Gulf Oil Lubricants India CFO Manish Gangwal.

Hinduja Group company Gulf Oil Lubricants India's stock hit a 52-week high after its Q1 numbers impressed investors. The lubricant company has also been in the news for handsomely rewarding shareholders through bumper dividends. The company is banking on volume growth for the core lubricants biz and investing in EVs as parallel growth areas since the focus gradually is shifting towards non-fossil fuels. But the company's growth aspirations can turn upside down by turbulence in input costs, rupee volatility, general inflation as well as the slowdown in vehicle demand. But all these don't derail its CFO Manish Gangwal’s welllaid plans.

In an exclusive interview with ETCFO, he says whenever there are headwinds, the company can protect margins by taking some price corrections or adjusting some of the schemes. He sees EVs as a complementary, or additional opportunity, and not as a threat to existing business and is even open for further investment in EV companies. Edited excerpts of the interview:

Q: Do you foresee this momentum sustaining for you in the next couple of quarters?

Manish Gangwal: We had a fantastic Q1, 15% topline growth and 23% PAT growth, the highest-ever quarter in terms of revenue at Rs 800 crore and then the highest also from an EBITDA perspective of Rs 92 crore.

Base oil, a key raw material, was quite stable and so was the rupee for most of Q1. We grew margins sequentially by 2%. Crude has taken some runaway from $77-78 per barrel to $83- 84. We have seen in the past that base oil follows crude with a time lag of 1-2 months and if crude sustains above a certain level for a longer period of time, then base price has to follow with a lag effect. When such events happen, we are able to protect margins by making some price corrections or adjusting some of the schemes.

As of now, we do not see this happening. We see base oil to be quite stable and the rupee also took a slight turn but it is still not beyond a range. We expect the rupee to be stable or to be in this range and as long as crude is stable in this range.

We don’t foresee any major challenges on the input cost side. But we are prepared to take price increases or adjust schemes if need be. Manish Gangwal, CFO, Gulf Oil Lubricants India

Q: Do you think you will have to go for another round of price rise to protect margins?

Manish Gangwal: The industry has taken nearly six price increases in the last 18 months because of the continued rise in input cost. And we feel some sort of stability coming now. Now that rupee and crude are in a range, we don’t foresee any major action happening or turn of events that can trigger massive price increases again.

We are prepared to manage our margins, so if need be, we will not be hesitant to take a price increase but we don’t foresee that. The last price increase we took was in March last week or April first week.

Q: How do you see volume boosting Gulf Oil's growth metrics? What are the triggers that can push up demand?

Manish Gangwal: On the volume side, we are confident of delivering 2-3X growth on a fullyear basis. Last year, we delivered 15% volume growth in our core lubricants. That is clearly 4X the market, and this year we are confident we would grow 2-3X.

There are many reasons for this optimism, first B2B and B2C segments both doing well, second infrastructure spending is increasing and robust, and third is OEMs are now expected to do well from Q2, and the fourth reason is this agri season monsoon has been decent, the rural economy should also pick up

Q: Isn't that over-optimism considering you operate in a cyclical business where external variations could outweigh gains?

Manish Gangwal: It’s a fairly stable business. Overall, on a full-year basis, India being an agri-driven economy, has done well. Our market share is decent, but it is not high, so we have a lot of headroom also from a distribution perspective and keep growing our volume. We are not worried about growing the 2-3X market we have done for the last 12 years, delivering CAGR 10% volume growth, and this year we don’t think to be an exception.

Q: Which are the areas where demand didn't pick up in Q1 and is now likely to pick up in Q2?

Manish Gangwal: OEM factory fill business was an area where demand didn't pick up. Some OEMs have adjusted their production schedule in Q1 which led to some softening in the OEM factory fill business but not in the franchise business. We are seeing that coming back.

The second area is the motorcycle segment where we saw some slowdown in the last 2-3 quarters, which has also started coming up from June onwards. Again, it is linked to the rural economy again. So, both these areas which had challenges in earlier quarters are now coming back.

Q: What's the margin’s outlook for the fiscal? Do you see any drop in margins?

Manish Gangwal: We delivered 11.5% EBITDA margins in Q1. We aspire to get into the 12- 14% band over the next 1-2 years. Earlier we had 15-16% EBITDA margins and then 35- 40% price increases over the last 18 months. That’s a significant increase in input costs and we have passed on that.

Now our topline has grown by 35-40%, and last year revenue grew by 37% when volume grew by 15%. But that has resulted in a % drop in the margins because you recover per litre cost by passing on the input cost increase but then if the top line and bottom line increase by the same amount, the percentage drops. And that has had an impact.

We have seen our margins bottomed out. The company delivered 10.5% margins in Q4FY23. Now, our gross margins improved by 2% in Q1FY24 but it is not fully reflected in EBITDA because, in the last quarter, we spent a lot of money on advertising and promotions in the IPL quarter. We see an upward trajectory in the margins continuing and hopefully, we should get to the 12-14% band over the next 1-2 years..

Q: Revenue during Q1 crossed Rs 800 crore. Any forecast for the rest of the fiscal year?

Manish Gangwal: Last year, we did about Rs 3,000 crore topline and this year Q1 we already delivered Rs 800 crore. We are definitely looking at double-digit revenue growth — 10% plus and 2-3x growth in the market.

Q: What's your current cash position? And how are they being used?

Manish Gangwal: We are having more than Rs 700 crore on the balance sheet. Last year, we increased our payouts as well. One of the highest payouts in history. At the same time, we keep looking at EV space, and the EV value chain. We have already made two small investments into EVs; one is in a UK company — Indra Renewable Tech, a home charger manufacturer of EV cars, and another in Techperspect, they are in software as a service in EVs.

We keep evaluating the opportunities in the EV area. It can happen anywhere, but looking at India-specific opportunities more from the India balance sheet, while the global parent is looking at global opportunities. We will evaluate both, but we have basically examined that we have 3-4 strengths. We have a pan-India distribution network, our brand is strong, and a strong B2B connection.

We are confident the lubricant business will continue to grow but at the same time, EVs will also come on the road, and that is an additional opportunity that attracts us. We are evaluating all options in the value chain.

Q: Growing two different structures in a parallel manner is going to be your strategy. And won’t EV foray cannibalise into your lubricants business?

Manish Gangwal: We see EV as a complementary, or additional, opportunity and not as a threat to existing business. The existing business will continue to grow and will keep generating cash. And then that cash has to be deployed for which we are looking at EV as an investment opportunity in the value chain area, be it charging infra, battery swapping, or charger manufacturing.

Our current business does not require much capex in the next 3-4 years, only Rs 20- 25 crore of additional capex will be sufficient to take care of our growth in the next 3-4 years. And since we are generating much more cash than that, we are looking at EV as an investment opportunity.

Q: What is the company’s cash position outlook for FY24? Does it look like it may face depletion or remain the same?

Manish Gangwal: As stated we have Rs 700 crore in gross cash. There are some working capital loans. So net cash is close to Rs 400 crore. Last year, we generated Rs 273 crore of cash from operations on a full-year basis, and we see a similar trend continuing forward since working capital growth is nearly at its peak.

Our capex is not that significant for the next 3-4 years. So, we see a lot of cash generated and a part of it would be paid back to the shareholders. We did a 52% payout last year, which was one use of the cash.

The second use is investments, which depend on the opportunities we get for instance in the EV space. We look at opportunities that fit our strategy. We are not rushing to get invested, but by evaluating each opportunity and only those that fit our strategy, we will go ahead.

Q: Since you have had high payouts, how do the trends and outlook appear for the fiscal?

Manish Gangwal: Ever since a separate demerged entity got listed in 2014, we have been paying 35-40% roughly as the payout. Till FY21, it was only dividends, and in FY22 we did a buyback, the payout including a buyback was 62%, last year (FY23) we did only dividends at a 52% payout.

In the last two years, the trend has been 50–60% payouts. Going forward, it will be a Board's prerogative but we generate sufficient cash. In addition to the investments in the areas of EV and given that we don’t have much requirements for capex, payouts are an option to continue for the benefit of shareholders..

Q: Aren’t there better treasury options other than just rewarding your shareholders?

Manish Gangwal: We distribute cash back to shareholders out of the cash being generated during the year only and we are not digging into our past reserves to reward our shareholders. If the company is doing well, and profits were at an all-time high last year, the logical way is to reward the shareholders more. That has been the Board's philosophy. We want to continue that trajectory. Treasury generation is not our prime objective

Q: What percentage of revenue is invested in advertising and promotion?

Manish Gangwal: About 3-4% of increased turnover, we are investing back in the brand from the earlier 6%. We will continue to invest in the brand.

Courtesy: ET CFO