Gulf Oil Lubricants will get re-rated & is good buy for 54% upside

[Pee Vee]

The strategic review and potential sale by BP Plc of its lubricant arm, Castrol Ltd, marks a major global corporate development in the otherwise quiet lubricant sector. Financial investors view the space cautiously, given potential long-term EV risks, though this deal could improve market sentiment. BP management has cited strong interest in Castrol, with recent media reports naming marquee players like Saudi Aramco and Reliance Industries (RIL), besides several PE and investment firms as interested parties, valuing Castrol at USD8-10bn. At USD10bn, Castrol Ltd’s implied market-cap/CY24 EBIT is 12x, while Castrol India’s is at 14x. The Indian business accounts for ~20% of Castrol’s global earnings and enjoys a healthier outlook than other countries. We believe a change in ownership of Castrol, which holds 51% stake in Castrol India (not rated), could trigger a mandatory open offer for the Indian entity. HPCL’s lube carve out and monetization is another event (which is, albeit, progressing slowly) that is eagerly awaited. Nevertheless, we find Gulf Oil Lubricants India (GOLI)’s valuation attractive at 11x CY24 EBIT. Even Veedol (not rated), which is putting forward 2% promoter OFS, is trading at 14x. We reiterate BUY on GOLI, with TP of Rs1,800. A stable currency and oil price scenario, and expected decline in base oil costs could expand EBITDA margin to 14-16% compared with the current guidance of 12-14%.

Castrol India accounts for ~20% of Castrol Ltd’s earnings

Castrol Ltd has seen good interest, per BP management. Media has reported that Saudi Aramco, RIL, and some PE and investment firms are interested in Castrol, with bankers assigning it a value of USD8-10bn. We note that Aramco owns the global business of Valvoline, while RIL and BP have an existing strong partnership in India (RIL fuel outlets sell Castrol lubes as well). As per available public data, Castrol Ltd’s CY24 EBIT was USD831mn, while Castrol India’s was USD180mn (Indian business contributing 22% of total EBIT). While CY24 was strong for Castrol Ltd at 14% EBIT growth vs Castrol India’s at 7%, CY19-24 CAGR was -8% for Castrol and +2% for Castrol India, highlighting India as the more attractive market. We believe margins from the India business also exceed global margins by ~5ppt.

HPCL lube carve-out, Veedol promoter offer are other corporate events

The Indian lubricant sector has seen a couple of more events like HPCL carving out its lube business to unlock value and Veedol’s co-promoter Andrew Yule putting forward 2% OFS. HPCL’s process is moving slower than expected, albeit is under way. Similarly, Veedol’s OFS—supposed to take place last week—has hit a technical snag, according to media reports, and has been withdrawn, although it could be revived. We believe these transactions could also firm up valuation and generate positive sentiment for the sector. GOLI remains attractive valuation-wise. We value it at ~20x target PER.