Stock Pick from Oil Marketing & Distribution Sector

Here Is Why:

• Venturing into overseas markets for revenue growth and profitability.
• Margin likely to improve due to declining crude oil prices.
• Strong balance-sheet with zero debt and still trading at a discount compared to peers.

India is the third-largest lubricant market after USA and China, contributing over 5.5 per cent of the global automotive lubricant demand and over 4 per cent of the demand for industrial lubricants. Therefore this time we have picked one of the companies from the lubricant sector for our readers. Tide Water Oil has a strong balance-sheet with zero debt along with healthy net cash position. It also delivers healthy return ratios. On the valuation front, the company is trading at a discount compared to its closest peers.

Tide Water Oil is a well-established player in the Indian lubricant industry owing to its strong brands such as Veedol, Prima, Turbo, etc. with a wide distribution network and good quality of products. Its repertoire of automotive products includes engine oils for trucks, tractors, commercial vehicles, passenger cars and two/three wheelers. It also produces gear oils, transmission oils, coolants and greases for automobiles. For industrial application it manufactures industrial oils, greases and specialty products like metal working fluids, quenching oils and heat transfer oils.In FY12 the company acquired Veedol International Ltd. With this acquisition it got the rights to manufacture and sell lubricants under the Veedol brand globally. In FY14, two years after acquiring global rights for the Veedol brand from British Petroleum (BP), the company has decided to re-launch the brand in European markets, including Germany, Austria and Switzerland, where it once had a strong presence.

Tide Water Oil is planning to set up a manufacturing plant in Canada with a capex of Rs 600 crore. Moreover, the Canadian plant could cater to the markets of entire North and South America. We believe that the company is taking the right step by venturing into the overseas markets for revenue growth and profitability at a much faster pace than the Indian lubricant industry. During the first half of FY15, the company’s sales increased by 13 per cent to Rs 474.85 crore. However the operating profit margin fell 170 basis points from 10.8 per cent to 9.1 per cent which saw operating profit falling by 5 per cent to Rs 43.32 crore. In terms of its bottomline, PAT grew 244 per cent to Rs 113.71 crore due to extraordinary income of Rs 107.64 for profit on transfer of business on slump sale to a JV company promoted with Nippon Oil Energy Corporation, Japan.

The company’s main raw material is base oil which is made from crude oil. Normally there is a lag time on the increase or decrease of crude prices, which impacts the raw material cost. Considering the way the price is inching downwards the company will accrue some benefits in the forthcoming quarters, assuming of course that exchange rate remains stable. We expect more benefit from the beginning of the fourth quarter of FY15.

Tide Water Oil's earnings per share without extraordinary income in Q2 FY15 was Rs 180.35 and its earnings per share without extraordinary income for the trailing 12 months (TTM) was Rs 789. Currently it is trading at a TTM PE ratio of 19.5x i.e. at a discount of more than 50 per cent to Castrol India’s PE valuation. Considering the above factors, i.e. venturing into global markets through Veedol brand, healthy return ratios and attractive valuation, we believe the company presents a good investment opportunity. Going forward we believe that the earrings are going to be improved and we recommend a buy with 30 per cent return in stock in the next one year.