Gulf Oil Lubricants to pass on full price increase due to BS VI regulation: CFO, Manish Gangwal

In an interview with ETCFO, Manish Gangwal, Chief Financial Officer at Gulf Oil Lubricants India Ltd discusses the slowdown impact on his business, the company’s preparedness towards BS VI regulation, and his economic outlook going forward.

Gulf Oil Lubricants (India) manufactures lubricants and associated products. About 65 per cent of the company’s business is in B2C space, where it supplies lubricants to the retailers and in the aftermarket. The rest 35 per cent is the B2B segment where it operates, and has three segments — infrastructure, industrial and automotive. The Mumbai-based company clocked Rs 1,702 crore of revenue in the financial year 2018-19.

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BS VI regulation, which is about cleaner emission norm, kicks off from April 2020. Below are edited excerpts of the interview:

Q: What has been the key impact of auto slowdown on your business?

Manish Gangwal: The key impact has been our OEM filling business. It has de-grown 60 per cent in the September quarter, dragged lower by production cuts of late. This business constitutes close to 10 per cent of our total lubricant volumes. Having said so, the company’s other businesses continue to post double digit growth, and hence from that perspective we are still outperforming the industry.

Q: Companies are continuing to cut productions, and defer their capex plans. What is the worst case scenario if the slowdown does not go soon?

Manish Gangwal: The economic growth seems to have already bottomed out. The September quarter was a difficult period.

To my mind, the government is continuing to take lot of revival measures, and the economic situation is likely to improve. The next six months till April is going to be a peak period for infrastructure spending. This is expected to generate more economic activities which will in turn spur consumption. Once that happens, the lubricant industry will certainly get to normal.

Also, the production pick-up is likely from the OEMs ahead of the BS VI regulation from April 2020.

Q: What steps are you taking to tackle the slowdown?

Manish Gangwal: The Company is extending its customer base, and looking at new opportunities. We have shored up our distribution in the first-half of this financial year by 9 per cent, reaching to about 73,000 retail touch points. We continue to expand geographically, concentrating on the rural markets.

Q: Have the benefits out of the corporate tax cuts fully flowed in? To what extent have they helped the company’s profitability?

Manish Gangwal: Yes, the effective tax has come down to 25 per cent from about 35 per cent. This has resulted in improvement of margins for the September quarter. Stable input costs in terms of both foreign exchange rate and oil prices, and greater focus on products giving us higher realisations or better margins such as passenger car motor oil, have benefitted us further in ensuring good profitability.

Q: Could you give some colour on your liquidity position?

Manish Gangwal: The company is debt free. It has a net cash of Rs 60 crore as of 30 September, 2019 as against Rs 10 crores as of 31 March, 2019.

A significant cash conversion has happened during the six-month period. More than 95 per cent of the cash has been converted into profits, which is a very high number. This happened despite an increase in the number of receivables. The cash conversion has been healthy for we were able to manage our inventories better. Our working capital cycle has been stable at about 105-110 days. Going forward, we expect to continue this picture on the liquidity front.

Further talking about liquidity, the company does not exploit commercial papers, and rather source funds from buyer’s credit to meet short-term borrowings.

Q: Any new OEM tie-ups on the cards?

Manish Gangwal: We try to forge 1-2 new partnerships every year. We have as of now tie-ups with 14 OEMs. There is a pipeline of new tie-ups. It takes time to place the product and commercially agree. We are hopeful of closing some tie-ups soon.

Q: How are you aligning your product portfolio as per BS VI? Would you pass down the cost increase?

Manish Gangwal: Gulf Oil Lubricants is a global company, and present in more than 100 countries across the globe including Europe and other advanced countries.

BS VI product is equivalent to Euro 6, and therefore , we have already aligned our product portfolio as the regulation. We have worked closely with the Indian OEMs, and tried to localise the product with them. As soon as they launch vehicles, we are ready to supply them the required lubricants.

Pricing wise, since these would be better products for they are low emission related lubricants, a price increase of about 10-15 per cent is likely.

The hike will be passed on the customers, both OEMs, as well as the retail players in the bazaar market. This will not have any impact on demand as per say, since lubricant is a necessary product; it is not a discretionary item where price can impact in a big way.