Introduction
Gulf Petrochem Group (Global
Company) based in the United Arab Emirates (UAE) is a company operating in the
downstream and midstream sectors of the oil and energy industry. It has six
divisions in Oil Trading and Bunkering, Oil Refining, Grease Manufacturing, Oil
Terminals, Bitumen Manufacturing, and Shipping and Logistics. Gulf Petrochem
was founded by brothers Ashok Goel and Sudhir Goyel in 1998.
They obtained the rights to
commission a refinery in Sharjah’s Hamriyah Freezone alongside a grease
manufacturing plant producing lithium base grease.
Gulf Petrochem under its
subsidiaries, Gulf Petrochem Energy Private Ltd and Gulf Petrochem Pte Ltd had
acquired 72.23 per cent in Sah Petroleums at a price of Rs 15.7 per share in
2014, for a total consideration of Rs 60 crores and renamed it GP Petroleums.
Now I would like to present to you some facts that I have been reading
about the company for the past one year. All of it is in no specific order but
in bits and pieces which I have tried to present in a flow. Once you read the
points below the picture of what I am trying to portray will be partially clear
in your eyes
This is what the new management had to say about the historical
business of the company and the future business they are planning on venturing
into…. "We have so far been
traders of bitumen, base oil and fuel oil. Now, we want to graduate to
marketers and manufacturers, and India will play an important role in the
strategy. We are looking at more acquisitions," S Thangapandian, executive
director, Gulf Petrochem”
"We aspire to make Gulf Petrochem Group a global conglomerate
operating in oil space and have an integrated portfolio. This acquisition fits into our strategy and also helps us extend our capabilities
manufacture, supply and globally distribute a wider variety of products,"
Sudhir Goyel, Managing Director, Gulf Petrochem Group”
On their investment
in India this is what the management had to say….”with a strong government at the helm and with its focus on domestic
manufacturing, Gulf Petroleum would like to invest another Rs500 crore in India
which will entail entering deeper into the lubricants space with products in
automotive and marine industries as well as setting up two more fuel storage
terminals to have a total storage capacity of up to 600,000 cubic metres” S
Thangapandian, executive director, Gulf Petrochem”
In June 2015 the
company announced the launch of REPSOL branded lubricants in India….. “GP petroleum will be securing the
formulation of Repsol, blending on behalf of Repsol and marketing the Repsol
brand in India. Repsol apart from helping GP in giving technology, formulation,
it will also join hands with them in spending money for marketing this
lubricant in the country. The spends will be shared 50:50 to start with. While
Repsol is strong in two wheelers, it intends to offer products for all the
segment of the automotive industry and challenging brands like Castrol,
IndianOil amongst others.”
“S Thangapandian, ED
at Gulf Petrochem says there is a a good synergy between both the companies
Repsol needed a partner, with a good strong presence in the country, the
partner who has the financial strength and distribution strength.”
Here is how they
intend to sell REPSOL in India… “Repsol
currently has around 30 distributors, with warehouses across the country, which
are marketing IPOL lubricant for both industrial and automotive segment. The
company has more than 2000 dealer counters across the country, which will start
selling Repsol lubricant. India will also be the feeder point for the SAARC
region for GP-Repsol.”
The Indian lubricant
market is intensely competitive but is one of the few sectors which is on a
growth path, both on the quality and quantity front. A separate dedicated team and network will service the Repsol brand
in India,” said Sudhir Goyel, managing director, Gulf Petrochem Group. Repsol’s products come with added benefits
of intense R&D and close association
with Honda in Moto GP, which will cater to the newly emerging premium and
top end segment across markets in the country.
Repsol
will launch the full range of products in Indian market. This year, the company
plans to introduce a range of products including, synthetic, synthetic blend and premium mineral base oil products
to cater to two wheelers, passenger cars and heavy duty vehicles for the Indian
market. Further an exclusive two wheeler
premium mineral oil product for the fastest growing segment, ie
scooters.
Marketing
initiatives GP Petroleums has roped
in Suresh Raina as the brand ambassador for marketing brand REPSOL in India
On sector potential
this is what the management had to say…. “While the global lubricant market is flat, the 2 million metric tonne
Indian lubricant market is growing at 2.5-3%, and within that the automotive
lubricant market, which makes up for 52% of the overall lubricant market is
growing at 6%. The partners have set
themselves a target of achieving 5% automotive lubricant market by the end of
the decade and if GP-Repsol achieves that India will be the second largest
lubricant market for Spanish lubricant maker with a production of 50,000 metric
tonne in India”
Now I feel the sectoral outlook for automotive lubricants seem to be
very positive and here is why. This is what another global behemoth, Petronas
had to say… PETRONAS Lubricants
International (PLI) today officially launched its state-of-the-art lubricant
blending plant in Maharashtra Industrial Development Corporation (MIDC) Patalganga.
The USD50 million-plant investment is an essential driver that will help propel
PLI's position as a formidable lubricants player in India. The new plant -
constructed on 25 acres of industrial land at Patalganga MIDC - with an
estimated production output of 110 million litres of lubricants, is expected to
commence operations by end 2017.”
"PLI has very aggressive ambitions to be amongst the world's top
lubricants player by 2019. India is without exception a very important market
for us here in the Asia region and we are confident of the potential ahead of
us. Therefore, we have embarked on a solid growth plan to accelerate our
business here in India, starting with investments into the new plant that is
equipped with world class lubricants blending facilities and equipment, highly
automated production line, and increased storage tanks. We have also embarked
on a new route-to-market approach that will see us transform the way we do
business with our distributors and retailers in the high-street business,"
said Giuseppe Pedretti, PLI Regional Head of Asia.”
Launching REPSOL branded lubricants in India…. As the management mentioned in June 2015 when it first announced
partnership with REPSOL to sell lubricants in India, Last year, GP Petroleums
and Repsol SA entered into a strategic partnership under which GP Petroleums
has the exclusive right to manufacture and market Repsol’s line of lubricants
in India. Thangapandian Srinivasalu, executive director at Gulf Petrochem
Group, said the company is targeting at
least 5% market share in India’s lubricant market.
Deal contours and future plans…. GP Petroleum, which in 2014 acquired SAH Petroleum in India is a modest
player in the domestic industrial lubricant space with its IPOL brand through
this partnership with Repsol wants to build its position in the thriving
automotive lubricants market. Apart from manufacturing Repsol lubricants at its
existing plants in Vasai and Daman, GP Petroleum is also planning to set up a
separate 1,00,000 tonnes plant on the outskirts of Pipavav with an investment
of Rs 125 crore
S Thangapandian, ED at Gulf Petrochem says
there is a good synergy between both the companies Repsol needed a partner,
with a good strong presence in the country, the partner who has the financial
strength and distribution strength.
“We already have a partnership with Repsol
as traders, we are big traders out of UAE, we are a big trader for base oil,
this relationship got extended to his partnership here,” he said.
“We know that this relationship is a starting
point, as things move forward, there are lot of things that we can do together.
It is an initial phase, so first you start understanding each other, the
culture, plus-minuses. I don’t rule out anything. We have been both open about
that, as we move forward, we will decide,” added Thangapandian. India will also
be the feeder point for the SAARC region for GP-Repsol.
Through the above statements I have tried
to put forward my understanding of what has been happening with this company GP
Petroleums, listed on the NSE & BSE over the past 18-24 months. What
interested me most about this company was when I got to know of their
partnership with REPSOL to sell automotive lubricants under the REPSOL brand in
India. Let’s see how the events unfolded
over the past one year….
·
Gulf Petrochem acquires SAH Petro in 2014 from
erstwhile financial investor Navis Capital who exited after a loss on their
investment of 5 years.
·
Over the course of the year company bought over
the stake from promoters “Sah Group” taking their shareholding to over 70
percent
·
In June 2015 GP Petroleums (name changed from
Sah Petro) announces a collaboration with REPSOL to sell lubricants in India,
launch slated within a year
·
In April 2016 GP Petroleums launches REPSOL
branded lubricants in India with Suresh Raina as brand ambassador
Now in the above four points I have tried to summarize whatever has
happened with this company over the last 18-24 months. Below I mention few
aspects which I find interesting about GP Petroleums
·
Gulf Petrochem, promoters of GP Petroleum is
owned by Indian origin NRI’s based in the UAE and is a USD 2 billion group.
They have created this empire in the last 18 odd years which speaks a lot about
their capabilities
·
Existing business is most suitable as it helps
them in access to base oil at cheap rates and also a deep understanding of the
automotive lubricants market (partnership with REPSOL) which is very
famous in the two wheeler circuit because of its long standing association with
HONDA in Moto GP
·
The Indian automotive lubricants market is a
highly lucrative one with the leader Castrol clocking operating margins in the
region of 25-30%
·
Gulf Petrochem & REPSOL SA are USD 2 billion
& EUR 16.5 billion companies who have partnered to launch REPSOL branded
lubricants in India, so there is comprehensive financial muscle behind a
company which has a market
capitalization of just USD 45 million
Now let’s dive a little deeper
into the past history of GP Petroleums, earlier known as Sah Petro. Sah Petro
sells lubricants under brand IPOL. The brand mainly sells in the Commercial
Vehicle segment and has a presence in the Indian markets since a long time.
However, even though the Indian automotive lubricants market is an attractive
space IPOL hasn’t been able to make any inroads in the segment so far. A look
at the company financials will tell you how poor has the company been
performing over the last few years
·
Over last 4 years there has been no
meaningful sales growth for the company. This is all the more
surprising considering the company has been spending close to 4% of sales on
advertisement & promotion. In fact, sales have trended lower. Need to
verify the authenticity of the payments being done on A&P
·
Even though raw material costs have come down
over last two years there have been no visible improvement in raw material
costs, staying close to 81% of sales in 2015 which is highest for the last 5
years
·
The most interesting aspect is the interest
costs. Even though the company has no visible debt it paid an amount of close
to Rs 10 crores as interest payments which is around 2.5% of sales
·
As expected profits have gone nowhere over the
last 5 years. In fact it has posted a cumulative profit of only 15 crores over
the last 5 years
From the above points it is
somewhat clear that the erstwhile management had been playing with the books of
the company and was not interested in doing business.
Since the new management has
taken over they have been pursuing the cleaning of the books of accounts. This
is visible from the changes witnessed in the 2015 balance sheet of the company.
If
one checks the annual report for 2015 we can see that inventory has been
written down by Rs 40 crores, debtors by 27 crores and creditors by Rs 80
crores
The interest payments over the
years have been forex losses over unhedged acceptances. This went up to almost
Rs 29 crores in 2012, 7% of sales. From what could be seen in the annual
reports of prior years, the company did not hedge its payables and hence huge
losses on forex exposure. Now, in the annual report for 2015 we see more than
50% of payables being hedged which should bring down forex losses to a great
extent. In fact if it hedges its creditors completely net margins can go up by
200-300bps
Advertisement & Promotion
(A&P) constitutes 3-4% of sales which we see as being clearly inefficient
as it has had no material impact on sales. With a new management stepping in we
believe this amount will be better utilized to improve sales over the next few
years
Days of receivables have seen a
considerable improvement in 2015 coming down from over 140 days to 118 days.
That should aid working capital requirement
Thus, we can see that even
without REPSOL, a better management can make the company profitable and back to
normal course of business as witnessed from the improvement in quarterly
results
·
9MFY16 profits are close to Rs 8 crores which is
almost 50% of cumulative profits over last five years
·
With a lot to be done on efficient procurement
of base oil & forex losses there is significant scope for improvement over
the current scenario.
·
With addition of REPSOL brand to the cluster one
can only wonder what the balance sheet & income statement will look like
over the next five years
·
For now, we are waiting for the final quarter
results for FY 16 and to have a look at how the balance sheet pans out for this
year
Recent developments with GP Petroleums
·
Mr. Hari Prakash Moothedath has been appointed
as the "Chief Executive Officer" of the Company w.e.f. December 23,
2015 in place of Mr. K. Murali, who has resigned from the post of "Chief
Executive Officer" of the Company with immediate effect.
·
Appointed
PricewaterhouseCoopers as internal auditors of the company
·
Mr. Jagdish G. Nagwekar has been appointed as
the Chief Financial Officer of the Company in place of Mr. Dhiraj Sharma, who
has resigned from the post of CFO with effect from August 05, 2015 under
section 203 of the Companies Act, 2013
·
CRISIL
upgrades long term & short term ratings of the company
Here is what CRISIL had to say while affecting a rating upgrade…
CRISIL ratings on the bank facilities of GP Petroleums Limited (GP
Petro; part of the Gulf Petrochem Group) continue to reflect GP Petro's
strategic importance to parent Gulf Petrochem FZC, Hamriyah Free Zone
(GPFZCH; rated 'CRISIL A-/Stable/CRISIL A2+'), and operational and financial
benefits derived from association with the Gulf Petrochem group. The ratings also factor in GP Petro's
healthy financial risk profile as reflected in its healthy capital structure
and debt protection metrics. These strengths are partially offset by modest
scale of operations in the highly competitive lubricants industry, and
susceptibility to volatility in foreign exchange (forex) rates.
CRISIL believes GP Petro will continue to benefit over the medium term
from its strategic position as the flagship entity of the Gulf Petrochem
group's Indian operations, and from its improved business risk profile. The outlook may be revised to 'Positive' in
case of considerable improvement in profitability, leading to better debt
protection metrics, or substantial increase in revenue along with steady
working capital cycle. Conversely, the outlook may be revised to 'Negative' if
financial risk profile weakens because of large debt-funded capital expenditure
or increased financial cost. The outlook/rating may also be revised in case of
any revision in the outlook/rating of GPFZCH.
Now all of this has got me interested into this small company, which is
listed on the Indian bourses. I have tried to analyze all the above points and
happenings with the company and present my facts below
Final outlook on GP
Petroleums
·
Gulf Petrochem has acquired majority stake in
the company taking stake to 72.3%. Possibility to increase stake further
remains limited as only a minor amount is left from the cap on promoter holding
·
They have changed the management, brought in the
brand REPSOL and roped in Suresh Raina as brand ambassadors, which shows that
they are serious about this business. Also the fact that automotive lubricants
is a huge market in India with a market potential of over 2 million metric
tonne by volume and growing at a rate of 2-3% p.a
·
Since the management change the first year has
been used to clean the books, get the house in order and then prepare for future
growth which should start coming in once REPSOL hits the markets
·
REPSOL has been launched in April, 16 and hence
we should start seeing the numbers from REPSOL in the P/L from end FY 17
·
REPSOL’s global association with Honda makes us
believe that the brand can have a huge potential in India if used effectively.
Also, with Honda being a major player in India, any association between the two
in the Indian markets can be a wonderful opportunity
·
GP Petroleums has the dealership network of over
2000 dealers through which it can easily channelize REPSOL in the Indian
markets.
·
REPSOL being a global renowned brand, we believe
the realizations per litre for GP Petroleums should start to increase and as
raw material for this product is just base oil which is same for all companies,
any increase in realization could add significantly to the margins
·
Even with a global brand in the kitty, the past
performance of the management makes us confident in their ability to manage the
company well in the future. There have been no known cases of financial
irregularities against the promoters and with the parent being a USD 2.5
billion dollar company we can be rest assured of financial assistance for the
Indian subsidiary
·
The ratings upgrade and the subsequent increase
in borrowings limit increases the assurance that rating agencies like CRISL
have also a positive view on the prospects of the company
·
What
looks most attractive to us is that here we have a company with a global brand
in kitty, backed by a strong promoter, no known case of financial irregularity,
very small in size (Market capitalization of just USD 45 million) and entering
into a sector with a huge potential
·
The above
factors combined makes the company a very attractive proposition at current
prices
Risks
No company is without inherent risks and here also there remain
a few risks to consider
·
REPSOL has just been launched and we are
estimating that it will be a success like Castrol in the coming five years.
That may not transpire as the Indian market may not take to the brand so well
·
Even if the brand starts to do well, the
management can be a poor capital allocator and squander the cash flows
generated
·
We don’t know a lot about the performance of the
company. Every quarterly result will present us with an improved picture
·
At this stage it’s difficult to estimate the
true value of the company as it depends on many variables taking place.
However, this is why we believe we are getting the company at these valuations.
·
Though I have tried to gather information about
the new promoters to find out their intentions it is not a process which ends
and hence one has to keep looking for signals from the management on this
front, especially on the capital allocation side
Disclaimer: I have holdings in the company GP Petroleum and I am not
advocating any investment in the same. I am not an investment advisor. This is
an educational post and I have just tried to assimilate facts and present my
view on the above. I have no targets or future price in mind. This should not
be construed as an investment advice. It’s just an educational post where I
invite others to point out holes in my analysis so that we can become better
investors
