IPO Analysis: Gandhar Oil Refinery India Limited

IPO Rating: Apply for the long-term

About the issue 

Gandhar Oil Refinery Limited, established in 1992, stands as a leading producer of white oils, primarily serving the consumer and healthcare industries. The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 2. The IPO price range is set between Rs 160 and Rs 169 per equity share, resulting in a total issue size of Rs 500.69 crore at the upper price band. 

The IPO is scheduled to commence on November 22, 2023, and will conclude on November 24, 2023. The market lot size for the IPO is 88 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 1,144 shares or a total investment of Rs 1,93,336 assuming the upper price band. 

Objects of the Issue 

The offer encompasses both the fresh issue and the offer for sale. It's important to note that the company will not accrue any proceeds from the offer for sale. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes: 

1. Investment in Texol by way of a loan for financing the repayment/pre-payment of a loan facility availed by Texol 
2. Capital expenditure through the purchase of equipment and civil work required for expansion in the capacity of automotive oil at the company’s Silvassa Plant 
3. Funding working capital requirements of the company 
4. General corporate purposes 

Promoter holding 

Ramesh Babulal Parekh, Samir Ramesh Parekh and Aslesh Ramesh Parekh are the promoters of the company. The promoters and promoter group currently hold a pre-issue shareholding stake of 87.50 per cent in the company. 

Company profile 

Gandhar Oil Refinery Limited, established in 1992, stands as a leading producer of white oils, primarily serving the consumer and healthcare industries. The company's product portfolio encompasses industrial oils, automotive oils, mineral oils, petroleum jelly, and rubber process oils. Additionally, it engages in the production of Pharmaceutical, Health care, and Performance oil (PHPO), Process Insulating Oil (PIO), and lubricants. All products are marketed under the company's flagship brand ‘Divyol.’ 

The company is a leading manufacturer of white oils by revenue in India with overseas operations catered to more than 100 countries globally. With more than 3,500 customers globally, the company is among the top two players in the Indian white oil market and accounts for 25 per cent of the market share in the white oil category. 

On the production front, Gandhar Oil runs three plants located in India and the UAE. The two plants in India are located in Silvassa and Taloja, and the plant in the UAE is located in Sharjah. As of June 30, 2023, the combined annual production capacity of the company’s manufacturing facilities was approximately 522,403 KL. 

Financials

Outlook and Valuation 

The company has demonstrated strong growth in both revenue and net profit in recent years. In the first quarter of fiscal year 2024, it reported a revenue of Rs 1,070 crore and a net profit of Rs 54 crore, indicating noteworthy year-on-year growth. Over the past two financial years, the company reported Return on Equity (RoE) and Return on Capital Employed (RoCE) figures exceeding 30 per cent and 40 per cent, respectively. 

The issue is priced with a P/BV ratio of 1.67 times, calculated using its Net Asset Value (NAV) of Rs 101.35 as of June 30, 2023. At the upper price cap, it is priced at a P/BV ratio of 1.49, considering its post-IPO NAV of Rs 113.70 per share. 

When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 6. As per its official documents, the company has referenced several listed peers, including Savita Oil Technologies, Apar Industries Ltd, Galaxy Surfactants, and Privi Speciality Chemicals which are currently trading at PE ratios of 11, 30, 24 and 222, respectively. Therefore, the issue is offered at an appealing price. 

Taking into account the risk factors, the company relies significantly on the personal care, health care, and performance oil business sectors. Downturns in these industries could harm the business. Additionally, the company is obligated to adhere to stringent quality requirements and inspection standards. Given the nature of the business, the company necessitates a substantial amount of working capital. The company primarily sources its key raw material, base oil, from South Korea and the Gulf Cooperation Council region. Any inability to secure an adequate supply of base oil from these countries, without alternative sources, or substantial price fluctuations, could pose challenges to the seamless operation of the business. 

However, the company's standing as one of the leading two players in the Indian white oil market, commanding approximately 25 per cent of the market share in the white oil category, stands out as a significant strength. Furthermore, the strategically positioned manufacturing facilities, enduring partnerships with key consumers and pharmaceutical manufacturers, along a strong global presence, contribute positively to the company's overall strength. Hence, we recommend investors to subscribe to the issue with a long-term perspective.