IPO: Gandhar Oil Refinery

Gandhar Oil Refinery, a specialty oil manufacturer, will launch its IPO (initial public offering) this week. Below is a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average ROE and ROCE are 30 and 32 per cent, respectively. It also reported positive cash flow from operations in the last three financial years.
  
• Growth : Revenue and net profit have grown annually by 36 and 38 per cent, respectively, over the last three years.
  
• Valuation : The stock is valued at a P/E and P/B of 9.4 and 1.5 times, respectively, compared to its peers' median P/E and average P/B of 29 and 4.6 times, respectively.
  
• Overview : The company is the largest player in white oil manufacturing in India. It is also among the major players in India's speciality oil sector. Gandhar Oil is comfortably positioned to take advantage of the increasing demands of the Indian economy, which is highly dependent on specialty oils in products from personal care to industrial usage. Around 40 per cent of the total issue is an offer for sale, 37 per cent is intended to meet working capital expenses, and the remaining is for capex and corporate expenses.

About Gandhar Oil Refinery

Gandhar Oil Refinery is a specialty oils manufacturer. It primarily focuses on white oils, which accounted for 64 per cent of its FY23 revenue. Also, it commands a substantial market share of 27 per cent in India. With a comprehensive product lineup featuring over 440 offerings, ranging from personal care, healthcare, performance oils, lubricants and process and insulating oils under its brand 'Divyol', the company caters to a broad spectrum of industries such as automotive, industrial power, tire and rubber, as well as personal and healthcare sectors.

Strengths of Gandhar Oil Refinery

• A leading player in white oil: Gandhar Oil is India's biggest white oil supplier, with a 27 per cent market share. Globally, it has a global market share of around 10 per cent.
  
• High growth prospects : Specialty oils such as white oil, petroleum jelly, automotive oil, industrial oil, transformer oil and rubber processing oil are used across various industries. Given that these products will always be in demand, being a leading manufacturer in the specialty oil industry is a strong positive for Gandhar Oil.

Weaknesses of Gandhar Oil Refinery

• Dependent on Brent crude : Specialty oils are highly reliant on base oils derived from Brent crude; hence, Brent crude's price volatility will directly impact Gandhar Oil's margins.
  
• Highly concentrated in supply: In FY23, the top 10 specialty oil suppliers accounted for 74 per cent of the total raw material requirement. Further, South Korea and the Gulf Cooperation Council (GCC) provided more than 60 per cent of the raw materials supply during the same period. Therefore, any macroeconomic events affecting these regions and suppliers will adversely impact Gandhar Oil's operations.
  
• High working capital requirements : In FY23, the company reported a working capital cycle of 31 days. This trend is increasing year-over-year, from 19 days in FY21 to 46 days in the quarter ending June 23.
  
• High promoter remuneration : Gandhar Oil's promoters, Ramesh Parekh, Samir Parekh, and Aslesh Parekh, received over 7 per cent of profit after tax as their remuneration in FY 23.

Risk report

Company and business

• Are the earnings before tax of Gandhar Oil Refinery more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax for FY23 was Rs 300 crore.
• Will Gandhar Oil Refinery be able to scale up its business?
  Yes. The company is in the specialty oil business, with significant revenue from white oil. According to the company, white oil is still underpenetrated and has immense growth potential, driven by a rising consumer demand.
• Does Gandhar Oil Refinery have recognisable brands with client stickiness?
  Yes. The company has long-standing relationships with its marquee clientele, including Unilever, Procter & Gamble (P&G), Marico, Emami, Dabur and Bajaj Consumer Care.
• Does the company have a credible moat?
  No. While the company operates in an oligopolistic market with high entry barriers, other established players provide strong competition.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over a 25 per cent stake in the company?
  Yes. Post IPO, the promoters' stake will increase to 65 per cent.
• Do the top three managers have over 15 years of combined leadership at Gandhar Oil Refinery?
  Yes. The key managerial personnel and senior management have more than 15 years of experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Gandhar Oil Refinery free of promoter pledging of its shares?
  Yes. Gandhar Oil Refinery is free of promoters pledging their shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE are 30 and 32 per cent, respectively. In FY23, the company's ROE and ROCE were 32 and 35 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows from operations in the previous three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio, as of March 2023, was 0.3 times.
• Is Gandhar Oil Refinery free from reliance on large working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive.
• Can the company run its business without relying on external funding in the next three years?
  Yes. While the company has some debt on its balance sheet, the proceeds from the IPO will help fund its working capital requirements.
• Is Gandhar Oil Refinery free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of the total equity stood at around 34 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  Yes. The stock will offer a 15 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company will trade at a price-to-earnings ratio of 9.4 times compared to peers' median level of 29 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 1.5 times compared to its peers' average of 4.6 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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