Tide Water Oil Compan

Tide Water Oil Company (India) Ltd (TWOC)

Buy

Target Price: Rs. 9600

CMP: Rs. 6550

Upside: 47%


Solid Growth, Great Value


Investment arguments



Led by strong growth with a strong Balance Sheet:

Tide Water Oil Co. (TWOC) has posted 11 fold jump in EBITDA from Rs.8.1 cr to 89.7 cr during the five year period FY2005-FY2010 while its net sales in value terms have grown by 3 times (CAGR of 24.6%) from Rs. 217 cr to Rs.652.6 cr during the same period. Sales volume of synthetic/lubricant oils for the same period grown just by 1.5 times (CAGR of 9%). The year FY2009 being the only year which saw a decline in volumes (down 8% YoY) in the recent period – however, it was compensated by significant rise in realization. Moreover, the company has hiked the dividend consistently to as high as 500% in FY2010 from 50% about a decade ago. TWOC is a ‘zero’ debt entity having a small equity base of Rs 0.87 crore (Rs 10 paid up) with an ROE of 33% for FY10.



Growing EBITDA margins, ability to pass on burden of oil price hike:

TWOC uses base oil, which is derived from crude oil as the core input. Despite significant fluctuations in the cost of base oil, TWOC has improved its realization proportionately more than the increases in base oil costs over the years. Further, counting on a strong brand ‘Veedol’, the company has been able to consistently increase its EBITDA margin 4-fold from 3.7% in FY2005 to 13.7% in FY2010.



Thematic play on growing automotive population:

Despite strong growth in the automobile industry in the last few years (India’s domestic sales has doubled to 12.3 mn vehicles in FY2010 over the last six years), India still remains an under-penetrated market as compared to other emerging economies. Centrum Research estimates that sales of two wheeler volumes and Passenger cars would grow at a CAGR of 16% and 17% respectively for the period FY10-12. Further, according to a study by CRISIL, commercial vehicles industry is expected to post a CAGR of 16-18% over the next 5 years (2009-10 to 2014-15) on the back of a sustained growth in the economy. Thus, amidst growing automobile production, India’s finished lubricants market is expected to consistently expand. We expect TWOC, with 70% of the volume sales coming from the replacement market and with a strong brand ‘Veedol’, to be a major gainer of booming automobile population.



Attractive Value Play:

Andrew Yule & Co. (AYC, a Public Sector Undertaking, with Government of India holding of 94%) has a stake of 26.20% in TWOC. AYC was classified as a BIFR case (a sick company) in the past. During the last 3 years, the core business of AYC was under stress with ‘Other Income’ (basically income from sale of assets/investments) mainly contributing to its bottom line. While the contribution of ‘Other Income’ has been Rs 66.59 cr, Rs 89.54 cr & Rs 114.06 cr, its net profits were Rs 18.27 cr, Rs 17.29 cr and Rs 17.32 cr respectively during the years FY2008, FY2009 and FY2010. Hence, we believe that there is a possibility of AYC divesting its stake in TWOC and any such divestment would unlock substantial value for TWOC shareholders by significantly improving its valuation multiple. At current market price of Rs 6,550, Tide Water has a market capatalisation of about Rs 570 crore i.e. ¾ of its FY11E net sales of Rs 741 cr.


Risk to our view

Any sudden spike in crude oil prices could lead to some margin pressures in the short term. However, we believe that eventually TWOC would be able to pass on the cost hike to the end customers as it has been the case in past.


Valuation and Recommendation

We expect, for the period FY2010-FY12, net sales to grow at a CAGR of 15%, while net profit to rise at 10% (CAGR) to Rs 857.6 cr and Rs 69.7 cr. EBITDA margin for FY2011 is expected to continue at lower level, however, the same is expected to rise in FY12 with the company passing on cost hikes to its customers with a lag effect. The stock currently trades at 10.3x FY2011 and 8.2x FY2012 estimated EPS of Rs 636.6 & Rs 799.5 respectively. We recommend a BUY with a target price of Rs.9600 (12x FY2012E EPS).