Lubricants picking up; Chevron to yield better margins – Analysts
View(s):Sri Lanka’s lubricant market has been picking up since 2014 due to increasing disposable incomes of households and the low interest rates’ regime causing consumers to shift from public transport modes to their own vehicles, analysts say.
“According to the regulator’s recent statistics (Lubricant market report 2014 – issued by the Public Utilities Commission) despite the lubricant market size shrinking from 2011 to 2013, the industry turned around marginally in 2014 with a total of 54,265 kilo litres of lubricants worth Rs. 22.6 billion being sold during the year,” a Softlogic Stockbrokers report says. Along with the increase in the standard of living, preference for high quality lubricants is growing due to longer oil drain intervals, it said.
The report analysing major player Chevron Lubricants PLC, added, “Despite the intense competition in the industry, this company would continue to yield better margins through differentiation strategies, market penetration, growing distribution channels, well managed relationship, strong ‘Caltex’ brand name, declining raw material costs and various cost saving initiatives”.
Amidst the new vehicles registrations dipping 25 per cent year on year (YoY) in 2012, the year 2013 also saw a similar trend with 18 per cent YoY dip. However new vehicle growth rebounded in 2014 to record a growth of 32 per cent YoY amidst the low interest rate environment in the country, the report said.
“Therefore the slowly improving dynamics in the economy through rising disposable incomes, coupled with the booming motor vehicle industry due to higher credit growth are expected to benefit Chevron’s automobile and retail sales segments. The exact growth however would not be reflected given that new vehicles and hybrid vehicles come with longer oil drain intervals. This is because, new engines are built with advanced technology to optimally utilise the lubes and result in less frequent oil fills,” the report said further.
On the flipside, influx of modern vehicles would provide opportunities for the company to enjoy better margins in its high end lubricants (Caltex range) along with introducing innovative products for niche markets. Mainly with consumers moving towards the higher tier products, with the expected benefits from longer drain intervals in vehicles, it would be easier for premium brands such as Chevron, Shell, Mobile and Castrol to sustain in such an environment, the report pointed out, adding that the company would be able to benefit among this niche, given that certain brands under Caltex are among the very few high quality grade lubricants in the market.
In order to increase its reach in the automotive segment, Chevron’s retail arm through new distributorships in oil marts targets on widening its presence island-wide to create a presence in the vicinity to each fuel station (which numbers 950+). Meanwhile the strategy of converting its high grade franchised service stations to ‘Star Care’ category commenced in 4Q2014 and would be continuing throughout 2015.
The industrial and marine segments are expected to recover mainly in the agriculture and fisheries sub-segments although the chief contributing thermal power sub-sector growth could be affected given the country’s shift towards renewable energy sources such as hydro power, according to the report, which said that the earnings growth can be expected from the construction sector which is expected to be on a growth trajectory with the mega investments planned in the country. “Also LLUB (Caltex) opening up to competitive tenders for high volume government contracts would help sustain the current growth levels and improve the company performance in the medium to long term.”