Lubricant players did not cut retail prices during the
last 23 years, but increased schemes and discounts; despite this, book realisations Weexpectrawmaterialcoststoremain
were down only marginally with Castrols falling just 0.3% yoy in CY15 and GOLI undercontrolaheadandrealisationsto
seeing a 5% drop in FY16. The raw material scenario should remain conducive for beamajordriverofgrossmargins.
lubeplayerstomaintaincoremargins.Highershareofpremiumproductsandpower
brandswouldleadtoanoverallimprovementinsalesmixandreportedmargins.

Lubricants companies also engage in trading of products, which include related

productssuchasgreases,coolants,andbatteries.Thisformsapartofthepurchases,
where costs are reflective of revenue growth. Trading forms a small part of overall
sales.

Baseoilinventoryisgenerallyatthreemonthsforlubricantsblenders,hencecosts
reflectafteraquarterslag.Somecompanieshedgetheirbaseoilexposure,though
GOLImentionedthatitdoesnot(onlyhedgescurrency).

Companies also hoard base oils in storage tanks in periods of rising prices, which
leadstobettermarginsandcoststructureinensuingperiods.

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INDIANLUBRICANTS SECTORANDINITIATING

Premiumisationandpowerbrandstodriverealisationsandmargins

Core product specifications are largely homogenous and barriers of entry are low
Lubricants in general are homogenous products, largely based on specifications
(viscosity,depositprotection,sludgecontrol,sealcompatibility,oxidationresistance,
wear protection, emission control, detergency) that are approved by agencies like
AmericanPetroleumInstitute(API)andJapaneseAutomotiveStandardsOrganization Globally,playersinnovateproducts
(JASO, mostly for motorcycles). Automobile manufacturers are also involved and throughR&D,buttechnologytransferis
provide OEM approvals for products depending on tieups and specifications. rampantandentrybarriersare
Globally,playersinnovateproductsthroughR&D,buttechnologytransferisrampant minimal,
and entry barriers are minimal, as it is a blending process. Base oil availability and
additivesareopenaccessinnature.

APIandJASOspecificationupgradesaregenerallyannouncedafteraninterval.For
example,APISNforgasolineengineswasintroducedinCY10whilethepreviousAPI
SMwassixyearsagoinCY04.Similarly,APICJ4fordieselengineswasintroducedin
CY06whileAPICI4PluswasinCY04.

ExamplesofAPIandJASOspecifications
APISN Introducedin Designedtoprovideimprovedhightemperaturedepositprotectionforpistons,morestringentsludgecontrol,andseal
October2010 compatibility.
APISM Introducedin Designedtoprovideimprovedoxidationresistance,improveddepositprotection,betterwearprotection,andbetterlow
November2004 temperatureperformanceoverthelifeoftheoil.
SL 2001 Foruseinservicetypicalofgasolineenginesinpresentandearlierpassengercars,sportsutilityvehicles,vansandlighttrucks
operatingundervehiclemanufacturersrecommendedmaintenanceprocedures.
JASOFA Originalspecestablishedregulatinglubricity,detergency,initialtorque,exhaustsmoke,andexhaustsystemblocking.
JASOMA Japanesestandardforspecialoil,whichcanbeusedin4strokemotorcycleenginewithoneoilsystemforengine,gearbox,
andwetclutchsystem.Fluidisnonfrictionmodified.
Source:Industry,PhillipCapitalIndiaResearch

Branding,salespromotion,productdifferentiationarekeyvolume/pricingdrivers
The retail lubricant industry is characterised by brand building, innovation, and Newproductlaunchesarefrequent
premiumisation (similar to the FMCG sector) which is an important driver to boost amongplayersandproduct
customer preference for commanding both market share and pricing power. New differentiationinqualityand
product launches are frequent amongplayers andproduct differentiation inquality performancecoupledwithnew
andperformancecoupledwithnewpackagingarewidelyseen. packagingarewidelyseen.

Therearethreetypesofmarketingactivityinthisindustry:(1)newproductlaunches
andmakeovers,(2)advertisinginprintandelectronicmedia,and(3)belowtheline
activities involving customers and important intermediaries such as distributors,
retailers,mechanics,anddrivers.

Productlaunches:Theseareanimportantelementtorenewbrandpositionanddrive
salesbyhighlightingnewproductswithbetterfeatures.Theseincludenewproducts
altogether based on specifications, minor overhauls, and new packaging. Product
launches are often accompanied by heavy marketing and branding activity,
depending on the target market. Castrol has continuously launched new products,
which has kept it on top of the innovation curve. GOLI has also been active in
launches. In last 67 years, the launches list of both companies is noteworthy
thoughCastrolisahead.

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INDIANLUBRICANTS SECTORANDINITIATING

Productlaunchchronology
Castrol GOLI
CY10 Activ4Trelaunchedwithimprovedprotectionformula FY11 CBOdieseloil,GulfSuperfleetLongDrain
SpecialtyProductsrelaunched oillaunched
CY11 RelaunchedPower1withadvancepowerreleaseformula FY12
ActivScooterlaunchedforgearless2W FY13 SuperfleetTurborangelaunched
Edgerelaunchedwithadvancedtitaniumstrengthtechnology
FY14 FormulaGX(syth),CBOdiesel&hydarulic
CY12 Activrelaunchedwithuniqueprotectionmolecules oilslaunched
Magnatecrelaunchedwithrefreshedbrandproposition
FY15 PrideScooterlaunched
CRBrelaunchedwithDurashieldboosters
FY16 UltrasynthXwithdetoxifiers,Powertrac
CRBPlusrelaunchedinagrimarkets
(synthetic)launched
RXSuperrelaunchedthroughbelowthelineactivity

CY13 NewPower1packlaunched
MagnatecDiesel,RXSuperMax(TataCBO),MagnatecStopStart,Activ
ScooterZipboosterslaunched
CY14 EdgeProfessional,Vectonlaunched
CY15 VectonRXFuelSaverlaunched
CY16 GTXUltraclean,GTXEcolaunched

Source:Company,PhillipCapitalIndiaResearch

Advertising and promotion: Being FMCG B2C in nature advertising and promotion
(A&P) plays a crucial role; this includes both print media (outdoor campaigns,
hoardings, shop upliftment) and electronic channels like TV, FM radio, and social
media.Advertisingandpromotionexpenseasa%ofsaleshasremainedsteadyfor
CastrolwhileithasincreasedforGOLI.

A&PspendtrendforCastrolandGOLI:Currentyearhasseenmoretraction
Castrol GOLI
A&PExpense(Rsmn) As%ofSales A&PExpense(Rsmn) As%ofSales
1,800 6% 7% 800 7.0%
6% 7%
1,600 700
6% 7%
1,400 5% 600 6.5%
4% 5% 5%
1,200 4%
4% 4% 4% 500
1,000 3% 3% 4%
400 6.0%
800 3% 6%
600 300
2%
400 200 5.5%
1%
200
100
0%
5.0%
FY15 FY16 FY17E

Source:Company,PhillipCapitalIndiaResearch

Lubricant players associate themselves with sporting and other events to gain
traction. Both Castrol and GOLI are actively associated with cricket, motocross, car
rallies, and Bollywood. GOLI had ropedin cricketer MS Dhoni in CY11 as its brand
ambassadorwhilebeingapartnerintheIndianPremierLeague.

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INDIANLUBRICANTS SECTORANDINITIATING

A&Pchronology
Castrol GOLI
CY10 BuyPower1andmeetCRonaldoinMadrid FY11 Brandpromotionsinairports
Sanjeevani (CRB) consumer contact program reached 1mn+ tractor Pride4TPluspromotions
owners KisanMelainMaharashtra
ICCpartnershipforWorldCup Motorsports&MRFevent
CY11 Expandingpresenceinsocialmedia FY12 MSDhoniendorsesGulf
SachinTendulkarandBrettLeeinbrandpromotionprogram Shopbranding,Signages,motorsports,customer
OnthegroundpromotionofCRBTurbo events,Cricket(IPL/CSK)
CRBfortractorpromoted Belowthelineactivities
CY12 Power1MotoGPandIndianGPpromotion FY13 AstonMartinteampromotion
BPVanellusTurboaggressivelymarketed MSDhonibasedpromotions
PromotionsthroughCricket Motorsports(rallies)
CY13 ActivpromotioninICCChampionstrophy Cricket,posters,fairs,promotionoflongdrainCBOs
Facebookfansof1mn+ FY14 Cricket(IPL)relatedpromotions
Magnatecthroughoutdoorpromotions Bikerally;Bollywoodrelatedpromotions
GTXSludgebustersthroughstreetplays Industrialfairs
CRBpromotionforminiLCVsandtractors FY15 AstonMartinteampromotion
Cricket(T20)+socialmedia Cricket(incl.IPL/CSK),bikefest,car&bikeracing
CY14 PowerBikingApp MSDhoniisbrandambassador;advertising(TV,social
BrandAmbassadorJohnAbrahampromotesnewvariantofPower1 media,outdoorcampaigns)
MagnatecStopStart,CRBMiniTruckpromoted FY16 MSDhonikeybrandambassador
CustomerengagementinCRB Associationswithcricket(PuneIPLteam),football
CustomervisitstoICCAcademyDubai (ManchesterUnited)
Football(FIFAWorldCup)engagement 2W,carrally;socialmediacampaigns;
CY15 RetailoutletbrandingforMagnatec OEMoilspromotion
OnlinepromotionofEdge AttendanceinIndustrialfairs
ActiveScooter,Vecton,CRBpromotion FY17 ManchesterUnitedbrandingforsyntheticPCMOoil

CricketWorldCupengagements,Ruralcustomerreachout
CY16

Source:Company,PhillipCapitalIndiaResearch

Belowthelineactivity:ThisiscrucialforgrowthinamarketlikeIndia,whichisrural
andtier2and3citydominated.Thisinvolvesengagementwithdistributors,dealers,
retailers, mechanics, drivers, and customers. Lubricant companies offer discounts,
schemes,brandingprograms,andotherrewardstoallthestakeholdersinthechain,
besidessettinguptrainingworkshopsformechanicstohonetheirskillsandthereby
create good will. Mechanic training is an important element and forms part of CSR
activityofseverallubricantplayers.

Belowthelineactivityacrossstakeholders
Distributors,dealers, Cashdiscountandvolumediscount,giftcoupons,rewardslikeincentives,
retailers holidays,freeoffersetc
Driversandcustomers Cashbacks,discounts,freeoffers,gifts
Mechanics Trainingandskilldevelopment,workshops,OEMplantvisits,rewards,conversion
ofgaragesintoexclusivecentres
Source:Industry,PhillipCapitalIndiaResearch

Thedistributionarchitectureisverymuchlinkedtobelowthelineactivity.Ingeneral, Distributionchannelscompriseofspare
distribution channels comprise of spareparts shops, dedicated lube shops, partsshops,dedicatedlubeshops,
workshops and garages, and other outlets. Both Castrol and GOLI have promoted workshopsandgarages,andother
exclusive workshops termed Bikepoint/Bikestop/Pitstop/Carstop which are multi outlets.
brandvehiclegaragesthroughofferofequipmentandmechanictraining.GOLIhas
targeted1012%increaseindistributionoutletsannually.Thesecompaniesalsohave
exclusiveshowroomsforsellingtheirproducts.Currently,salethroughonlineportals
(Amazon,Snapdeal,andFlipkart)hasalsopickedup.

Dieselengineoil(DEO/CVO)customersarevaluechasers,seekingbettereconomics
(long drain, pricing, distribution reach); hence, accessibility to value propositions,
lube facility, and proper distribution channels is required besides pricing
competitiveness.

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INDIANLUBRICANTS SECTORANDINITIATING

Belowthelinechronology
Castrol GOLI
CY11 Mechanicskillcontest;Rewardingkeydealers FY12 Awardingdistributors
Uniquemobilecarmechanictrainingunitincorporated;GTX NonStopExpresslaunchedtodeepen
mechanicincentiveofferlaunched;6,000nonfranchised FY13 distribution;Pilotsforruralpenetration
motorcyclegaragesenrolledasBikepoints;PitstopExpress FY14
CarMaintenancecentressetup;Subdistributorssetupin GulfRuralStockistprogramlaunchedfor
CY12 ruralmarkets;ExclusiveCastrolPointssetupcountrywide FY15 MCOandTO
8,000+mechanicsweretrainedthroughmobileunitonMagnatec; SelectgaragesforGulfCarstops;Industrial
opportunityformechanicstovisitSilvassaplant;Tataworkshopskillcontest; FY16 customeroffsites
basicmaintenancetrainingto0.15mn+2Wmechanics;EngineExperts

CY13 LoyaltyClubhas30kmechanics
CY14
CY15 Mobilemechanictrainingunitforupdatingmechanics

CY16
Source:Company,PhillipCapitalIndiaResearch

Asperindustryresearch,CastrolisatthehelmofbrandrecallandGOLIhasatop3
brandpositioning.

Distributionreach
Castrol CY15 GOLI FY16
Plants 3 Plants 1
DeliveryCentres 3 DeliveryCentres
Warehouses 23 Warehouses
Distributors 420 Distributors 350
TownLocations TownLocations
RetailOutlets 80,000 RetailOutlets 55.000
B2CCustomers 80,000 B2CCustomers 55,000

B2BAccounts 3,000
B2BAccounts
Source:Company,PhillipCapitalIndiaResearch

OEMactivity:Lowonmargins,buthighongoodwill
LubricantplayersenterintoOEMtieupssuchasengineoilfillsandrefillsinfactories
(factory fill) and authorised service centres, besides branding partnerships which
result in genuine (GO) and cobranded oils (CBO). Although OEM tieups and
approvals are a low margin business (due to royalty, margin sharing), they are
necessaryforgoodwillinthereplacementmarket,asusersthereseekreassuranceon
productqualityandimage.

TheOEMmarketcomprisesonly~20%ofautomotivelubricants.Beingthedominant TheOEMmarketcomprisesonly~20%
industryplayerwitharguablythestrongestbrand,CastrolislessreliantonOEMtie ofautomotivelubricants
upscomparedtoothers,andismostlyintoengagementsratherthanlaunches.The
companyisnotdirectlyintogenuineoilsexceptforasingleMarutiproductforEuro1
and2engines.Ontheotherhand,GOLI,whichistargetinghighersalesandadeeper
brandpositioning,isgoingformorelauncheslikecobrandedandgenuineoilswith
MahindraandAshokLeylandamongothers.

OEMengagementsarecontinuousforalllubricantplayersincludingthePSUOMCs.
CastrolspredominantOEMtieupsarewiththeVolkswagenGroup(includingSkoda,
Audi,andBMW),TataMotors,andMaruti.GOLIstieupincludes(theHindujaGroup
company)AshokLeyland,andMahindra,Swaraj,SchwingStetteramongothers.OEM
tieupsexistinindustrialcategoriesaswelllikeJohnDeereandACECNCforCastrol
andL&TKomatsuandGreavesforGOLI.

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INDIANLUBRICANTS SECTORANDINITIATING

OEMactivitychronology
Castrol GOLI
CY10 VWisastrongglobalpartner FY11 CBOlaunchedwithMahindra
SignedathreeyearspartnershipwithSkodaIndia SupplyagreementwithEssar
RenewedagreementwithTataforfiveyears FY12 AgreementwithL&TKomatsuforCBO,AL
CRBPrimarecommendedandpushedbyMahindra TieupwithALNissan/Deere
CY11 BMW,VWextendglobalpartnershiptoIndiabusiness FY13
ConductedtechnologydayatTataandMaruti FY14 CBOlaunchedwithMahindra,Toshiba
LubelearningcentreinTataPuneplant
FY15 AgreementwithSchwingStetter
StrategicalliancewithACECNCtoolmanufacturer
M&McodevelopedXHDtractoroillaunched
RecognitionfromJohnDeere,SKF
FY16 TechnicalpartnershipwithMilwaukeeBMWTeam
LubnetservicetoL&T
CY12 ConductedtechnologydayatFord FY17 EngagementwithSwaraj

SafetyMoUwithTata
EngagementwithAudi,Skoda,Jaguar
MaruticonductedsuccessfulauditofSilvassaplant
LearningcentresetupinAssamwithTata
RenewedalliancewithACE
CY13 SafetyawarenesswithTata;otherengagementswithTata
CricketrelatedengagementswithVWandMaruti
CY14 SetupLiquidEngineeringCentreinMarutiGurgaonplant
MagnatecProfessionalcodevelopedwithTata
SetupanewproductdevelopmentblenderinSilvassaforOEMs
AwardbyBosch
AgreementwithTriumphforIndia
CY15 SignedlocalsuppliercontractwithVW
RecognitionfromJohnDeere
EngagementswithTata
CY16

Source:Company,PhillipCapitalIndiaResearch

Compensation to OEM makers is in the form of royalties for aftermarket sales,

though factory fills are tendered at competitive prices and low margins. As per our
channel checks, Japanese and Korean OEMs are less attractive than European and
American counterparts due to high royalty rates and preference for oil makers of
theirregion.

OEMtieupsofmajorlubricantplayersincludinggenuineandcobrandedoils
Castrol GOLIGulf IOCLServo BPCLMAK HPCLHPLubes TideWaterVeedol
TataMotors, AshokLeyland, Skoda,Hyundai, Hero,TVS,Tata Bajaj,Enfield,JCB, Hero,HondaMotors,
VolkswagenGroup, Mahindra,Swaraj, Maruti,AshokLeyland, Motors,GM,Honda, Mahindra,Komatsu, Yamaha,HondaSiel
Maruti,Suzuki,Ford, SchwingStetter,Volvo Eicher,Force,HMT, LTKomatsuetc Gabriel,San Cars,SMLIsuzu,LT
GM,JCB,LTKomatsu, Engines,MAN, TataMotorsetc Engineeringetc Komatsu,Kobelco,
Bosch,Triumph, Greaves,LTKomatsu, KubotaAgrietc
Suzlon,SKF,Tata BharatBenz,Scania,
Cummins,Timken, LeylandDeere,
JohnDeere,JSWSteel, LeylandNissanetc
ZF,FederalMoguletc
Source:Company,PhillipCapitalIndiaResearch

Premiumisation/powerbrandsleadtoseculargrowthinrealisationsandmargins
Premiumisation, new product launches, and brand promotion is a virtuous cycle to Castrolhastermeditspremium
improve the sales mix resulting in higher average realisations and margins for a productspowerbrandsandovertime
lubricantplayer.Castrolhastermeditspremiumproductspowerbrandsandover ithasfocussedonpushingthishigh
time it has focussed on pushing this highmargin category. GOLI and other players margincategory.
also follow the same strategy. Power brands form a subset of the PM segment,
mostly as DEO/CVO are more price elastic and valuebased, though with new
generationCVs,premiumoilsareintroducedinthiscategorytoo.

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INDIANLUBRICANTS SECTORANDINITIATING

Castrolspowerbrands
Brand Type Viscosity/Products Subbrands
CarEngineOils Edge Fullysynthetic 0W40,5W40
Magnatec Partsynthetic 5W30,10W40,15W40 MagnatecStopStart,Ultraclean,Magnatec,MagnatecDiesel
GTX Mineralbased 15W40 GTX,GTXDiesel,GTXCNG(LPG),GTXEco
BikeEngineOils Activ 4stroke 10W30,20W40,20W50 ActivScooter,Activ4T
Power1 4stroke 10W30,15W40,20W50 Power14T,Power1Racing4T
Source:Company,PhillipCapitalIndiaResearch

CastrolhasthreepowerbrandsinthecarengineoilcategoryEdge,Magnatec,and
GTX while for 2W it has two Activ and Power 1. These are highspecification
productsingeneralgoingbytheirviscosityindexandcharacteristics(synthetic,semi
synthetic,mineralbased)thatareaggressivelybrandedandpackaged.CastrolEdgeis
a fully synthetic oil. In the car segment, ithas two other brands namely GTDand
Maruti Genuine Oil which are not labelled as power brands; both are OEM
products.In2W,CastrolGoistheonlyremainingbrand.

Productpricingamongselectplayers
PCMO(Rs/litre) Castrol GOLI Tide IOCL MCO(Rs/litre) Castrol GOLI Tide IOCL
15W40ModernEngine 340 280 260 4T20W40 275 265 244
15W40CNG 302 4T20W50 294 210 244
10W40(Premium) 409 335 4T10W30 292 269 268 244
5W30(Premium) 451 372 290 10W50Racing(Premium) 651 326 523
5W40(Premium) 661 807 829 776 10W30(Premium) 367 342 281
0W40(Premium) 788 20W50(Premium) 348 270
20W50 261 238 4T20W40(LowEnd) 248 205

CobrandedDEO 312 255 15W50 226 268

Scooter10W30 303 275 272
2T20W40 326 240 219 254
Source:Industry,PhillipCapitalIndiaResearch

ComparedtoGo4T,powerbrandActiv4Tis10%expensive,i.e.,almostRs30/litre Powerbrandscurrentlycomprise50%of
dearer this illustrates how a power brand can have better realisations as well as CastrolsPMsegmentor20%oftotal
margins. Even in DEO, premium products can be successful. Vecton, which is a volumes
relativelynewerproduct,ispricedatRs50/litreorata15%premiumtosimilargrade
CRB Turbo, which is labelled a massmarket product. Power brands currently
comprise 50% of Castrols PM segment or 20% of total volumes, which aids in
maintainingmarketleadingpricing,margins,andstructuralrealisationgrowth.

GOLIdoesnothavemineralbasedpowerbrandslikeCastrol,butitisalsointensifying
semisyntheticandsyntheticgrades,whichithaspricedhigher.Mostofits2Wrange
is branded as Pride; within this, its price differs depending on specifications among
mineralbasedgrades.However,oneofitssyntheticgrade4TSynthispricedata
steepRs70/litre,orata30%premiumtothemassmarketgrades.Incars,too,ithas
products priced at a material premium. MAX is the predominant brand for GOLI in
PCMOwhileSuperandXHDareitscorebrandsinCVOandtractoroilsrespectively.

Syntheticoilsshareissmall,butgrowingfast
Lubricating oils are classified according to their rawmaterial base oil. Lowquality Fullysyntheticoilsareexpensiveand
Group1andcurrentmassmarketGroup2baseoilsareessentiallymineralbasedoils areusedspeciallyinFormula1racing,
whileGroup3isofhigherquality.Group4,whichistermedpolyalphaolefin(PAO),is sportscars,andpremiumautomobiles
fullysynthetic and polymer based. Fullysynthetic oils are expensive and are used andbikes.ExxonMobilandCastrolare
speciallyinFormula1racing,sportscars,andpremiumautomobilesandbikes.Exxon predominantplayers
MobilandCastrolarepredominantplayerssellingpremium0W40gradespricedat
Rs 9001,000/litre+ while Shell, GOLI, Total, and IOCL also market nextinline 5W
grades,alsopricedatRs9001,000/litre+.

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INDIANLUBRICANTS SECTORANDINITIATING

SelectedsyntheticengineoilsinIndia Marginprofileofmineral,semisynthetic,andsyntheticoils
Brands/Products Price(Rs/litre) ___Mineral___ ___Semisynthetic___ ___Synthetic___
Mobil10W40 1,185 Rs./litre Low High Low High Low High
CastrolEdge0W40 900 Price 200 250 400 500 900 1,250
ShellHelix5W40 900 RawMatCost 100 120 200 250 500 650
GulfFormulaGX5W40 1,100
GrossMargin 100 130 200 250 400 600
TotalQuartz5W40 1,050
IOCLServoFuturaSynth5W50 907

AveragePrice 957
Source:Industry,Amazon,PhillipCapitalIndiaResearch

Semisynthetic oils are generally Group2 and Group3 blended, with specialised
additives. These are pricier than ordinary oils and are of better quality. While it is
difficulttoascertainthecompositionandspecificationsofsuchoils,theyareheavily
promoted as premium products, and marketed at materially higher prices than
ordinarymineralgrades.

Currently, the share of synthetic grades in India is low for Castrol and GOLI their Syntheticoilsisasmallsegmentfor
share is only ~2% of total volumes. Nevertheless, this segment is growing rapidly. now,butitisfastgrowing
GOLIhasquotedcloseto20%yoyincreaseinvolumes.

Viscositygrading

Fullysynthetic
0W30: Fueleconomy
0W40: Enhancesengineperformance/power
5W40: Protectionfromwearanddepositbuildup,goodstarting,andcirculationin
coldconditions,Mobilitywithintheengine

Semisynthetic
5W30:Betterprotection
10W40:Goodprotectionduringstartingout
15W40:Betteratreducingenginewear,increaseddrainintervals

Mineralbased
10W40:Basicprotection
15W40:Massmarketproduct

EngineoilgradingwasestablishedbytheSocietyofAutomotiveEngineersaccording
to their viscosity characteristics. Currently, most oils are multigrade with a wide
temperature range particularly in winters and when the engine remains shut, to
summers, and fullrunning and heatingup conditions respectively. Viscosity is
inversely proportional to temperature. Ina multigradeoil with 5W40 grading, the
5W bit (W is winter) implies the oil has a certain maximum viscosity/flow at low
temperature.Theloweritis,thebettertheoil'sperformanceundercoldconditions.
The 40 after W implies the thinning property at higher temperature. Higher the
number, lower the thinning. Good quality oil should not lose its properties under
differentconditions,hencewithhighergradingrange,theoilisconsideredsuperior.
Newgenerationoilsaremoreecofriendlyaswell.

IndiasmovetoBS6byCY20wouldalso
With greater focus on pollution and emission control, lubricant makers are bracing openupthescopeforfurther
for cleaner oils. This year, Castrol launched the GTX Eco in India which it claims innovationandmodificationinoil
reducesCO2emissionsby10%andextendsenginelife.WhileGTXEcoispricedatthe propertiesandcanleadtohigher
same level as its regular GTX grade, there is scope for premium pricing in this realisationsandmargins
categoryasecofriendlyoilsstartcommandingahighershare.IndiasmovetoBS6
byCY20wouldalsoopenupthescopeforfurtherinnovationandmodificationinoil
propertiesandcanleadtohigherrealisationsandmargins.

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INDIANLUBRICANTS SECTORANDINITIATING

Industrialsegmentrealisationsandmarginslower,butopportunitiesexist
Theindustrialsegmentispricesensitive,beingB2Binnature,andthemarketassuch
isaggressiveandcompetitive.ThereisanOEMadvantageforoilchangeduringthe
warranty period for imported and branded engines and equipment. Pricing is, to
some extent, formulalinked but by nature, it is more favourable to a lubeplayer
under low crude oil and baseoil pricing. The industrial segment caters to a wide
range of consuming sectors (marine and aerospace, oil & gas, mining, power
generation,roadconstruction,automobilemanufacturing,metals,andmachinery).

Pureindustrialsegmentexcludesprocessandtransformeroils;CastrolandGOLIdo Theindustrialsegmentismarkedby
not have a material presence in these. Industrial oils include hydraulic oils, heavy heavylubricantconsumptiondueto
engine distillate oils, gearbox, air compressor, turbine, turbocharger oils, greases, continuousengine/equipment
sealoil,chainoil,cuttingoil,andcirculatingoil.Theindustrialsegmentismarkedby operations
heavy lubricant consumption due to continuous engine/equipment operations.
Therefore,anindustrialandminingrecoverycouldleadtoaquickjumpinlubricant
consumption. Additionally, in this segment, promotion expenses are lower (though
sectorslikeminingarelocatedremotely,andhencerequireanefficientdistribution
system).

Castrolssegmentalnetrealisation CastrolssegmentalEBITmargin
Automotive Nonautomotive 60 Automotive Nonautomotive
200
177 176
180 50
165
155 50
160 152 153
145 143 141
134 38
140 124128 40 36 37
34
120 32 32 33 32
29
Rs/ltr
Rs/ltr

30 27
100 24
80
20
60
40 10
20

CY10 CY11 CY12 CY13 CY14 CY15 CY10 CY11 CY12 CY13 CY14 CY15

Source:Company,PhillipCapitalIndiaResearch

ThetenderbusinessisPSUdominated
Theindustrialsegmentincludestenderbasedprocurementinsegmentssuchascoal,
railways,anddefence.Forexample,CoalIndiahassizeablelubricantconsumptionfor PSUOMCshaveanedge,astheysupply
equipmentsuchasexcavators,dumpers,anddozers.However,thistypeofbusiness dieselaswell,whichstrengthenstheir
is led by L1 bidders; hence, it is mostly PSU OMCs dominated. As per our channel positionandbargainingpower.
checks,receivablerecoveryisslow;hence,privateplayersshyawayfromitwhilePSU
OMCshaveanedge,astheysupplydieselaswell,whichstrengthenstheirposition
and bargaining power. Nevertheless GOLI has won government and Transport
Corporationtenderswhichhashelpedclocksharpvolumejump.

Stableoilpricestokeepindustrialsegmentmarginssteady
About56yearsago,Castrolsautomotiveandindustrialnetrealisationsandmargin
were similar with only a Rs 45/litre difference. However, since then,
premiumisation in automotive led to this segments realisations steadily increasing
and after oil prices peaked out in CY1213, margins started rising. Against that,
growthinindustrialsegmentrealisationwasmutedduetoindustrialslowdownand
competitive pressure and margins remained weak before recovering in CY15, when
oil prices dropped. We believe industrial pricing and margins will remain healthy
under a stable oil price scenario, and that the automotive segment would be the
maindriverformarginaccretiongoingforward.

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INDIANLUBRICANTS SECTORANDINITIATING

However, specialised industrial products such as cutting oils, metal working fluids,
broachingoil,andhoningoil,usedinautomobilemanufacturingandothermedium
scale industries, are niche markets where realisations and margins are better.
Castrol is already a leader in many such segments, and continues to be aggressive
withnewproductlaunchesandtieups.

Expectrealisationstostructurallykeepimprovingduetopremiumsalesmix
We expect Castrol and GOLIs average net realisations to keep growing, aided by
improving sales mix and premiumisation and an overall nondestructive pricing
environment. Despite a fall in oil prices, lubricant players have not cut retail prices
officially they have resorted more to discounts and schemes, which can be easily
rolled back. In the last 5 years, Castrol/GOLIs realisations saw CAGRs of 7%/5%;
growthwasonlydownlastyear,andthattooby0.3%/5%.

Withoilpriceslikelytoremainstable,weexpectgrossmarginstokeeponexpanding SeeCastrolrecording1%/5%yoy
and see Castrol recording 1%/5% yoy increase in net realisation in CY16/17 and increaseinnetrealisationinCY16/17
7%/5% increase in gross margin. For GOLI, we estimate 2%/4% increase in net and7%/5%increaseingrossmargin.
realisationyoyinFY17/18and3%/5%increaseingrossmargin.OurCY17/FY18run ForGOLI,weestimate2%/4%increase
rateisslightlyhigher,asweassumeoilpriceswillrisebyUS$5/bbltoUS$50/bblon innetrealisationyoyinFY17/18and
an average; hence, we anticipate some hike in prices or rollbacks in discounts and 3%/5%increaseingrossmargin
schemes.Underanormalscenario,wewouldassumea23%realisationincreasefor
Castroland12%forGOLI.

Castrolsnetrealisationandgrossmargintrend GOLIsnetrealisationandgrossmargintrend
Netrealisation Grossmargin Realisationgrowth Netrealisation Grossmargin Realisationgrowth
200 25% 160 20%

140
20% 15%
160
120
15% 10%
120 100
Rs/ltr

Rs/ltr

10%
80 5%
80
5% 60
0%
40 40
0%
5%
20
5%
10%
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Source:Company,PhillipCapitalIndiaResearch

Castrol:Primaryvolumegrowthandmarginassumption
Rs/litre CY11 CY12 CY13 CY14 CY15 CY16E CY17E
Salesvolume(mnlitre) 209 204 197 196 191 203 216
Growth 5% 2% 3% 0% 2% 6% 7%
Grossmargin 62 64 71 74 89 95 100
OPEX 30 33 36 38 42 44 45
Growth 6% 10% 8% 5% 11% 5% 2%
EBITDA 32 31 35 37 47 51 55
CleanEBITDA(Rsmn) 6,697 6,229 6,875 7,167 8,949 10,374 11,822
Growth 8% 7% 10% 4% 25% 16% 14%

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INDIANLUBRICANTS SECTORANDINITIATING

GOLI:Primaryvolumegrowthandmarginassumption
Rs/litre FY12P FY13P FY14P FY15 FY16 FY17E FY18E
Salesvolume(mnlitre) 61 65 64 68 75 84 95
Growth 15% 7% 1% 6% 10% 12% 13%
Grossmargin 51 53 55 61 63 66
OPEX 35 35 36 40 40 41
Growth 3% 1% 2% 11% 5% 2%
EBITDA 16 18 19 21 22 25
CleanEBITDA(Rsmn) 1,050 1,145 1,272 1,565 1,859 2,333
Growth 9% 11% 23% 19% 26%
Source:Company,PhillipCapitalIndiaResearch;PareprovisionalestimatesfiguresandarenotreportedbyCo.

OPEXcomprisesofemployeecost,freight,royalty,processingcharges,A&Pexpense,
and other expenditure. We are building in an OPEX/litre growth of 5%/1% in the
currentfiscaland2%eachnextyearforCastrol/GOLI.

ShareofPMtooverallvolumesbetweennowandthen
Castrol GOLI
GOLI
45% Castrol 30%
40%
40% 24%
25%
35%

30% 20%

25%
15% 13%
20%

15% 10%
10%
10%
5%
5%

0% 0%
CY06 FY16 CY06 FY16
Source:Company,PhillipCapitalIndiaResearch

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INDIANLUBRICANTS SECTORANDINITIATING

Takeawaysfromourinteractionwithalubricantsectorexpert
Werecentlyhostedalubricantsectorveterantounderstandhisviewsandinsights
ontheindustry.

Volumes:Signsofrecovery,expectgrowthratetodoubleto5%+from~3%CAGR
Inthelastfiveyears,theIndianlubricantsmarketsaw~3%CAGRinvolumesto
1.7bnlitres.MajorplayersIOCL/HPCL/Castrolsawtotalmarketsharereduceto
30%/15%/14% in FY1415 from 35%/20%/18% in FY09, while BPCL/Tide
Water/Gulf maintained their positions at 11%/4%/4%. However, other smaller
playerssawtheirsharesdoublingto20%from10%.
Fromhere,volumegrowthislikelytoincreaseto56%yoy,drivenbygrowthin
vehicle sales, high petrol/diesel consumption (pointing towards increasing
vehiclerunsandlubechangecycles),drainintervalsinCVs/passengercarsnearly
at optimal levels, and recovery in manufacturing and mining sectors under the
industrialspace.

Automotive:Drainintervalcycleseemstohavepeaked
Theautomotivesegmenthasa60%shareoftotallubricantssales;ofthis5060%
isCVs,~10%istractors,2025%ispassengercars,and1520%twowheelers.The
splitbetweenOEMandbazaartrade(replacementdemand)is20%and80%.
Over the last 56 years, drain intervals in CVs/cars have almost doubled to
36,000/10,000kmsfrom18,000/5,000kmsearliermainlyduetoadecreasein
engine size (which lowers volume requirement and increases consumption Smallerplayerssawtheirshares
efficiency)andhighqualityoilsthatlastlonger.However,thisimprovementhas doublingto20%from10%.
nearly hit a physical peak now. Lubes also have a definite shelf life and are
affectedbytheenvironment.
Eventhoughsomelubeplayersclaimtohaveoilsthathave7080,000kmsdrain
intervals, engine makers have not approved them. Hence, these claims are
unsubstantiated and not followed by transporters/fleet operators. In reality,
evenifavehicleownerneedsachangeafter36,000kms,oil isusually changed
afterjust20,000kmsthisisbecausetheprescribeddrainintervalisonlyifideal
conditions prevail (45km/hour speed, constant operation, no elevation, and no
idlerunning).Itisactuallyonatimescale;drainintervalneedstobemeasured.
Thisway,intervalswouldbedifferentfordifferentvehicles
Passengercarsandtwowheeleroilsaleshaveseenasteadygrowthrate,which
is likely to continue with newgeneration vehicles. OEMs will remain an
importantmode,thoughwithnewmultibrandservicecentres,secondhandcar
shopsandorganisedtaxifleets,bazaartradewouldgetfillip.
Dieselengineoil(DEO)demanddependsontheCVcycle.Overtheyears,dueto
elongating drain intervals, the CV segment saw a fall in lube usage. However,
with this elongation peaking, volumes are likely to recover somewhat. Ahead,
thissegmentwoulddependonanindustrialrecoveryandmanufacturingrevival,
whichwouldpushuplogisticsactivity.
Tractorshavedonewellforawhilenow,withhigherpenetrationandusage,and
increasingnumberofhighhorsepowerhaulage/constructiontractors.
Currently, market share for Castrol/PSUs/Gulf/Tide Water/Others in the
automotive segment is 22%/30%/7%/7%/34%. For Castrol, it has declined from
25%fiveyearsago,whileforPSUs,ithasincreasedfrom22%earlier.

Industrial:Miningrecoverypossible;otherswouldmoveinlinewitheconomy
Industrialsegment(40%share)targetmarketcanbebrokenupas25%power,
20%chemicals,10%mining,10%automobilemanufacturing,and10%metals.
Of this, mining currently is almost nil as operations in the eastern mining belt
have virtually stopped. Some signs of recovery are visible with state
governments allowing mining restarts. Hence, mining could be a significant
volumedriverinthefuture.
Inmanufacturing,metalssectorisseeinganuptick,particularlysteel.Specialised
applications like metal cutting and honing are gaining traction. These
applications require premium oils that could be both volume and margin
accretive.

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INDIANLUBRICANTS SECTORANDINITIATING

OEM tieups in specialised industrial applications (machines) is a strength for

players. MNCs have an edge on imported machines with preapprovals due to
global tieups; hence, players like Castrol are targeting these segments for
volumegrowth.

Margins:Toremainstableonanannualisedbasis,bazaartradeismostlucrative
Withdeclineinbaseoilprices,themarginscenariohasimprovedforallplayers.
AtapeakoilpriceofUS$110/bbl,Indianbaseoilprices(perlitre)wereat~Rs
70,whichfelltoRs35whenoilhitUS$30/bblcurrently,theyhoveratRs42.
The movement in prices would depend on oil prices. However, the base oil
marketremainswellsuppliedwithnoglobalshortages.
Lubeplayersdidnotcutprices,asretailpricingissticky.However,theyincreased
discounts and schemes to drive sales. For distributors, companies offered
volume discounts while for retailers, cashback coupons. For customers, free
offers and discounts were introduced. However, these are highly elastic and
dependentonrawmaterialpricing.Manyoftheseoffersarerealisedattheend Oilisusuallychangedafterjust
of the financial year. Premium product suppliers, in fact,do not want prices to 20,000kmsthisisbecausethe
fall,asthiswouldaffecttheirproductsperception. prescribeddrainintervalisonlyifideal
Onanannualisedbasis,marginsarelikelytobemaintainedevenifthereissome conditionsprevail
recoveryinoilandbaseoilprices.
Personal mobility (cars and two wheelers) is a highmargin business and lube
playerswillcontinuetoinnovatepremiumproductstoimproverealisationsand
marginsinthissegment.Newgenerationoilsarefocussingoncleantechnology
tocomplementenvironmentfriendlyfuelslikeEuro5and6.
Amongvehicletypes,twowheelercommandthehighestmarginsat~25%,while
passenger cars are at 22%, and CVs at 15%. The corresponding pricing is Rs
350/litre,Rs300/litre,andRs300/litre(dieselengineoilshoweverarecostlierto
manufacture).

Inindustrial,specialisedoilscancommandhighermargins.
Bazaar trade entails the highest premiums, followed by OEM service centres
where both dealer margins and royalty are higher. Factoryfill is the most
unattractivesegment,asautomobilecompaniesbasicallyofftakeatniloreven
negativemarginsifrawmaterialpricesgoupintheintermediateperiod.
Playerwise, Castrol is always at a premium. On a net realisation perlitre of Rs
250forCastrol,Gulf/TidewaterwouldbeatRs210/190andPSUs(OMCs)atRs
170.OtherMNCplayersaresimilartoorhigherthanCastrol.
As vehicles come out of the OEM market due to warranty expiry and cheaper
alternatives,bazaarsaleoflubesgrowandmarginsimprove.

ProductsandrawmaterialsMostlyhomogenous
Lube products are primarily homogenous among manufacturers, as
specifications are uniformly made by agencies like API (USA) and JASO (Japan).
There are no significant technological entry barriers, as it is a blending process
wherebaseoilandadditivesuppliersareuniversallyaccessible.
Perceptionandbrandpowerplaysamainroleincustomerpreferences.Hence,
lubricantsisamarketingdrivenbusiness.
Indianlubesaresimilartoglobalgrades,thoughanewtechnologywouldtakea
yearortwototransfer.
Currently,theIndianbaseoilmarketisGroup2dominated.Onlyasmallshareof
oldvehicles,taxis,anddumptrucksuseGroup1basedlubes.Group3lubes,on
theotherhand,areincreasinglyusedbynewgenerationvehicles(~20%)their
high sheer strength and extreme thinness is ideal for small compact engines;
theydoesnotlosetheirpropertiesatdifferenttemperatureranges.
While Group2 lubes are priced at Rs 42/litre, Group3 would be priced at Rs
50/litre.
In India, base oil is manufactured by HPCL Mumbai Refinery, IOCL Haldia
Refinery,CPCLChennaiRefinery,andBPCLMumbaiRefinery.MostlyGroup2is
available in India, though Haldia has started a Group3 line. HPCLs Mumbai
RefinerymayalsobecapableofproducingGroup3.
PrivateplayersimportbaseoilfromIran/MiddleEast(Group1and2)andSouth
Korea(Group2and3).

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INDIANLUBRICANTS SECTORANDINITIATING

Additives are highly priced and very specialised. Only three companies supply
theseinIndia.
Lube players hoard base oil if they expect prices to rise. They have their own
storageswhilethirdpartytankagesarealsoavailableinports,terminals,etc.

MarketingBelowthelineismoreimportant
In the Indianmarket, belowtheline promotion activities are very important as
channelpartners(distributors,dealers,retailers,andgarages/mechanics)arekey
drivers.Ittakesyearstobuildabrandatthegrassrootlevel.Companieshaveto
creategoodwill.StrongplayerssuchasCastrol,Gulf,TideWater,andevenPSUs
invest heavily into this by being in constant touch with their partners, giving
themincentivesandgifts,andorganisingworkshopsandmeets.
Advertising is also important, but it alone will not work. Many MNCs (Mobil,
Shell,Motul)havenotbeenabletoexpandduetolackoffocusbelowtheline,
concentratingonlyonads.
Castrol has a definite firstmover advantage as it developed the bazaar trade
initially and is an old player. Despite lower margins, retailers have maximum
Castrol products considering customer recall and preferences. Castrol should
retain this advantage and therefore, any recovery in the lube cycle would first
percolatetoCastrol.
Gulfisalsoveryaggressive.However,itisequallyfocussedonadvertising,asit
wantstoincreasebrandrecallamongtargetcustomerssuchastwowheelers.In
CVs,GulfhasanaturaladvantageduetoitsHindujaconnectioninAshokLeyland
whereitisanOEMs.AgainstCastrols45%dealermargin,otherplayersoffer7
8%.Retailermarginsarehigherat15%duetolowervolumes. Marketsharefor
Thoughlessattractive,OEMsarerequiredthispushesthebrandinthebazaar Castrol/psus/Gulf/TideWater/Othersin
trade and no retailer likes to stock products that do not have OEM approvals. theautomotivesegmentis
Thisisthecasewithcustomerstoo. 22%/30%/7%/7%/34%
PSUs share of sales in fuel stations have declined significantly. Currently, the
shareisonly10%with90%beingbazaartrade.AmongOMCsIOCLcontinuesto
remain a market leader with significant bulk industrial exposure (like railways)
andlowestprices,butBPCLandHPCLhavebecomeaggressiveinrecentyears.
Inanycase,PSUswillalwaysbebehindotherplayersindecisionmakingdueto
their administrative and reporting structure. Hence, they are not quick in their
pricingandschemedecisions.
OEMapprovalsgenerallytake12years.However,MNCshavepreapprovalsdue
toglobaltieups.OEMoilsaregenerallygenuineoils,whicharebrandedinthe
nameoftheautomobilemanufacturer.
Cobrandedoilshavethenameofbothparties.Mostplayershavegenuineoils,
exceptCastrol,whoonlygoesforcobrandedoilsatthemost.
CastrolsretailernetworkisalmosttwiceGulf/TideWaters.Additionofoutletsis
necessaryfordistributionreach.

Others
MarketsTheWesternIndiamarketisthemostlucrative,followedbysouthern,
then northern, and finally eastern. Castrol is strong in western and northern
markets, while it is Gulf in the south (due to the Ashok Leyland legacy). Elf is
stronginthenorth.TideWaterisalsostronginthewest.Globalmarketsvary
developedcountriesaremostlyorganised;salestherearethroughsupermarkets
too, and servicing is mostly done at authorised centres. Western markets have
grownslower(1%CAGR)whileChinaisthefastestgrowing.
Synthetic oils: Group3based oils are marketed as synthetic/semi synth. In
reality,syntheticisnotmineralbaseditisacompoundnamedpolyalphaolefins
marketed by Mobil and Chevron. It is almost 78x pricier and is used in super
luxury/premiumsports/F1cars.
Brandpower:Castrolremainsatthetopacrossthechain.Gulfis#3intermsof
brandrecallasperasurvey.
Newplayers:Newplayersarenotabletomakeadentonthebroadermarket,
yettheyareprofitablebasedonspecifictargetmarketslikeShellforaviation
lubricants,MobilforMarine,andValvolineforCumminsgenerators.

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INDIANLUBRICANTS SECTORANDINITIATING

Indianlubricantssector
TheIndianlubricantssectorisa2.8mmtpa(3.1bnlitre,conversionof1.11x)market
withtheautomotivesegmentholding42%volumeshare,industrial23%,transformer
&whiteoils23%,processoils8%,andgreases4%.Themarkethasover30players,
both PSU and private, domestic and industrial, integrated and standalone. Castrols
estimates that it commands ~55% market share along with PSU OMCs (IOCL, BPCL,
HPCL)inthebazaartrade,20%iswithMNCs(internationalplayerslike Total,Shell,
Mobil,Valvoline,Motul),and25%iswithotherprivateplayers(includingGulf/GOLI,
TideWaterOil,Savita,Raj).

Volumeshareamonglubricanttypes Broaderbazaarmarketshare

Process,8% Private,25%
MNCs,20%

Transformer/
Automotive,
White,23%
42%

Greases,4%

Industrial, Castrol+PSU
23% OMCs,55%

Source:Industry,PhillipCapitalIndiaResearch

Automotive and pure industrial lubricant (excluding transformer and process oils,
greases) market is dominated by the PSU OMCs with an almost 60% market share,
followed by Castrol at 12%, GOLI and Tide Water Oil at 4% each, and over 20% by
remainingplayers.However,overthelast56years,largerplayerslostmarketshare
whilesmalleronesgainedduetobaseeffect.

MarketsharetrendofIndianlubeplayers
FY10Size1,750mnlitre FY16Size2,000mnlitre

TideWater, TideWater,
3% 4%
GOLI,3% Others,9% Others,23%
GOLI,4%

BPCL,12%
BPCL,12%
IOCL,35%

Castrol,18% Castrol,12% IOCL,30%

HPCL,20% HPCL,15%

Source:Industry,PhillipCapitalIndiaResearch

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INDIANLUBRICANTS SECTORANDINITIATING

Automotivelubricants
Automotive lubricants comprise of primarily engine oils (80% share) with gear oil,
transmissionoils,andgreaseoccupyingsmallerproportions.Engineoilsarebroadly
classified as 2W or motorcycle oils (MCO), passenger vehicle oils (PV), CV oils
(CVO/DEO), and tractor oils (also diesel). 2W and PV, which together form the PM
segment,mostlycompriseofpetrolengineoilswithdieselformingonlyasmallpart.
CVandtractoroilsaremostlydiesel.ThesizeoftheIndianmarketinFY16was1.3bn
litres.CVscomprisemostofautomotivelubeconsumptionat60%+followedby
tractorsat12%,2Wsat10%,PVsat5%,3Wat5%andothers(likeagripumpsand
gensets) having 78% share. In the last 56 years, the automotive segment is
estimatedtohavegrownby34%.

MarketsharetrendofIndianlubeplayersintheautomotivesegment
FY10Size1,100mnlitre FY16Size1,300mnlitre

TideWater, TideWater,
Total/Elf,8% GOLI,7% 7%
7%
Total/Elf,6%
GOLI,5%

PSUOMCs,
Others,33% 28%

PSUOMCs,
22%
Others,31%

Castrol,25% Castrol,21%

Source:Industry,PhillipCapitalIndiaResearch

Intheautomotivemarket,Castrolistheleaderwith20%+marketsharefollowedby
the PSU OMCs with a 30% combined share, GOLI and Tide Water Oil at 7% each,
Total/Elfwith6%,andothershavinga30%share.Overthelast56years,Castroland
Totalhavelostmarketshareagainstflattogainsbyothers,withPSUOMCsposting
the biggest gain due to their low base and focus on the bazaar segment. These
figures,asperourchecks,includeOEMSandfactoryfillstosomeextent.

Bazaartrade
Bazaartradeisdefinedasdirectretailsalesinthereplacementmarketandexcludes
fuel pump sales, which are dominated by the PSU OMCs. Currently, 80% of the
automotivelubricantsareinthereplacementmarketofwhichonly20%arefuel
pumpandnonbazaarsales.Traditionally,fuelpumpsusedtohavehighersales,but
with the advent of private competition, auto lube business took on a more FMCG
type character and sales tilted to sparepart shops, lube shops, and
garages/workshops. PSU OMCs have themselves also started focussing more on
bazaartradewithonlytransportersandfleetoperatorsbeinglubecustomersinfuel
outlets.

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INDIANLUBRICANTS SECTORANDINITIATING

Breakupofbazaartrade Marketshareinthebazaartrade

Garages/wor Others,10%
kshops,20% Castrol,21%
Others,32%

IOCL,15%
Lubeshops,
20%
GOLI,7%
Sparepart
TideWater, BPCL,10%
shops,50%
7% HPCL,10%

Source:Industry,PhillipCapitalIndiaResearch

Sparepart shops comprise a bulk 50% of bazaar trade, followed by dedicated lube
shopsandgarages/workshopsat20%each.Castrolisthemarketleaderinthebazaar
segment,with21%marketshare,followedbyIOCLat15%.Castrolseparatelystatesa
marketsharecomprisingofitsprimaryfocus,theurbanautomotivebazaarmarket,
whereithasgrownoverthelast56yearsto22%+from20%.ThecompanysPM
marketshareisasignificant30%+(MCO:~30%andPCMO:~40%)whileforCVOitis
below20%.

Castrolstargetedbazaarsegmentmarketshare

Castrol'surbanautomotivemarketshare
23%

22%

21%
22.8%
22.4%
20% 21.6% 21.6%

19% 20.0% 20.0%

18%
CY10 CY11 CY12 CY13 CY14 CY15

Source:Company,PhillipCapitalIndiaResearch

GOLIhasestimateditsmarketshareat7%+,whichinclude8%marketshareinCVs,
5%intractors,9%in2W/MCO,and45%inPVs.

Industriallubricants
TheindustrialsegmentisdominatedbyPSUsandadifferentsetofprivateplayersin
segmentssuchastransformeroilsandprocessoils.Theindustrialornonautomotive
segment, with a 1.8bn litre size, comprises of sectors such as power, oil & gas,
mining, metals, industries, road construction, marine, railways, and aviation etc.
While general industrial lubricant occupies 40% share in the industrial space,
transformer oil used in the power sector is also a large segment with a 40% share.
Process oils and industrial greases have a 14% and 7% respectively. Almost 30% of
industrialoilishydraulicoil,followedby2025%ofindustrialengineoils.Cuttingoils
areestimatedtohavea2025%share

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INDIANLUBRICANTS SECTORANDINITIATING

Targetsectoralvolumeshareofindustriallubes Shareoftypesofindustrialoils1,800mnlitre

Others,18% Process,14%
Power,24%

Rail/Air/Mari General
ne,7% Industrial,
40%

Mining,8%
Chemicals,
20% Transformer/
Auto,11% White,40%
Metals,12%
Greases,7%

Source:Industry,PhillipCapitalIndiaResearch

IOCL is the market leader in industrial lubricants with a market share of ~20%
followedbyAparIndustriesat15%,ColumbiaPetroat10%,RajLubricantsandSavita
Chemicalsat8%each,HPCLat6%,Shellat5%andsoon.

The aviation lubricant business is populated byMNCs due to global OEM approvals
and strict norms, while marine business also has a sizeable MNC presence though
Indian companies are entering it. Volumewise, Castrols industrial exposure is 15%
whileGOLIsis15%ifpureindustrialisconsideredasfactoryfillsandtenderbusiness,
thoughpartoftheB2Bcategoryareautomotiveingeneral.

Focusareas
Lubricant players have specific focus areas. Castrol has continued its aggressive
strategy in the PM segment, circulating around lube shops, sparepart shops, and
garages/workshops.Ithasalsobecomeaggressiveintheindustrialspace,particularly
inhighmarginspecialisedapplicationsandiscapitalisingonglobalOEMtieups.

GOLIhasalsofollowedasimilarbazaartradestrategy,buthasfocusedonOEMtie
upstoimprovebrandpositioningandtractioninthetractormarket,tenderbusiness
(particularly government departments and transport corporations, which have
helpedinperiodicvolumespurtforthecompany),andengagementsintheCVspace,
particularly through authorised dealers. It is also following Castrols footstep by
openingexclusiveworkshopsthatithasnameCarstop(1,000inno.s)andBikestop
(4,000inno.s)respectively.

Focusareasofdifferentlubeplayers
PM Tractor CV Industrial
OEMS Tide,Shell,BPCL,Elf GOLI GOLI,BPCL Castrol,OMCs,Tide,Elf
FuelPumps OMCs OMCs OMCs
SparepartShops IOCL,GOLI,Tide,Elf,Castrol GOLI,Elf
LubeShops IOCL,GOLI,Tide,Elf,Castrol GOLI,Elf
Workshops Castrol GOLI,Elf
AuthorisedDealers GOLI,Mobil Elf,GOLI GOLI,Elf Elf
Source:Industry,PhillipCapitalIndiaResearch

PSUOMCsareaggressiveinthebazaartrade,besidesmaintainingtheirengagements
in auto fuel outlets. OEM tieups are also pursued. MNCs mostly concentrate on
authorised dealers and OEM tie ups, though they have to enhance belowtheline
activity to increase foothold. Companies like Valvoline Cummins, Mobil, and Shell
haveleadershippositionsinnichemarketslikedieselgensets,marine,andaviation
spacerespectivelyduetoOEMsupport.

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INDIANLUBRICANTS SECTORANDINITIATING

Capexandnewcapacities
Onarecurringscale,lubricantsisalowcapexbusiness;onlyminormodificationsin
existing plants can change assembly line configuration/product specifications.
However, due to capacity constraints and logistic/market needs, companies are
planning new blending plants. GOLI expanded the annual capacity of its Silvassa
facility to 90 mn litre last year (from 75mn litre) at a capex of Rs 450mn. It is now
constructinganewplantinChennaiwithacapacityof~50mnlitreinvolvingacapex
ofRs1.5bn,whichwillstrengthenitssupplypositioninthecrucialsouthernmarket
and lower freight cost. Castrol has also indicated possibility of new project capex if
volume growth escalates. If not for the plant, Castrols recurring capex would have
beenmeagre(Rs400500mninlastthreeyears)againstitsFCFofRs47bn.HPCLis
alsoplanningtosetuptwonewplantsinMumbaiandoneinKasna(UP).

Briefprofileofkeylubricantplayers(bazaarsegment)
CastrolIndia:Castrol,promotedbyBP,isoneofthekeyplayersinIndia.Ithasthree
blendingplantsinSilvassa,Patalganga(Maharashtra),andPaharpur(Bengal)witha
combined capacity of 200mn litres+, three delivery centres, 23 warehouses, 420
distributors, and 80,000+ retail outlets. Castrol is present in automotive as well as
industrial lubricants though its presence in the tender business and
transformer/process oils is minimal. Castrols marquee brands are Edge (fully
synthetic),Magnatec(semisynth),GTX,andGTD(OEMDEO)inPCMO,Activ,Power1
andGoinMCO/2W,andVecton,CRBandRXinCVO.Besidesthese,italsomarkets
CNG oils, transmission fluids, antifreeze/coolants, driveline fluids, fork oils, and
greases. In nonautomotive/industrial, Castrol supplies to marine, oil & gas,
automobile manufacturing, aviation and aerospace, machinery, power generation,
metals,andminingsectorsproductssuchashydraulicoils,cylinderoils,heavyengine
oils, compressor oils, turbocharger oils, seal oils, transformer oils, cutting oils,
circulating oils, cleaners, chain oils, corrosion preventives etc. Castrol is the price
leaderamongmajorcompaniesinIndia.

GulfOilLubricantsIndia:GOLI,promotedbyGulfOilInternational,aHindujagroup
companyisoneofthetopthreedomesticprivatelubricantmarketersinIndia.Ithas
ablendingplantlocatedinSilvassawithacapacityof90mnlitre,350distributors,and
55,000+ retail outlets. GOLI also has exposure to tender business of transport
corporations.GOLIsmarqueebrandsareGulfFormulaGX,Tec,UltrasynthandMAX
inPCMO,GulfPrideinMCO/2W,GulfSupreme,Superduty,Superfleet,SuperDiesel
andMasterinCVO,GulfXHDintractorsandGulfSupremein3W/CNG.Besidesthese,
italsomarketsCNGoils,gearoils,greases,brakefluid,forkoils,greasesandcoolants.
Innonautomotive/industrial,GOLIsprofileissimilartoCastrolswithbrandssuch
asHarmony,Security,Crest,Fidelity,Select,andQuench.Pricingwise,GOLIclaimsto
be at a 1015% discount to Castrol. The company also has minor battery business,
where it markets imported 2W batteries. GOLI was demerged from Gulf Oil
CorporationasapureplaylubricantscompanyinCY15.

TideWaterOilCompany:TideWater,promotedbyAndrewYule,aPSU,isalsoatop
threedomesticprivatelubricantmarketerinIndia.Ithasfiveblendingplantslocated
inSilvassa,Turbhe,Oragadam,FaridabadandRamkristopurwithacombinedcapacity
of 100mn litre+, 55 depots, 50 distributors, 350 dealers and 50,000+ retail outlets.
TidesumbrellabrandisVeedol,whichitacquiredfromBPwhilesubbrandsinclude
Syntron,Powertron,BlueBloodandTurbostarinPCMO,SuperSwiftandTakeOffin
MCO/2W, Max Pro and Turbo in CVO and Prima in tractors. Besides these, it also
markets CNG engine oils, gear and transmission oils, greases, brake fluid, fork oils,
andindustrialgrades.Pricingwise,Tideisata1520%discounttoCastrolasperour
channelchecks.Tidehasanannualsalesvolumeof~75mnlitre.Tideisalsoforaying
abroadwithNepal,Bangladesh,andEuropeamongfocusareas.

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INDIANLUBRICANTS SECTORANDINITIATING

Indian Oil Corporation: IOCL, an integrated downstream PSU, is a major panIndia

lubricant player with a blending capacity of 450mn litre+ and total lube sales of
418mnlitreinFY16(4.4%yoygrowth)ofwhichinstitutionalportionwas276mnlitre
and retail 142.5mn litre. IOCL is strong in the tender business, involving railway,
defence,andindustrialPSUmonopolieslikeCoalIndia.IOCLclaimstohavea27.5%
marketshareinfinishedlubesasamarketleader.IOCLsumbrellabrandisServoand
subbrandsincludeServoPride,Premium,andSuperPlusinCVO/DEOcategory,Servo
Futura (synthetic), Superior and Xee in PCMO and 2T/4T in MCO/2W. Servo has
multiplecobrandedoilswithautomobilemanufacturerslikeHyundai,Eicher,Force
Motors,andHMT.Servoalsomarketstransmissionfluids,gearoils,brakefluids,agri
application oils, and boat engine oils. IOCLs bulk industrial lubricants comprise of
variouscategoriesmentionedforplayersabovealongwithsmallscaleindustryoils.
IOCLandotherPSUOMCsproductsarepricedata20%+discounttoCastrolasper
ourchannelchecks.

Hindustan Petroleum: HPCL is also a PSU OMC though about half the size of IOCL
withastrongpresenceinthelubricantspaceduetoitsbaseoilproductionfacilityin
the Mumbai refinery. It has 7 blending plants with a combined capacity of 275mn
litre while gross lube sales in FY16 was 590 mn litre (a growth of 27% yoy) against
LOBSproductionof465mnlitre.HPLubeshas208distributors,13,600dealers/auto
fuel outlets and 96 CFAs which amounts to 45% of automotive lubricant volume
share.HPCListhefastestgrowingPSUwith4%marketsharegainrecordedinFY16
amongPSUs,asperthecompany.HPCLsbrandsincludeHylube,Milcy,LaalGhoda
andRailroadinDEO,ExtraSuper,CruiseandRacerinPCMOandMCOrespectively.
HPCL also markets CNG oils, gear oils, transmission fluids, fork oil, brake fluids,
coolants, and greases. HPCL is present in industrial lubricants space and tender
business,includingdefence.

Bharat Petroleum: BPCL is a PSU OMC similar to HPCL. BPCL has 3 blending plants
with a combined capacity of 250mn litre, 4 lube filling plants, 13,000 auto fuel
outlets,591distributors,60,000+retailoutletsand54depots.BPCLclaimstohavea
21%marketshareamongPSUOMCsinautomotivelubricants.BPCLsumbrellabrand
isMAKandsubbrandsincludeElite,Diamond,SupremeandClassicinPCMO,V3and
Diamond in DEO/CVO and 4T in MCO/2W. BPCL also markets CNG oils, gear oils,
transmission fluids, fork oil, brake fluids, coolants and greases. BPCL is present in
industriallubricantsspace.

Other players: MNCs and smaller private entities like Shell (brands include Helix,
Advance, Rimula), Valvoline Cummins, Exxon Mobil (Mobil, Mobil 1), Total (Elf,
Quartz),Petronas,Idemitsu,Motul,RajLubricants,Savita(Savsol)andGPPetroleum
(previousSah/IPOL,~15mnlitrevolumes).

GSTcanlowerpricesandprovidescopeformarginupside
Currenttaxationonlubricantscomprisesofexcisedutyof~14%andaVATrateof14
15%.IfeffectivetaxationgetsloweredthroughGST,thentherewouldberoomtocut
pricesaswellasincreasemargins,whichispositiveforthesector.Hence,depending
ontheGSTrate,thelubricantsectorcanbeaGSTplay.

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INDIANLUBRICANTS SECTORANDINITIATING

Automotivelubricantpricebuildup(Rs/litre)
160 150

140

120

100

80

60
42
32 37
40
12 15 12
20

0
BaseOil Additive Overheads SGA Total Exciseduty VAT@14%
Marketing @14%
Margin

Source:Industry,PhillipCapitalIndiaResearch

Keyrisks
Adverse oil price and base oil pricing scenario: Raw material cost fluctuation
wouldimpactmarginsifretailpricingissticky.Thiswouldincludeadditivesand
packaging.
Currency risk: Since base oil and additives are dollar and retail products are
rupeedenominated,currencyriskisinherentinthebusinesswithadepreciating
Rs/USDbeingadverseonmargins.
Competitiverisk:Predatoryanddestructivepricingbycompetitors,crowdingof
newplayers.Intensepromotionalactivitiescanleadtoajumpinadvertisingand
otherexpenses.
Other risks: Plant outage, industrial relations, adverse taxation, JV and related
partyrisks.
Higher drain intervals: Structural decline in lube consumption due to efficient
andsmallerenginesandlongdrainoilsbylubricantplayers.

Generally, margin accretion in long drain oils offset volume decline, keeping
profitabilityintact.Whileplayersintroducedoilswithincreasingdrainintervals(GOLI
introduced the last 72,000kms long drain CVO/DEO in CY11 post which it has not
launched any more. Castrol Vecton has a drain interval of 60,000kms), our channel
check has indicated that approval from engine maker is required before OEMs and
servicecentresacceptsthese.WeassumeCVdrainintervalstoincreaseto45,000kms
in next five years (from current 36,000kms), based on our interaction with a lube
expert and due to nameplate drain intervals applicable only in ideal conditions
whicharehardlymet;yetlubecompaniesthemselveshavesaidthatdrainintervals
could grow to 100,000kms during this period. This is a key risk to our volume
estimatesthoughitwouldbeoffsetbyhigherrealisations.

SomeofGOLIslongdrainoils
FY07 Launched36,000kmsdrainintervaloilnamedGulfSuperfleetLEMax15W40,India'sfirst
10,000kmMCOnamedPride4TPlus20W40
FY1112 FirstM&Mcobranded10,000kmdieseloilnamedGulfSuperDieselX10,First72,000kmdiesel
oilnamedSuperfleetLEDuraMax15W40
FY13 India'slongestdrainintervalrearaxleoilfor0.15mn.km,India'slongestdraingearboxoilfor
0.24mn.kmnamedGulfMTFPNG
Source:Industry,PhillipCapitalIndiaResearch

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INDIANLUBRICANTS SECTORANDINITIATING

Electric vehicles: A longerterm risk as electric engines would have minimal lube
consumption with almost nil engine oil usage. However, it is premature at the
moment considering the global reliance on hydrocarbonbased engines. Battery
makingisafuturediversificationoption.

BPs stake sale in Castrol: Castrol Indias promoter, Castrol Ltd, a wholly owned
subsidiary of BP Plc, divested 11.5% stake in the company in May 2016 to financial
investors,loweringitsshareholdingfrom71%to59.5%therebyraising~US$308mn
(Rs20.8bn).BP'sdivestmentproceedsgloballyareusedtomeettheGulfofMexico
oilspilldemands.In1HCY16,BPraisedUS$1.9bnfromdivestmentincludingCastrol
IndiastakesaleagainstoilspillpaymentofUS$2.7bn.BP'scumulativechargeforthe
oilspillisUS$62bn,ofwhichUS$20bnhadbeenpaid.DivestmenttargetforCY16is
US$35bn,butthiswouldgodowntohistoricallevelsofUS$23bnthereafter.BP's
oilpriceassumptionformanagingcashflowsis~US$50/bbl.

This stake sale had been an overhang for the Castrol India stock, which earlier
corrected by 15% in May to the block price of Rs 365/share. BP has maintained its
intention to be Castrol Indias majority shareholder with no impact on such
transactions on the employees, customers and contractors. As per media reports,
secondtrancheofstakesalehasbeenannouncedrecentlywhereinBPwoulddivest
8.5% additional stake to reduce its shareholding to 51%, just above the 50%
threshold level. We do not see any business related concerns about the motive of
Castrols stake sale and believe the divestment is part of oilspill payments. We
recommendsubscribingsuchanissue.

Financialcharacteristicsoflubricantcompaniesahighreturn,assetlightmodel
Thelubricantbusinessismarkedbyhighreturnratiosduetoastrongassetturnover.
Most players are zerodebt entities, as the sector is not capital intensive. FCF
generationisstableandrobustandyieldsaredecentat34%.EBITDAmarginunder
current oil prices is 1530% depending on pricing power and sourcing efficiency.
Castrol operates at negative working capital due to high creditor days while GOLIs
inventorylevelsarehigherduetowhichbookworkingcapitalisof~40days.

DuPontanalysis
Castrol CY10 CY11 CY12 CY13 CY14 CY15 GOLI FY15 FY16
PAT/PBT 66% 67% 67% 67% 65% 65% PAT/PBT 67% 65%
PBT/EBIT 105% 111% 112% 116% 107% 111% PBT/EBIT 93% 100%
EBIT/Sales 26% 22% 19% 21% 20% 26% EBIT/Sales 13% 15%
Sales/Assets 530% 546% 524% 447% 756% 610% Sales/Assets 237% 225%
Assets/Networth 93% 91% 92% 95% 90% 94% Assets/Networth 218% 181%

ROE 89% 80% 69% 68% 96% 107% ROE 41% 40%
Source:Company,PhillipCapitalIndiaResearch

Valuation
Due to an apparent simplified and clean business model and financial metrics with
zerodebtandveryhighRoE/RoCEs,lubricantplayersgetpremiummultiples.

Absolutevaluation
Castrol traded at an average PE of 33x during CY1315, before derating in CY16,
whichwebelievewasaccentuatedbypromoterstakesale.InCY14,Castrolwentfor
a capital reduction scheme where its face value reduced from Rs 10 to Rs 5, by
returningRs5toshareholders.Duringthatyear,Castroltradedatapeakofover43x
PEasRoEjumpedfrom~70%toalmost100%.

Whilesuchaneventcannotberuledoutinthefuture,alongwithspecialdividends,
bonussharesandbuybacks,wewouldnotassumeasimilarrerating;besides,theBP
divestment has removed the potential delisting premium from valuations too.
However, since CY14, RoEs have remained above 100% and we expect the same in

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INDIANLUBRICANTS SECTORANDINITIATING

CY16/17. This is coupled with return of volume growth, low oil prices, and a
conservativemarginassumption,whichcanbeatourexpectations.

Therefore, we assign a 33x base case target PE multiple on CY17 EPS of Rs 16.7 to
arriveatCastrolsfairvalueofRs550.Furtherreratingto35x+ispossibledepending
on corporate actions mentioned above, market condition and earnings beating
estimates.AtCMP,Castrolistradingat25xCY17EPSwhileits10yearaveragePEis
23.5x.WedonotexpectaderatingtotheselevelsasthestructuralRoEupmovein
CY14to100%+iscontinuing.Nevertheless,23.5ximpliesa7%downsidetocurrent
levels,whichwebelieveisabearcaseforCastrolwithinitscurrentbusinessoutlook
andfinancialposition.

Due to its relatively new listing, we would tie GOLIs valuations to Castrols.
Apparently, GOLIs return ratios are weaker at 3940% with upside unlikely unless
GOLI also goes for corporate actions. Nevertheless, GOLI is a growth story and
earningsCAGRisestimatedat1.5xofCastrol.Hence,wewouldassigna30xmultiple
for GOLI on FY18 EPS of Rs 31.7 which implies a fair value of Rs 950, which is our
basecasescenario,thoughdependingonmarketleaderCastrolsre/derating,GOLIs
multiplescouldalsochangeequivalently.GOLIspromotershaveraisedstakeinthe
companyfrom~60%duringthedemergerandrelistingto~69%currently,whichhas
alsoimprovedsentimentforthestock.

CastrolsoneyearforwardPEbandchart
700 Rs
36x
600

500 27x

400
18x
300

200
9x
100

0
Jan07 Jan08 Jan09 Jan10 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16

Source:PhillipCapitalIndiaResearch

Comparativevaluation(toFMCGcompanies)
DuetolubricantplayerssimilaritytoFMCGcompaniesintermsoffinancialmetrics
and consumer centric business, we compare Castrol with FMCG peers. Castrols
110%+RoEisonlynexttoHULs147%whileittradesata37%discounttoHULwitha
betterprofitgrowthoutlook.TheaverageRoEofourFMCGproxyuniverseis~45%
whilePEmultipleis33x.Hence,wearecomfortablewithour33xtargetPEmultiple
forCastrol.

GOLIsprofitgrowthisstrongerthanmostoftheplayersinourFMCGproxyuniverse
exceptAgroTechFoods,which,however,hasjusta12%RoE.AsianPaintsisthemost
similartolubricantplayers,anditcurrentlytradesataPEof47xonanROEof31%
and PAT growth of 13%/15% in FY17/18. Hence, in comparison, Castrol and GOLIs
valuationseemsreasonableandattractive.

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INDIANLUBRICANTS SECTORANDINITIATING

Castrol/GOLIscomparativevaluationsversusFMCGplayers
____EBITDAmargin____ _____PATgrowth_____ ________RoE________ _______PE(x)_______ _______PB(x)_______
FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E
Castrol 27% 29% 30% 30% 19% 13% 107% 112% 113% 34.0 28.7 25.3 36.3 32.2 28.6
GOLI 16% 16% 17% 30% 24% 26% 40% 39% 38% 34.8 28.1 22.3 14.1 10.9 8.5
AgroTechFoods 7% 8% 9% 13% 37% 52% 7% 10% 12% 55.0 36.0 27.0 4.0 3.0 3.0
BajajCorp 31% 31% 31% 11% 9% 13% 51% 54% 58% 25.0 23.0 21.0 13.0 13.0 12.0
Britannia 13% 13% 14% 49% 14% 19% 46% 39% 36% 51.0 46.0 38.0 24.0 18.0 14.0
Colgate 24% 25% 26% 33% 3% 16% 65% 52% 49% 36.0 35.0 30.0 23.0 18.0 15.0
Dabur 21% 20% 20% 18% 12% 11% 30% 28% 27% 42.0 37.0 33.0 13.0 11.0 9.0
Emami 26% 27% 27% 26% 80% 18% 23% 37% 38% 86.0 46.0 38.0 17.0 15.0 12.0
GCPL 18% 18% 19% 24% 18% 14% 22% 22% 21% 50.0 43.0 38.0 11.0 9.0 8.0
GSKConsumer 15% 16% 17% 18% 10% 13% 28% 27% 27% 39.0 35.0 31.0 11.0 9.0 8.0
HUL 16% 17% 18% 7% 10% 11% 112% 124% 143% 49.0 45.0 40.0 55.0 55.0 58.0
Marico 17% 20% 20% 26% 23% 14% 34% 35% 33% 54.0 43.0 38.0 18.0 15.0 13.0
Nestle 20% 22% 22% 52% 121% 14% 38% 38% 37% 59.0 50.0 44.0 22.0 19.0 16.0
AsianPaints 17% 17% 18% 65% 13% 15% 32% 31% 31% 63.0 55.0 47.0 20.0 17.0 15.0
ITC 37% 37% 37% 2% 11% 6% 29% 30% 32% 34.0 30.0 28.0 9.0 9.0 6.0
Average 20% 21% 22% 14% 22% 17% 44% 45% 46% 47.6 38.8 33.5 19.5 17.1 15.2
Source:CompanyPhillipCapitalIndiaResearch,*FMCGestimatesarefromPhillipCapitalconsumerteam

Stockperformanceoflubricantplayerstootheroil&gasdownstream/distribution
companies
Since the 50%+ crash in oil prices in the last two years, petroleum and gas
downstreamanddistributioncompanieshavedeliveredsuperiorreturnswithOMCs
witnessing 40140% returns in two years, refiners 24180%, and gas downstream
companies 7080%. In comparison, Castrol only yielded 6% returns despite
improvement in margins and profitability. This may be due to rerating in CY14 and
promoter stake sale in CY16. However, we expect a mean reversion due to volume
growthrecoveryandearningstraction.GOLI,duetoitsfreshdemergertoapureplay
lubricantplayer,yielded130%+returnsthoughgoingforwardweexpectittotrack
thelubricantsector,withvaluationsmovingintandemwithCastrol.TheBSESensex
was3%downduringthisperiodduetounderperformanceofupstreamplayers.

Castrolsreturnshaveunderperformedotherdistributorsinlasttwoyears,whenoil
priceshalved
% 1Y 2Y 3Y
IOCL 42.8 43.4 146.4
BPCL 38.7 78.8 300.3
HPCL 47.9 141.8 538.6
MRPL 54.0 24.1 141.5
CPCL 29.8 182.8 349.1
Essar 40.6 108.5 342.1
IGL 65.8 79.4 189.2
Petronet 97.8 72.1 190.6
Castrol (2.3) 6.3 30.1
GOLI 50.1 133.6 na
Nifty 10.2 7.0 48.2
Sensex 8.7 3.8 42.4
BSEOil&Gas 26.6 (2.8) 28.7
Brent 7.3 (49.4) (56.6)
Rs/US$ (1.1) (10.6) (5.7)
Source:Bloomberg,PhillipCapitalIndiaResearch

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INSTITUTIONALEQUITYRESEARCH

CastrolIndiaLtd(CSTRLIN)

Growthisback

20September2016
INDIA|OIL&GAS|InitiatingCoverage

Volumesrecord7%yoygrowthinCY16against3%negativeCAGRinthelastfiveyears BUY
ThisgrowthwasdrivenbysteadydoubledigitvolumegrowthinthePMsegmentcoupled CMPRS423
withtractioninCVandindustrials.Ouranalysisrevealsa10yearvolumeCAGRof13%inthe
TARGETRS550(+30%)
PM segment, which derives higher realisations and margins compared to CVO and

industrials,wherethecompanyrecorded5%negativeCAGRduetoadeliberateattemptto
COMPANYDATA
maintain its premium position. Share of PM in total volumes has grown to 40% currently O/SSHARES(MN): 495
(from10%inCY06and20%inCY10).Castrolsmarketshareintheurbanbazaarmarkethas MARKETCAP(RSBN): 209
improved slightly to 22.4% in CY15 from 20% in CY10, despite intense competition and a MARKETCAP(USDBN): 3.1
highvolumebase.CastrolgainedmarketshareinPCMOto40%whileMCOsharestandsat 52WKHI/LO(RS): 478/360
LIQUIDITY3M(USDMN): 7.9
30%.CVOandindustrialmarketsharerangesfrom1820%inrelevantmarkets.
PARVALUE(RS): 5

Newstrategyfocusesonprofitablevolumegrowthandpremiumisation SHAREHOLDINGPATTERN,%
Castrolinitiatedanewstrategy12yearsagotofocusonprofitablevolumegrowth,which Jun16 Mar16 Dec15
includes renewed push on the highmargin PM segment while also building inroads into PROMOTERS: 59.5 71.0 71.0
lucrativepocketsofothersegments.Thecompanyhaswidelypromoteditspowerbrands, FII/NRI: 9.7 5.9 6.3
FI/MF: 13.4 8.0 7.6
which currently form 50% of PM volumes and 20% of overall volumes, and entails better NONPRO: 4.3 1.2 1.2
realisationsandmargins.Withgrowingshareofpowerbrands,volumemixwouldcontinue PUBLIC&OTHERS: 13.1 14.0 13.9
to improve, thereby leading to a structural improvement in realisations, which, under a
benign oil price environment would result in continued improvement in margins. Castrols PRICEPERFORMANCE,%
grossmarginssawa13%CAGRinthelast10years,andweexpectittogrowby57%inthe 1MTH 3MTH 1YR
ABS 4.0 13.0 3.6
nexttwoyears.Inindustrial,Castrolisaggressiveinspecialisedcuttingandmetalworking RELTOBSE 2.0 5.5 12.8
oils, which entails higher realisations and margins. Castrols global OEM tieups help
maintainitspositionasapreferredbrandforspecialisedenginesandequipment. PRICEVS.SENSEX
190
Estimate1516%earningsCAGRonvolumegrowthof6%
170
WeexpectCastroltorecordavolumeCAGRof6%andEBITDA/litreCAGRof8%;EBITDAand
PATshouldgrowata15%and16%CAGRrespectivelyduringCY1517(vs5%PATCAGRin 150
CY1015). Our EBITDA/litre estimate is based on 3% realisation growth, and 6% and 10% 130
increaseinCOGSandopexrespectively.WeestimateROEstoremainrobustat110%+while 110
EBITDA margin would be stable at close to 30%. Castrols balance sheet is estimated to 90
remain comfortable and debtfree, even if new capex is made on capacity expansion. We
70
estimateastableFCFyieldof~3%.Webuildina75%dividendpayout,whichimpliesayield
Apr/14 Dec/14 Aug/15 Apr/16
of23%.
Castrol BSESensex

InitiatecoveragewithaBuyratingandtargetpriceofRs550 Source:PhillipCapitalIndiaResearch

WevalueCastrolat33xourCY17EPSofRs16.7.Castrolhastradedatanaveragevaluation
KEYFINANCIALS
of 33x during CY1315 while peak valuation crossed 43x (CY14 end). While BPs stake sale Rsmn CY15 CY16E CY17E
removes scope of a potential delisting story, we believe a 33x multiple is justified NetSales 32,980 35,304 39,517
considering recovery in volume after five years of degrowth and low oil prices favouring EBIDTA 8,949 10,374 11,822
margins.WeinitiatecoverageonCastrolwithatargetpriceofRs550,whichprovides30% NetProfit 6,153 7,311 8,247
upside.RecommendBuy EPS,Rs 12.4 14.8 16.7
PER,x 34.0 28.7 25.3
EV/EBIDTA,x 22.6 19.4 17.0
P/BV,x 36.3 32.2 28.6
ROE,% 106.9 112.1 112.9
Source:PhillipCapitalIndiaResearchEst.

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CASTROLINDIALTD INITIATINGCOVERAGE

Keyparameters

Volumeandgrowth Realisationandbaseoilcost
Salesvolume(mnltr) yoygrowth Averagerealisation Baseoilcost
220 7% 8%
6% 200 183
215 173 173 174
6% 162
210
160
205 203 4%
200 197 196 120
2%

Rs/ltr
195 191
0% 80
190 0% 63 66
48 46 48
185 2%
2% 40
180 3%
216
175 4%

CY13 CY14 CY15 CY16E CY17E
CY13 CY14 CY15 CY16E CY17E

GrossandEBITDAmargin Earnings
Grossmargin EBITDAmargin EBITDA PAT
120 14
100 11.8
100 95 12
89 10.4
10 8.9
80 74
71 8.2
8 7.2 7.3
6.9
Rs/ltr

Rsbn

60 55 6.2
51
47 6 4.9 4.7
35 37
40
4

20 2

0
CY13 CY14 CY15 CY16E CY17E CY13 CY14 CY15 CY16E CY17E

Returnratios FCFandyield
RoE RoCE FCFgeneration(Rsbn) FCFyield
180% 10 4%
3%
158% 159% 159%
152% 3% 4%
150% 8 3%
3%
112% 113% 2%
120% 107% 3%
96% 6
92%
2% 2%
90%
68% 4 2%
60%
1%
2
30%
1%
4 5 7 6 8
0% 0%
CY13 CY14 CY15 CY16E CY17E CY13 CY14 CY15 CY16E CY17E

Source:Company,PhillipCapitalIndiaResearch

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CASTROLINDIALTD INITIATINGCOVERAGE

Financials&valuation
Y/E,December31 CY13 CY14 CY15 CY16E CY17E
Revenues(Rs.mn) 31,796 33,923 32,980 35,304 39,517
EBITDA(Rs.mn) 6,875 7,167 8,949 10,374 11,822
ReportedPAT(Rs.mn) 5,086 4,746 6,153 7,271 8,247
AdjustedPAT(Rs.mn) 4,933 4,746 6,153 7,311 8,247
Growth 10% 4% 30% 19% 13%
ReportedEPS(Rs.) 10.3 9.6 12.4 14.7 16.7
AdjustedEPS(Rs.) 10.0 9.6 12.4 14.8 16.7
AdjustedPE(x) 42.4 44.0 34.0 28.6 25.3
PB(x) 27.8 42.1 36.3 32.2 28.6
EV/EBITDA(x) 29.5 28.6 22.6 19.4 17.0
RoE 68% 96% 107% 112% 113%
RoCE 92% 152% 158% 159% 159%
Debt:Equity(x)
EBITDA/litre(Rs.) 34.9 36.6 46.8 51.2 54.7
SalesVolume(mn.litre) 197 196 191 203 216
Growth 3% 0% 2% 6% 7%
Source:Company,PhillipCapitalIndiaResearch

Valuation
Rs./sh CY13 CY14 CY15 CY16E CY17E
Castrol'sAdjustedEPS 10.0 9.6 12.4 14.8 16.7
TargetMultiple(x) 33.0
TargetPrice 550
Source:PhillipCapitalIndiaResearch

Companydescription
Castrol India traces its origin from C C Wakefield & Co which entered the Indian
marketin1910.Itwasincorporatedin1979asIndrolLubricantsandSpecialitiesPvt
LtdandrechristenedCastrolIndiain1990.Presently,CastrolispromotedbyCastrol
Ltd(59.5%stake),whichisawhollyownedsubsidiaryofglobalpetroleummajorBP
(BritishPetroleum)Plc.

Castroloperatesinautomotiveandindustriallubricantsanditsproductlineincludes
engineoilsandotherassociateditemslikegearoils,transmissionfluids,coolants,and
greases under automotive and hydraulic oils, compressor oils, cutting oils, and
corrosionpreventivesunderthenonautomotiveindustrialcategory,whichincludes
marineoils.IthasthreeblendingplantslocatedinSilvassa,Patalganga(Maharashtra)
andPaharpur(Bengal).

The company board comprises of Mr Omer Dormen, MD, and two functional
directors namely Ms Rashmi Joshi Director Finance and Mr Jayanta Chatterjee
DirectorSupplyChain.MrSMDattaisChairmanwiththreenomineedirectorsfrom
parent BP and two independent directors. The company reported revenues of Rs
33bnandPATofRs6bninCY15.CurrentmarketcapstandsatRs209bn.

Page|36|PHILLIPCAPITALINDIARESEARCH


CASTROLINDIALTD INITIATINGCOVERAGE

Financials

ConsolidatedIncomeStatement CashFlow
Y/EDec,Rsmn CY14 CY15 CY16e CY17e Y/EDec,Rsmn CY14 CY15 CY16e CY17e
Netsales 33,923 32,980 35,304 39,517 Pretaxprofit 7,263 9,510 11,016 12,496
Growth,% 6.7 (2.8) 7.0 11.9 Depreciation 361 390 421 370
Totalincome 33,923 32,980 35,304 39,517 Chginworkingcapital 580 1,128 111 303
Rawmaterialexpenses 19,375 16,008 16,020 17,965 Totaltaxpaid 2,470 3,277 3,625 4,127
Employeeexpenses 1,616 1,766 1,942 2,098 Otheroperatingactivities 259 350 1,129 1,044
OtherOperatingexpenses 5,766 6,258 6,967 7,632 Cashflowfromoperatingactivities 5,476 7,400 6,573 7,997
EBITDA(Core) 7,167 8,949 10,374 11,822 Capitalexpenditure 504 370 600 600
Growth,% 4.3 24.9 15.9 14.0 Chginmarketablesecurities 3 0 0 0
Margin,% 21.1 27.1 29.4 29.9 Otherinvestingactivities 364 392 1,064 1,044
Depreciation 361 390 421 370 Cashflowfrominvestingactivities 137 23 464 444
EBIT 6,806 8,559 9,952 11,451 Freecashflow 5,339 7,423 7,037 8,442
Growth,% 3.6 25.8 16.3 15.1 Equityraised/(repaid) 2,473 0 0 0
Margin,% 20.1 26.0 28.2 29.0 Dividend(incl.tax) 4,494 4,772 6,544 7,422
Interestpaid 24 8 0 0 Cashflowfromfinancingactivities 6,966 4,772 6,538 7,416
OtherNonOperatingIncome 481 959 1,064 1,044 Netchgincash 1,628 2,651 499 1,026
NonrecurringItems 0 0 0 0
Pretaxprofit 7,263 9,510 11,016 12,496
Taxprovided 2,518 3,357 3,746 4,249 ValuationRatios
Profitaftertax 4,746 6,153 7,271 8,247
CY14 CY15 CY16e CY17e
NetProfit 4,746 6,153 7,311 8,247
PerSharedata
Growth,% (3.8) 29.6 18.8 12.8
EPS(INR) 9.6 12.4 14.8 16.7
NetProfit(adjusted) 4,746 6,153 7,311 8,247
Growth,% (3.8) 29.6 18.8 12.8
Unadj.shares(m) 495 495 495 495
BookNAV/share(INR) 10.0 11.6 13.1 14.8
Wtdavgshares(m) 495 495 495 495
FDEPS(INR) 9.6 12.4 14.8 16.7
CEPS(INR) 10.3 13.2 15.6 17.4
CFPS(INR) 10.5 13.8 12.7 15.4
BalanceSheet DPS(INR) 7.5 9.0 11.0 12.5
Y/EDec,Rsmn CY14 CY15 CY16e CY17e Returnratios
Cash&bank 4,315 6,965 7,464 8,490 Returnonassets(%) 105.8 113.8 116.7 114.3
Debtors 2,715 2,365 2,531 2,833 Returnonequity(%) 95.5 106.9 112.1 112.9
Inventory 3,655 3,046 3,260 3,649 Returnoncapitalemployed(%) 151.7 158.3 158.9 158.7
Loans&advances 1,716 1,822 1,950 2,183 Turnoverratios
Othercurrentassets 26 67 72 80 Assetturnover(x) 7.6 6.1 5.6 5.5
Totalcurrentassets 12,426 14,265 15,278 17,236 Sales/Totalassets(x) 7.6 6.1 5.6 5.5
Grossfixedassets 3,762 3,915 4,511 5,108 Sales/NetFA(x) 1.8 1.8 1.7 1.7
Less:Depreciation 2,041 2,427 2,783 3,154 Workingcapital/Sales(x) 5.2 7.9 9.0 9.6
Add:CapitalWIP 157 364 368 371 Receivabledays 29.2 26.2 26.2 26.2
Netfixedassets 1,877 1,853 2,096 2,325 Inventorydays 39.3 33.7 33.7 33.7
Noncurrentassets 1,877 1,853 2,096 2,325 Payabledays 73.4 83.4 83.4 83.4
Totalassets 14,303 16,117 17,374 19,561 Workingcapitaldays (4.9) (23.6) (23.6) (23.6)
Currentliabilities 6,759 6,979 7,240 8,043 Liquidityratios
Provisions 3,084 3,758 3,900 4,333 Currentratio(x) 1.2 1.2 1.3 1.3
Totalcurrentliabilities 9,843 10,737 11,140 12,376 Quickratio(x) 0.7 0.9 0.9 0.9
Noncurrentliabilities 508 376 250 122 Interestcover(x) 286.0 1,031.2
Totalliabilities 9,336 10,361 10,890 12,253 Dividendcover(x) 1.3 1.4 1.3 1.3
Paidupcapital 2,473 2,473 2,473 2,473 Netdebt/Equity(%) (0.9) (1.2) (1.2) (1.2)
Reserves&surplus 2,495 3,283 4,010 4,835 Valuation
Shareholdersequity 4,968 5,756 6,483 7,308 PER(x) 44.0 34.0 28.7 25.3
Totalequity&liabilities 14,303 16,117 17,374 19,561 PEG(x)yoygrowth (658.5) 114.6 158.1 188.7
Price/Book(x) 42.1 36.3 32.2 28.6
Source:Company,PhillipCapitalIndiaResearchEstimates
Yield(%) 1.8 2.1 2.6 3.0
EV/Netsales(x) 6.0 6.1 5.7 5.1
EV/EBITDA(x) 28.6 22.6 19.4 17.0
EV/EBIT(x) 30.1 23.6 20.2 17.5

Page|37|PHILLIPCAPITALINDIARESEARCH
INSTITUTIONALEQUITYRESEARCH

GulfOilLubricantsIndia(GOLIIN)

Rapidexpansionstory

20September2016
INDIA|OIL&GAS|InitiatingCoverage

Robustvolumegrowthat23xofindustryduetosmallersize BUY
With a 7% market share and a low base, GOLI is a fastgrowing lubricant player. The CMPRS705
company was able to deliver on its target of achieving 23x industry growth with 6%/10%
TARGETRS950(+35%)
volumegrowthinFY15/16against0%/2%growthbymarketleaderCastrolinCY14/15.In

Q1FY17, GOLI recorded a stellar volume growth of 32% yoy, aided by an institutional
COMPANYDATA
government tender of 2.4mn litres. Despite this, volumes grew by 17% yoy against 6% O/SSHARES(MN): 50
growthrecordedbyCastrolduringthesamequarter.Duetoitssmallersizeandaggressive MARKETCAP(RSBN): 35
strategies, GOLI is growing strongly in the automotive category with 20%+ yoy growth in MARKETCAP(USDBN): 0.5
Q1FY17; periodic tenderbased volume jumps and further inroads into categories like 52WKHI/LO(RS): 760/452
LIQUIDITY3M(USDMN): 0.2
marine oils have led to doubledigit volume growth in B2B (automotive factory fill +
PARVALUE(RS): 2
industrial)categorysincethelastthreequarters.InPMalso,GOLIsvolumesharerosefrom
13%to2325%inthelast78years.Webelievethatasthelubricantssectorgoesthrough SHAREHOLDINGPATTERN,%
thevolumerecoveryphase,GOLIwouldoutperformlargerpeerswithhighergrowthrates. Jun16 Mar16 Dec15
ItsnewmarketsincludeLCVs,rural,andagrisectors. PROMOTERS: 68.7 64.9 64.9
FII/NRI: 5.9 10.7 10.1
FI/MF: 12.0 11.8 12.1
Strongfocusonbazaartradewithpromotioncampaignstoimprovebrandpositioning NONPRO: 2.7 0.7 0.6
GOLIisaggressiveinthebazaartradewithfocusonallcategories,namelyproductlaunches PUBLIC&OTHERS: 10.9 11.9 12.3
and makeovers, advertising and belowtheline activities. A&P spends as a percentage of
saleshaveincreasedfromlessthan5.8%inFY15to6.7%inFY16/17with50%ofthisspent PRICEPERFORMANCE,%
belowtheline. It has MS Dhoni as a brand ambassador since CY11, unleashing an intense 1MTH 3MTH 1YR
ABS 2.6 33.7 42.2
mediacampaign.ThecompanyisactivelyengagingwithOEMslikeMahindra/Swaraj,which RELTOBSE 0.6 26.2 33.0
has supported tractor oil sales. GOLI has strong OEM tie up with sister company Ashok
LeylandinCVO/DEOcategory,whichprovidesfactoryfillopportunities.Ithasan8%market PRICEVS.SENSEX
shareinB2CCVOand40%volumeshare.InMCO,ithasahealthy9%marketshareand18% 150
volume share. In PCMO, market share is low at 5% though it is a key target area and in
Q1FY17, it recorded a 20% yoy growth while CVO/MCO volumes were also up 11%/15%. 130
35% of GOLIs volume is B2B of which 15% is pure industrial. GOLI has made entry into
shipping sector adding customers. GOLI is investing Rs 1.5bn in a new 50mn litre plant in 110
Chennai,whichisexpectedtobecompletedbyCY17endand(1)lowerfreightcoston30%
ofvolumessoldinthesouthernmarketbyRs34/litreand(2)improveitsstanding(pricing, 90
volumes,customerservice)inthesouthernmarket.
70

Jan/15 Jul/15 Jan/16 Jul/16

Estimate2225%earningsCAGRonvolumegrowthof12%
GulfOil BSESensex
WeexpectGOLItorecordavolumeCAGRof12%andEBITDA/litreCAGRof8%andestimate
EBITDAandPATtogrowata22%and25%CAGRrespectivelyduringFY1618.Weestimate Source:PhillipCapitalIndiaResearch

ROEs to remain stable at near 40% while EBITDA margin would be steady at 1617%. We
KEYFINANCIALS
estimate a stable FCF yield of ~2% assuming Chennai capex, full benefit of which would Rsmn FY16 FY17E FY18E
percolate only in FY19. The company has already become net cash positive in FY16 end. NetSales 10,114 11,503 13,517
Dividendpayouthasbeen35%inFY16. EBIDTA 1,592 1,887 2,363
NetProfit 1,003 1,243 1,569
InitiatecoveragewithaBuyratingandtargetpriceofRs950 EPS,Rs 20.2 25.1 31.7
WevalueGOLIat30xourFY18EPSofRs31.7,whichisata10%discounttoCastroldueto PER,x 34.8 28.1 22.3
lowerreturnratioof~40%andmargins;however,itsgrowthwouldoutperformsignificantly. EV/EBIDTA,x 21.7 18.3 14.5
We initiate coverage on GOLI with a target price of Rs 950, which provides 35% upside. P/BV,x 14.1 10.9 8.5
ROE,% 40.4 38.8 38.1
RecommendBuy.
Source:PhillipCapitalIndiaResearchEst.

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GULFOILLUBRICANTSINDIALTD INITIATINGCOVERAGE

Keyparameters

Volumeandgrowth Realisationandbaseoilcost(calculated)
Salesvolume(mnltr) yoygrowth Averagerealisation Baseoilcost
100 95 14% 160
13% 141 142
84 134 134 137
12% 12% 140
80 75
68 10% 10% 120
64
8% 100
60

Rs/ltr
6% 6% 80 67 71
57 56 58
40 4% 60

2% 40
20
0% 20
1%
2%
FY14P FY15 FY16 FY17E FY18E FY14P FY15 FY16 FY17E FY18E

GrossandEBITDAmargin Earnings
Grossmargin EBITDAmargin EBITDA PAT
70 66 2.5 2.4
61 63
60 55
53 2.0 1.9
50 1.6 1.6
1.5 1.3
40 1.2
Rs/ltr

Rsbn

1.2
1.0
30 25 1.0
21 22 0.8
18 19 0.7
20
0.5
10

FY14P FY15 FY16 FY17E FY18E FY14P FY15 FY16 FY17E FY18E

Returnratios FCFandyield
RoE RoCE FCFgeneration(Rsbn) FCFyield
0.5 1.0 3%
3%
41% 40% 41% 2%
39% 38% 3%
0.4 37% 0.8
34%
31% 2%
0.3 0.6
2%
1%
0.2 0.4
1%
1%
0%
0.1 0.2
1%
0.2 0.2 0.9 0.4 0.8
0 0%
FY14P FY15 FY16 FY17E FY18E FY14P FY15 FY16 FY17E FY18E

Source:Company,PhillipCapitalIndiaResearch,PareprovisionalnumbersnotofficiallyreportedbyCo.

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GULFOILLUBRICANTSINDIALTD INITIATINGCOVERAGE

Financials&valuation
Y/E,March31 FY14P FY15 FY16 FY17E FY18E
Revenues(Rs.mn) 8,625 9,675 10,114 11,503 13,517
EBITDA(Rs.mn) 1,150 1,294 1,592 1,887 2,363
ReportedPAT(Rs.mn) 685 774 1,003 1,243 1,569
AdjustedPAT(Rs.mn) 685 774 1,003 1,243 1,569
Growth 30% 24% 26%
ReportedEPS(Rs.) 13.8 15.6 20.2 25.1 31.7
AdjustedEPS(Rs.) 13.8 15.6 20.2 25.1 31.7
AdjustedPE(x) 51.1 45.2 34.8 28.1 22.3
PB(x) 18.7 14.1 10.9 8.5
EV/EBITDA(x) 30.0 27.3 21.7 18.3 14.5
RoE 41% 40% 39% 38%
RoCE 31% 34% 37% 41%
Debt:Equity(x) 1.2 0.8 0.5 0.3
EBITDA/litre(Rs.) 17.8 18.9 21.2 22.5 24.9
SalesVolume(mn.litre) 64 68 75 84 95
Growth 6% 10% 12% 13%
Source:Company,PhillipCapitalIndiaResearch

Valuation
Rs./sh FY14P FY15 FY16 FY17E FY18E
GOLI'sAdjustedEPS 13.8 15.6 20.2 25.1 31.7
TargetMultiple(x) 30.0
TargetPrice 950
Source:PhillipCapitalIndiaResearch
PleasenoteFY14numbersofGOLIareprovisionallyreportedascompanywasofficiallydemergedeffectiveFY15
withreportedFY14numberslargelycorrect

Companydescription
Gulf Oil Lubricants India Ltd is 68.7% owned by Gulf Oil International, which is a
Hindujagroupcompany.ThebrandGulfwasacquiredfromChevronin1980andthe
parentcompanyhasrightsinallcountriesexceptPortugal,Spain,andUSA.Gulfhas
beenpresentinIndiasince1920.Previously,thelubricantbusinesswaspartofGulf
Oil Corporation. It was demerged as a pure play lubricant company in CY15 with
separatefinancialstatementsavailablefromFY15.

GOLI operates in the segments of automotive and industrial lubricants and its
productlineincludeengineoilsandotherassociateditemslikegearoils,transmission
fluids,brakefluids,andforkoilunderautomotiveandhydraulicoils,compressoroils,
cuttingoils,andrustpreventivesundertheindustrialcategory,whichincludesmarine
oils.IthasablendingplantinSilvassa(90mnlitrecapacity)andasecondoneisunder
construction in Chennai with a capacity of 50mn litres, capex of Rs 1.5bn, and
commissioningbyCY17end.

GOLI also has minor batterybusiness where it markets imported 2Wbatteries; this
contributed ~Rs 200mn in revenues in FY16. The company board comprises of Mr
RaviChawla,MD,andMrSanjayHindujaChairmanwiththreeindependentdirectors
andanonindependentnonexecutivedirector.MrManishGangwalistheCFO.The
companyreportedrevenuesofRs10bnandPATofRs1bninFY16.Currentmarket
capstandsatRs35bn.

Page|40|PHILLIPCAPITALINDIARESEARCH


GULFOILLUBRICANTSINDIALTD INITIATINGCOVERAGE

Financials

ConsolidatedIncomeStatement CashFlow
Y/EMar,Rsmn FY15 FY16 FY17e FY18e Y/EMar,Rsmn FY15 FY16 FY17e FY18e
Netsales 9,675 10,114 11,503 13,517 Pretaxprofit 1,160 1,533 1,880 2,377
Growth,% 4.5 13.7 17.5 Depreciation 48 60 67 69
Totalincome 9,675 10,114 11,503 13,517 Chginworkingcapital 340 21 156 239
Rawmaterialexpenses 5,911 5,509 6,226 7,249 Totaltaxpaid 338 497 630 801
Employeeexpenses 440 574 652 715 Otheroperatingactivities 103 62 60 84
OtherOperatingexpenses 2,030 2,438 2,739 3,191 Cashflowfromoperatingactivities 1,314 1,178 1,101 1,323
EBITDA(Core) 1,294 1,592 1,887 2,363 Capitalexpenditure 353 183 720 528
Growth,% 23.0 18.6 25.2 Chgininvestments 26 5 32 0
Margin,% 13.4 15.7 16.4 17.5 Otherinvestingactivities 93 156 185 157
Depreciation 48 60 67 69 Cashflowfrominvestingactivities 286 33 502 370
EBIT 1,246 1,531 1,820 2,294 Freecashflow 1,028 1,146 598 953
Growth,% 22.9 18.8 26.1 Debtraised/(repaid) 450 227 300 300
Margin,% 12.9 15.1 15.8 17.0 Dividend(incl.tax) 326 373 647 733
Interestpaid 178 178 125 74 Cashflowfromfinancingactivities 776 599 947 1,032
OtherNonOperatingIncome 92 179 185 157 Netchgincash 1,804 546 349 80
Pretaxprofit 1,160 1,533 1,880 2,377
Taxprovided 386 529 637 808
Profitaftertax 774 1,003 1,243 1,569 ValuationRatios
NetProfit 774 1,003 1,243 1,569
FY15 FY16 FY17e FY18e
Growth,% 29.6 23.9 26.3
PerSharedata
NetProfit(adjusted) 774 1,003 1,243 1,569
EPS(INR) 15.6 20.2 25.1 31.7
Unadj.shares(m) 50 50 50 50
Growth,% 29.6 23.9 26.3
Wtdavgshares(m) 50 50 50 50
BookNAV/share(INR) 37.7 50.1 64.7 83.0
FDEPS(INR) 15.6 20.2 25.1 31.7
CEPS(INR) 16.6 21.5 26.4 33.0
BalanceSheet CFPS(INR) 4.6 18.7 7.9 16.5
Y/EMar,Rsmn FY15 FY16 FY17e FY18e DPS(INR) 5.5 7.0 8.8 11.1
Cash&bank 1,804 2,351 2,002 1,922 Returnratios
Debtors 1,141 1,064 1,211 1,423 Returnonassets(%) 19.0 22.3 25.2 28.3
Inventory 1,416 1,569 1,784 2,097 Returnonequity(%) 41.4 40.4 38.8 38.1
Loans&advances 256 360 409 481 Returnoncapitalemployed(%) 30.5 34.1 36.9 41.3
Othercurrentassets 16 22 25 30 Turnoverratios
Totalcurrentassets 4,634 5,366 5,431 5,952 Assetturnover(x) 2.4 2.2 2.3 2.4
Investments 35 32 0 0 Sales/Totalassets(x) 2.4 2.2 2.3 2.4
Grossfixedassets 1,237 1,469 1,524 1,550 Sales/NetFA(x) 9.9 9.3 6.6 6.1
Less:Depreciation 345 400 467 536 Workingcapital/Sales(x) 0.3 0.3 0.3 0.2
Add:CapitalWIP 84 19 684 1,185 Receivabledays 43.1 38.4 38.4 38.4
Netfixedassets 976 1,088 1,741 2,199 Inventorydays 53.4 56.6 56.6 56.6
Noncurrentassets 1,011 1,120 1,741 2,199 Payabledays 42.1 56.1 56.1 56.1
Totalassets 5,645 6,486 7,172 8,151 Workingcapitaldays 54.3 38.9 38.9 38.9
Currentliabilities 1,334 1,702 1,921 2,228 Liquidityratios
Provisions 253 313 353 407 Currentratio(x) 2.9 2.7 2.4 2.2
Totalcurrentliabilities 1,586 2,015 2,273 2,635 Quickratio(x) 1.9 1.7 1.4 1.3
Noncurrentliabilities 2,188 1,985 1,693 1,400 Interestcover(x) 7.0 8.6 14.5 31.1
Totalliabilities 3,774 4,001 3,966 4,035 Dividendcover(x) 2.8 2.9 2.9 2.9
Paidupcapital 99 99 99 99 Totaldebt/Equity(%) 1.2 0.8 0.5 0.3
Reserves&surplus 1,772 2,386 3,107 4,017 Netdebt/Equity(%) 0.2 (0.2) (0.1) (0.1)
Shareholdersequity 1,871 2,485 3,206 4,116 Valuation
Totalequity&liabilities 5,645 6,486 7,172 8,151 PER(x) 45.2 34.8 28.1 22.3
PEG(x)yoygrowth 347.1 117.7 117.9 84.8
Source:Company,PhillipCapitalIndiaResearchEstimates Price/Book(x) 18.7 14.1 10.9 8.5
Yield(%) 0.8 1.0 1.2 1.6
EV/Netsales(x) 3.6 3.4 3.0 2.5
EV/EBITDA(x) 27.3 21.7 18.3 14.5
EV/EBIT(x) 28.3 22.6 19.0 15.0

Page|41|PHILLIPCAPITALINDIARESEARCH


INDIANLUBRICANTS SECTORANDINITIATING

RatingMethodology
Weratestockonabsolutereturnbasis.Ourtargetpriceforthestockshasaninvestmenthorizonofoneyear.
Rating Criteria Definition
BUY >=+15% Targetpriceisequaltoormorethan15%ofcurrentmarketprice
NEUTRAL 15%>to<+15% Targetpriceislessthan+15%butmorethan15%
SELL <=15% Targetpriceislessthanorequalto15%.

Management
VineetBhatnagar(ManagingDirector) (9122)24831919
KinshukBhartiTiwari(HeadInstitutionalEquity) (9122)66679946
JigneshShah(HeadEquityDerivatives) (9122)66679735
Research
Automobiles ITServices Pharma&SpecialityChem
DhawalDoshi (9122)66679769 VibhorSinghal (9122)66679949 SuryaPatra (9122)66679768
NiteshSharma,CFA (9122)66679965 ShyamalDhruve (9122)66679992 MehulSheth (9122)66679996
Banking,NBFCs Infrastructure Strategy
ManishAgarwalla (9122)66679962 VibhorSinghal (9122)66679949 NaveenKulkarni,CFA,FRM (9122)66679947
PradeepAgrawal (9122)66679953 DeepakAgarwal (9122)66679944 AnindyaBhowmik (9122)66679764
PareshJain (9122)66679948 Logistics,Transportation&Midcap Telecom
Consumer&Retail VikramSuryavanshi (9122)66679951 NaveenKulkarni,CFA,FRM (9122)66679947
NaveenKulkarni,CFA,FRM (9122)66679947 Media ManojBehera (9122)66679973
JubilJain (9122)66679766 ManojBehera (9122)66679973 Technicals
PreeyamTolia (9122)66679950 Metals SubodhGupta,CMT (9122)66679762
Cement DhawalDoshi (9122)66679769 ProductionManager
VaibhavAgarwal (9122)66679967 YashDoshi (9122)66679987 GaneshDeorukhkar (9122)66679966
Economics MidCaps&DatabaseManager Editor
AnjaliVerma (9122)66679969 DeepakAgarwal (9122)66679944 RoshanSony 9819972726
Engineering,CapitalGoods Oil&Gas Sr.ManagerEquitiesSupport
JonasBhutta (9122)66679759 SabriHazarika (9122)66679756 RosieFerns (9122)66679971
VikramRawat (9122)66679986

Sales&Distribution CorporateCommunications
AshvinPatil (9122)66679991 SalesTrader ZarineDamania (9122)66679976
ShubhangiAgrawal (9122)66679964 DileshDoshi (9122)66679747 BharatiPonda (9122)66679943
KishorBinwal (9122)66679989 SuniilPandit (9122)66679745
BhavinShah (9122)66679974
AshkaMehtaGulati (9122)66679934 Execution
ArchanVyas (9122)66679785 MayurShah (9122)66679945

ContactInformation(RegionalMemberCompanies)

SINGAPORE:PhillipSecuritiesPteLtd MALAYSIA:PhillipCapitalManagementSdnBhd HONGKONG:PhillipSecurities(HK)Ltd
250NorthBridgeRoad,#0600RafflesCityTower, B36BlockBLevel3,MeganAvenueII, 11/FUnitedCentre95QueenswayHongKong
Singapore179101 No.12,JalanYapKwanSeng,50450KualaLumpur Tel(852)22776600Fax:(852)28685307
Tel:(65)65336001Fax:(65)65353834 Tel(60)321628841Fax(60)321665099 www.phillip.com.hk
www.phillip.com.sg www.poems.com.my

JAPAN:PhillipSecuritiesJapan,Ltd INDONESIA:PTPhillipSecuritiesIndonesia CHINA:PhillipFinancialAdvisory(Shanghai)Co.Ltd.

42NihonbashiKabutocho,Chuoku ANZTowerLevel23B,JlJendSudirmanKav33A, No550YanAnEastRoad,OceanTowerUnit2318
Tokyo1030026 Jakarta10220,Indonesia Shanghai200001
Tel:(81)336662101Fax:(81)336640141 Tel(62)2157900800Fax:(62)2157900809 Tel(86)2151699200Fax:(86)2163512940
www.phillip.co.jp www.phillip.co.id www.phillip.com.cn

THAILAND:PhillipSecurities(Thailand)PublicCo.Ltd. FRANCE:King&ShaxsonCapitalLtd. UNITEDKINGDOM:King&ShaxsonLtd.

15thFloor,VorawatBuilding,849SilomRoad, 3rdFloor,35RuedelaBienfaisance 6thFloor,CandlewickHouse,120CannonStreet
Silom,Bangrak,Bangkok10500Thailand 75008ParisFrance London,EC4N6AS
Tel(66)222680999Fax:(66)222680921 Tel(33)145633100Fax:(33)145636017 Tel(44)2079295300Fax:(44)2072836835
www.phillip.co.th www.kingandshaxson.com www.kingandshaxson.com

UNITEDSTATES:PhillipFuturesInc. AUSTRALIA:PhillipCapitalAustralia SRILANKA:AshaPhillipSecuritiesLimited

141WJacksonBlvdSte3050 Level10,330CollinsStreet Level4,MillenniumHouse,46/58NavamMawatha,
TheChicagoBoardofTradeBuilding Melbourne,VIC3000,Australia Colombo2,SriLanka
Chicago,IL60604USA Tel:(61)386339800Fax:(61)386339899 Tel:(94)112429100Fax:(94)112429199
Tel(1)3123569000Fax:(1)3123569005 www.phillipcapital.com.au www.ashaphillip.net/home.htm

INDIA
PhillipCapital(India)PrivateLimited
No.1,18thFloor,UrmiEstate,95GanpatraoKadamMarg,LowerParelWest,Mumbai400013
Tel:(9122)23002999Fax:(9122)66679955www.phillipcapital.in

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INDIANLUBRICANTS SECTORANDINITIATING

DisclosuresandDisclaimers

PhillipCapital(India)Pvt.Ltd.hasthreeindependentequityresearchgroups:InstitutionalEquities,InstitutionalEquityDerivatives,andPrivateClientGroup.
ThisreporthasbeenpreparedbyInstitutionalEquitiesGroup.Theviewsandopinionsexpressedinthisdocumentmay,maynotmatch,ormaybecontraryat
timeswiththeviews,estimates,rating,andtargetpriceoftheotherequityresearchgroupsofPhillipCapital(India)Pvt.Ltd.
ThisreportisissuedbyPhillipCapital(India)Pvt.Ltd.,whichisregulatedbytheSEBI.PhillipCapital(India)Pvt.Ltd.isasubsidiaryofPhillip(Mauritius)Pvt.Ltd.
References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for
information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as
solicitationorasofferingadviceforthepurposesofthepurchaseorsaleofanysecurity,investment,orderivatives.Theinformationandopinionscontainedin
thereportwereconsideredbyPCIPLtobevalidwhenpublished.ThereportalsocontainsinformationprovidedtoPCIPLbythirdparties.Thesourceofsuch
informationwillusuallybedisclosedinthereport.WhilstPCIPLhastakenallreasonablestepstoensurethatthisinformationiscorrect,PCIPLdoesnotoffer
anywarrantyastotheaccuracyorcompletenessofsuchinformation.Anypersonplacingrelianceonthereporttoundertaketradingdoessoentirelyathisor
herownriskandPCIPLdoesnotacceptanyliabilityasaresult.SecuritiesandDerivativesmarketsmaybesubjecttorapidandunexpectedpricemovements
andpastperformanceisnotnecessarilyanindicationoffutureperformance.
Thisreportdoesnotregardthespecificinvestmentobjectives,financialsituation,andtheparticularneedsofanyspecificpersonwhomayreceivethisreport.
Investorsmustundertakeindependentanalysiswiththeirownlegal,tax,andfinancialadvisorsandreachtheirownconclusionsregardingtheappropriateness
of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future
prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the
securitiesmentionedwithinit.Theinformationcontainedintheresearchreportsmayhavebeentakenfromtradeandstatisticalservicesandothersources,
whichPCILbelieveisreliable.PhillipCapital(India)Pvt.Ltd.oranyofitsgroup/associate/affiliatecompaniesdonotguaranteethatsuchinformationisaccurate
orcompleteanditshouldnotberelieduponassuch.Anyopinionsexpressedreflectjudgmentsatthisdateandaresubjecttochangewithoutnotice.
Important:These disclosuresanddisclaimers mustbereadinconjunctionwiththeresearchreportofwhichitformspart.Receiptanduseof theresearch
reportissubjecttoallaspectsofthesedisclosuresanddisclaimers.Additionalinformationabouttheissuersandsecuritiesdiscussedinthisresearchreportis
availableonrequest.
Certifications:Theresearchanalyst(s)whopreparedthisresearchreportherebycertifiesthattheviewsexpressedinthisresearchreportaccuratelyreflectthe
researchanalystspersonalviewsaboutallofthesubjectissuersand/orsecurities,thattheanalyst(s)havenoknownconflictofinterestandnopartofthe
researchanalystscompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificviewsorrecommendationscontainedinthisresearchreport.
AdditionalDisclosuresofInterest:
UnlessspecificallymentionedinPointNo.9below:
1. TheResearchAnalyst(s),PCIL,oritsassociatesorrelativesoftheResearchAnalystdoesnothaveanyfinancialinterestinthecompany(ies)coveredin
thisreport.
2. TheResearchAnalyst,PCILoritsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelydonotholdmorethan1%ofthesecuritiesofthe
company(ies)coveredinthisreportasoftheendofthemonthimmediatelyprecedingthedistributionoftheresearchreport.
3. TheResearchAnalyst,his/herassociate,his/herrelative,andPCIL,donothaveanyothermaterialconflictofinterestatthetimeofpublicationofthis
researchreport.
4. TheResearchAnalyst,PCIL,anditsassociateshavenotreceivedcompensationforinvestmentbankingormerchantbankingorbrokerageservicesorfor
anyotherproductsorservicesfromthecompany(ies)coveredinthisreport,inthepasttwelvemonths.
5. TheResearchAnalyst,PCILoritsassociateshavenotmanagedorcomanagedintheprevioustwelvemonths,aprivateorpublicofferingofsecuritiesfor
thecompany(ies)coveredinthisreport.
6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connectionwiththeresearchreport.
7. TheResearchAnalysthasnotservedasanOfficer,Director,oremployeeofthecompany(ies)coveredintheResearchreport.
8. TheResearchAnalystandPCILhasnotbeenengagedinmarketmakingactivityforthecompany(ies)coveredintheResearchreport.
9. DetailsofPCIL,ResearchAnalystanditsassociatespertainingtothecompaniescoveredintheResearchreport:

Sr.no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for No
investmentbankingtransactionbyPCIL
2 WhetherResearchAnalyst,PCILoritsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelyholdmorethan1%ofthe No
company(ies)coveredintheResearchreport
3 WhethercompensationhasbeenreceivedbyPCILoritsassociatesfromthecompany(ies)coveredintheResearchreport No
4 PCIL or its affiliates have managed or comanaged in the previous twelve months a private or public offering of securities for the No
company(ies)coveredintheResearchreport
5 ResearchAnalyst, hisassociate,PCILoritsassociateshavereceived compensationforinvestmentbankingormerchantbanking or No
brokerage services or for any other products or services from the company(ies) covered in the Research report, in the lasttwelve
months

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment
banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek
compensationforinvestmentbankingservicesfromthesubjectissuersinthenextthree(3)months.PhillipCapital(India)Pvt.Ltdisnotamarketmakerinthe
securitiesmentionedinthisresearchreport,althoughit,oritsaffiliates/employees,mayhavepositionsin,purchaseorsell,orbemateriallyinterestedinany
ofthesecuritiescoveredinthereport.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or
particularrequirementsofanyindividualrecipienthereof.Certainsecuritiesmaygiverisetosubstantialrisksandmaynotbesuitableforcertaininvestors.
Eachinvestormustmakeitsowndeterminationastotheappropriatenessofanysecuritiesreferredtointhisresearchreportbaseduponthelegal,taxand
accountingconsiderationsapplicabletosuchinvestoranditsowninvestmentobjectivesorstrategy,itsfinancialsituationanditsinvestingexperience.The
value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or
politicalfactors.Pastperformanceisnotnecessarilyindicativeoffutureperformanceorresults.

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INDIANLUBRICANTS SECTORANDINITIATING

Sources,CompletenessandAccuracy:ThematerialhereinisbaseduponinformationobtainedfromsourcesthatPCIPLandtheresearchanalystbelievetobe
reliable,butneitherPCIPLnortheresearchanalystrepresentsorguaranteesthattheinformationcontainedhereinisaccurateorcompleteanditshouldnot
berelieduponassuch.Opinionsexpressedhereinarecurrentopinionsasofthedateappearingonthismaterial,andaresubjecttochangewithoutnotice.
Furthermore,PCIPLisundernoobligationtoupdateorkeeptheinformationcurrent.Withoutlimitinganyoftheforegoing,innoeventshallPCIL,anyofits
affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind
includingbutnotlimitedtoanydirectorconsequentiallossordamage,howeverarising,fromtheuseofthisdocument.
Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No
reprintingorreproduction,inwholeorinpart,ispermittedwithoutthePCIPLspriorconsent,exceptthatarecipientmayreprintitforinternalcirculationonly
andonlyifitisreprintedinitsentirety.
Caution:Riskoflossintrading/investmentcanbesubstantialandevenmorethantheamount/margingivenbyyou.Therecipientshouldcarefullyconsider
whether trading/investment is appropriate for the recipient in light of the recipients experience, objectives, financial resources and other relevant
circumstances.PCIPLandanyofitsemployees,directors,associates,groupentities,oraffiliatesshallnotbeliableforlosses,ifany,incurredbytherecipient.
Therecipientisfurthercautionedthattrading/investmentsinfinancialmarketsaresubjecttomarketrisksandareadvisedtoseektrading/investmentadvice
before investing. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PCIPL and any of its employees, directors,
associates, group entities, affiliates are not inducing the recipient for trading/investing in the financial market(s). Trading/Investment decision is the sole
responsibilityoftherecipient.
ForU.S.personsonly:ThisresearchreportisaproductofPhillipCapital(India)PvtLtd.,whichistheemployeroftheresearchanalyst(s)whohaspreparedthe
researchreport.Theresearchanalyst(s)preparingtheresearchreportis/areresidentoutsidetheUnitedStates(U.S.)andarenotassociatedpersonsofany
U.S.regulated brokerdealer and therefore the analyst(s) is/are not subject to supervision by a U.S. brokerdealer, and is/are not required to satisfy the
regulatorylicensingrequirementsofFINRAorrequiredtootherwisecomplywithU.S.rulesorregulationsregarding,amongotherthings,communicationswith
asubjectcompany,publicappearances,andtradingsecuritiesheldbyaresearchanalystaccount.
This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a6(b)(4) of the U.S.
SecuritiesandExchangeAct,1934(theExchangeAct)andinterpretationsthereofbytheU.S.SecuritiesandExchangeCommission(SEC)inrelianceonRule15a
6(a)(2).IftherecipientofthisreportisnotaMajorInstitutionalInvestorasspecifiedabove,thenitshouldnotactuponthisreportandreturnthesametothe
sender.Further,thisreportmaynotbecopied,duplicated,and/ortransmittedonwardtoanyU.S.person,whichisnotaMajorInstitutionalInvestor.

InrelianceontheexemptionfromregistrationprovidedbyRule15a6oftheExchangeActandinterpretationsthereofbytheSECinordertoconductcertain
businesswithMajorInstitutionalInvestors,PhillipCapital(India)PvtLtd.hasenteredintoanagreementwithaU.S.registeredbrokerdealer,Decker&Co,LLC.
TransactionsinsecuritiesdiscussedinthisresearchreportshouldbeeffectedthroughDecker&Co,LLCoranotherU.S.registeredbrokerdealer.

IfDistributionistoAustralianInvestors
ThisreportisproducedbyPhillipCapital(India)PvtLtdandisbeingdistributedinAustraliabyPhillipCapitalLimited(AustralianFinancialServicesLicenceNo.
246827).

Thisreportcontainsgeneralsecuritiesadviceanddoesnottakeintoaccountyourpersonalobjectives,situationandneeds.PleasereadtheDisclosuresand
Disclaimerssetoutabove.Byreceivingorreadingthisreport,youagreetobeboundbythetermsandlimitationssetoutabove.Anyfailuretocomplywith
these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced,
distributedorpublishedbyyouinwholeorinpart,foranypurpose.Ifyouhavereceivedthisreportbymistake,pleasedeleteordestroyit,andnotifythe
senderimmediately.

PhillipCapital(India)Pvt.Ltd.
Registeredoffice:No.1,18thFloor,UrmiEstate,95GanpatraoKadamMarg,LowerParelWest,Mumbai400013

Sabri
Digitally signed by Sabri Hussain Hazarika
DN: c=IN, o=Personal,
serialNumber=02610b63a67483592cd078cb3324
23dbd942dbc425ec7756bc9cf2ba25092952,
cn=Sabri Hussain Hazarika,

Hussain
pseudonym=f5dbb06f8743417d9141ad29ba11c6
b8,
2.5.4.45=034100663732626363623535343131333
5313963373363313539653836663461666532373
8386464303662633238656561346564323738363

Hazarika
633306163636166393034, postalCode=785008,
2.5.4.20=3b2fdf20ba15016554a21690408151cbc3
fc8b956453bb59d5e09b339aee390f, st=Assam
Date: 2016.09.20 08:07:56 +05'30'

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