Gandhar Oil Refinery India

White oil manufacturing company

Over 440 product offerings include personal and health care, performance oils, lubricants and process and insulating oils under brand Divyol

Incorporated in 1992, Gandhar Oil Refinery India (GORL) is a leading manufacturer of white oils by revenue with a growing focus on the consumer and healthcare end-industries. The company has three main business divisions: PHPO (personal care, healthcare, and performance oils), lubricant and PIO (process and insulating oils. As of June 30, 2023, its product suite comprised over 440 products primarily across the personal care, healthcare and performance oils (PHPO), lubricants and process and insulating oils (PIO) divisions under the Divyol brand. GORL has a diversified customer base, comprising 3,558 customers in FY2023.

The PHPO division comprises white oils, waxes, and jellies. White oils are highly refined mineral oils that are pure, stable, colorless, odorless, non-toxic and chemically inert and are used as an ingredient in various end-products. Petroleum jelly is a thick, waxy paste that many people use as a skin care product. Primary end used industries are consumer, healthcare, plastics, chemicals, textiles, and fragrances. Key customers are P&G (for petroleum jelly in the Indian market), Unilever, Bajaj Consumer Care, Dabur, Emami, Marico, Patanjali Ayurved, Amrutanjan Healthcare, Supreme Petrochem, Encube. The PHPO division formed 54.96% of total sales in FY2023 and 56.29% in Q1FY2024.

The lubricants division comprises of automotive oils and industrial oils. Automotive oils are used in automotive applications including engine oils, passenger car oils, shock absorber oils, brake fluids, motorcycle oils, gear oils, and automotive grease. Industrial oils areused in industrial operations providing lubrication to machines or specified process application and maintaining a stable temperature. The primary end user industries are automobile and fleet operators for automotive oils and Industrial machines and equipment for industrial oils. Key customers are Gulf Oil, Adani Ports and Special Economic Zone. The lubricant division formed 25.03% of total sales in FY2023 and 26.78% in Q1FY2024.

The PIO division comprises transformer oils and rubber processing oils. Transformer oils are used to serve the dual purposes of providing liquid insulation and acting as a coolant, while rubber processing oils are used to ensure uniform mixing and improve blending of the rubber being processed. Primary end used industries for transformers oil are transformer manufacturers, and power generation and distribution. Primary end used industries for rubber processing oils are tyre and rubber product manufacturers. Key customers are Toshiba Transmission, Distribution Systems (India), Farseen Rubber Industries (FRIL), Avigiri Urethane and Rubber Industries and Vamshi Rubber. The PIO division formed 9.51% of total sales in FY2023 and 6.71% in Q1FY2024.

In addition to the three main business divisions, PHPO, lubricants and PIO, the company sells its PHPO, lubricant and PIO products to channel partners, who sell these products to end-users. These channel partners distribute products to multiple end-industries at their discretion. Channel partners formed 10.5% of the total sales in FY2023 and 10.22% in Q1FY2024

As of June 30, 2023, the overseas operations catered to over 100 countries globally. Overseas sales primarily comprise revenue from overseas sales of the company and revenue earned by subsidiary Texol in Sharjah, United Arab Emirates. Overseas sales formed 53.32% of total sales in FY2023, while domestic sales were 46.68% in FY2023. Overseas sales of APAC comprised 70.28% of total exports in FY2023, Americas 14.77%, Africa 12.74%, and Europe 2.21%.

Overseas sales grew at a CAGR of 71.22% over the last three financial years from Rs 741.361 crore in FY2021 to Rs 1345.664 crore in FY 2022 and Rs 2173.350 crore in FY2023 and was Rs 690.558 crore in the quarter ended June 30, 2023, contributing 36.00%, 39.76%, 53.32% and 64.57% of its proforma consolidated revenue from sale of products, respectively, in these periods.

Segmentwise, the consumer segment formed 54.98% of total sales in FY2023 while heathcare formed 14.36%, plastics 9.62%, chemicals 6.31%, textiles 11.29%, and fragrances 3.56%.

The company currently operates three manufacturing facilities, with two plants located in Western India and one plant located in Sharjah, United Arab Emirates, spread across 1,28,454 square meters to cater to its Indian and global operations. As of June 30, 2023, the combined annual production capacity of manufacturing facilities was approximately 522,403 kl. Its Silvassa plant, with an annual production capacity of 143,853 kl as of June 30, 2023, primarily manufactures specialty oils for the Indian market. Its Taloja plant, with an annual production capacity of 143,256 kl as of June 30, 2023, primarily manufactures white oils, petroleum jelly and waxes for overseas sales. Its Sharjah plant, with an annual production capacity of 235,294 kl as of June 30, 2023, primarily manufactures specialty oils for the GCC, Africa and the MiddleEast regions. The Sharjah plant is operated by subsidiary Texol and commenced operations in 2017.

Further, the R&D facility is located at its Silvassa manufacturing facility, where the companyundertakes the R&D activities to support manufacturing activities. The R&D facility is registered with the Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India (DSIR).

The company is in the process of enhancing the production capacity of its Taloja plant by an aggregate of 100,000 kl. Of this, it commissioned an incremental capacity of 25,000 kl in October 2022. This enhancement of capacity is proposed to be funded out of internal accruals and through external borrowings obtained by the company. It expects to complete the enhancement to the production capacity in FY2024.

The combined capacity utilization was 83.29% in FY2023 and 88.56% in Q1FY2023. The Taloja plant capacity utilization was 99.21% in FY2023 and 104.49% in Q1FY2023. The Silvassa plant capacity utilization was 114.99% in FY2023 and 104.46% in Q1FY2023. The Sharjah plant capacity utilization was 54.22% in FY2023 and 69.14% in Q1FY2023.

The raw material used by the company for the manufacture of its specialty oil products primarily comprises base oil, along with waxes and other additives. The company procuresmost of its raw material from South Korea and the Gulf Co-operation Council Region. Key suppliers in these regions include SK Lubricants, S-Oil, GS Caltex and other global base oil suppliers. It sources highly refined grades of base oil primarily used in the PHPO division for consumer and pharmaceutical products from its suppliers. It sourcesthe remaining raw materials, including its remaining base oil requirements, additives, and waxes, from various Indian oil refining companies. Supplier agreements with certain key suppliers are renewed on an annual basis and provide for assured volumes of raw materials.

Historically, the company also operated a non-coking coal trading business through Gandhar DMCC in addition to its specialty oils business. GORL made a strategic decision to exit the coal-trading business and focus on the specialty oils business. In FY 2022, it exited its non-coking coal trading business through a slump sale and divested its shareholding in Gandhar DMCC. Accordingly, pro forma consolidated financial information has been prepared to demonstrate the results of operations and the financial position that would have resulted as if the sale of such business and shareholding and the conversion of Texol into its subsidiary had taken place at the earliest of the periods presented in the pro forma consolidated financial information (i.e., April 1, 2020).

The Offer and the Objects

The offer comprises fresh issues of up to 17869822 equity shares at the upper price band of Rs 169 and 18875000 equity shares at the lower price band of Rs 160 aggregating Rs 302 crore and an offer for sale of up to 11756910 equity shares aggregating Rs 199 crore at the upper price band of Rs 169 and Rs 188 crore at lower price band of Rs 160.

The promoters of the company are Ramesh Babulal Parekh, Samir Ramesh Parekh, and Aslesh Ramesh Parekh.

The company proposes to utilize the net proceeds from the fresh issue towards funding investment in Texol by way of a loan for financing the repayment/pre-payment of a loan facility availed by Texol from Bank of Baroda, amounting Rs 22.71 crore, capital expenditure through purchase of equipment and civil work required for expansion in capacity of automotive oil at the Silvassa plant, amounting Rs 27.73 crore, funding working capital requirements of the company amounting Rs 185.01 crore, and the balance towards general corporate purposes.

Texol has availed a fund-based and non-fund based working capital facility from Bank of Baroda for an initially sanctioned amount of AED 23.30 million, or Rs 51.796 crore. As on September 30, 2023, the outstanding amount under this facility was AED 11.02 million, or Rs 24.976 crore.

The company intends to increase production capacity of the Silvassa plant by an aggregate of 18,840 kl. It expects 50% commercial production by March 2025 and remaining by March 2026.

Promoter group selling shareholder Ramesh Babulal Parekh post-issue shareholding will decrease to 28.5% from 37.7% pre-issue shareholding.Kailash Parekh’s post-issue shareholding will decrease to 7.2% from 11.6% pre-issue shareholding.Gulab Parekh’spost-issue shareholding will decrease to 8.7% from 13.5% pre-issue shareholding.

Strengths

The white oil market is the fastest growing segment in the specialty oils sector. GORL was Indias largest manufacturer of white oils by revenue in FY2023. This included domestic and overseas sales. It is one of the top five players globally in terms of market share in the CY 2022.

The company has completed rigorous selection processes for securing business from several of its customers. It has been able to maintain high customer loyalty. The percentage of customers placing repeat orders in the quarter ended June 30, 2023, and FY 2023, 2022 and 2021 was 83.74%, 69.11%, 68.86% and 66.37%, respectively.

White oil, the fastest-growing segment of the Indian specialty oil market, is estimated to be worth $0.47 billion in 2023 and reach $0.76 billion by 2028, at a CAGR of 9.9%. In terms of volume, it is expected to reach 1,236 kt by 2028 from 782 kt in 2023, at a CAGR of 9.6%.

The Indian specialty oil market is estimated to be $7.33 billion in 2023 and reach $9.30 billion by 2028, at a CAGR of 4.9%. In terms of volume, the market is estimated to be 5,578 kt in 2023 and reach 7,098 kt by 2028, at a CAGR of 4.9%.

The global white oil market is oligopolistic with a few players highly active in the market and the top 10 players account for 40-45% of the global white oil market. GORL was India’s largest manufacturer of white oils by revenue in FY2023, including domestic and overseas sales and was one of the top five players globally in terms of market share in the calendar year 2022.

The company will get benefits of high entry barriers to this industry as large, marquee global manufacturers across applications such as pharma, food and beverage, and cosmetics have extensive supplier accreditation and internal approval processes that need to be followed by manufacturers of specialty oils. The overall time for empanelment of suppliers with marquee manufacturers can take up to 4–5 years. Further, the costs associated with changing suppliers of such products are relatively high, consequently disincentivizing any such change. Customers typically select suppliers after a process of acute review and tend to develop long-term relationships with a limited number of suppliers.

The specialty oil business is capital intensive in nature and involves inherent complexities in terms of technology, hazards management and regulations. Scale, size, quality and consistency are crucial factors for manufacturers in the specialty oils industry. Given the nature of industry as well the stringent quality standards applicable to various products in the end-industries to which it cater, it is difficult for new entrants to replicate its quality, scale and business operations.

The company has a diversified customer base, which limits concentration risk and mitigates the risk of any one of its customers defaulting or delaying payments. The Top 5 customers accounted for 14.45% of total revenue in FY2023 while top 10 customers accounted for 20.85% and top 20 customers 28.01% of total revenues.

End-use industries such as pharmaceuticals and consumer products are expected to grow strongly going forward driven by strong domestic consumption, favourable demographics, and government initiatives. The Indian consumer product segment is expected to grow at 9.1% CAGR, reaching $0.92 billion by 2028 from $0.60 billion in 2023. Further, total demand from the healthcare sector is expected to be $0.340 billion in 2028, around 68% higher than $0.2 billion in 2023. This growth represents 11.0% CAGR over the next five years. Further, specialty oil demand from the healthcare sector is expected to rise to 259 KT by 2028 from 153 KT in 2023, exhibiting 11.1% CAGR.

Weaknesses

As a manufacturer of specialty oils, the company’sproducts and processes are required to comply with strict standards and other specifications prescribed by its customers.

The company obtains a substantial portion of its raw materials from a limited number of suppliers and it does not have long-term contracts with its suppliers. The Top 10 suppliers formed 74.26% of total raw materials purchased in FY2023.

Delays, interruptions or reduction in the supply of raw materials to manufacture its products and abrupt fluctuations in the prices of raw materials may adversely affect business, results of operation, financial condition and cash flows.

The improper handling, storage or processing of its raw materials or specialty oils and lubricants products, or any spoilage thereof, or any real or perceived contamination in its products, could adversely affect business, results of operations and financial condition.

The company may be unable to obtain, renew or maintain statutory and regulatory permits, licenses and approvals required to operate its business and operate manufacturing facilities, which could have an adverse effect on results of operations.

Exchange rate fluctuations in various currencies in which it do business could negatively impact its business, financial condition and results of operations

The company business requires significant working capital, including in connection with its manufacturing operations.

The company does not hold any patents or other form of intellectual property protection in relation to its manufacturing processes, and its inability to maintain the integrity and secrecy of manufacturing processes may adversely affect business. Further, its inability to protect or use its trademarks may also adversely affect business.

The company may be unable to obtain, renew or maintain statutory and regulatory permits, licenses and approvals required to operate its business and operate manufacturing facilities, which could have an adverse effect on results of operations.

Valuation

For FY2023, consolidated sales were up by 15% to Rs 4079.44 crore. OPM rose 900 bps to 7.8% which led to 29% increase in operating profit to Rs 316.62 crore.Other income decreased 13% to Rs 22.35 crore, while interest cost rose 62% to Rs 51.51 crore and depreciation increased 9% to Rs 16.51 crore. PBT increased 21% to Rs 270.95 crore. Tax expenses were 6% lower at Rs 57.78 crore. Net profit increased 29% to Rs 190.12 crore.

FY2023 EPS on post-issue equity works out to Rs 19.4. At the upper price band of Rs 169, P/E works out to be 8.7

As of 20 November 2023, its listed peers such as Savita Oil Technologies trades at TTM P/E of 13.7, Apar Industries trades at TTM P/E of 28.8, Panama Petrochem trades at TTM P/E of 13.4, Galaxy Surfactants trades at TTM P/E of 43.8, Privi Speciality Chemicals trades at TTM P/E of 227.4, Rossari Biotech trades at TTM P/E of 45.4 and Fairchem Organicstrades at TTM P/E of 52.6.

For FY2023, GORL Ebitda margin and ROE stood at 7.8% and 32.3% respectively, compared to 9.9% and 16.7% for Savita Oil Technologies, 8.6% and 32.3% for Apar Industries,13.7% and 27.1% for Panama Petrochem, 12.8% and 22% for Galaxy Surfactants, 11.6% and 2.6% for Privi Speciality Chemicals, 13.5% and 12.5% for Rossari Biotech and 11.2% and 17.7% for Fairchem Organics.