High-growth lubricants business can fire up HPCL's profits

The stock of Hindustan Petroleum Corporation ( HPCL) has shot up by 50 per cent in the past three months, reflecting analysts' expectation that the public sector oil refining and marketing company would improve cash flows significantly following the government's policy to link prices of petrol and diesel to market-related factors as against the previous regime of price regulation.

But, what seems to be missing from the analysts' estimates is HPCL's fast growing lubricants business where it has gradually garnered business from existing players over the past few years.

Though, the lubricants division contributes less than 10 per cent to the revenue, it garners over 35 per cent of its profit reflecting a much higher profitability compared to the company's core business of petroleum refining and marketing of petrol, diesel, and other related products.

According to HPCL, it is the second largest and the fastest grow ing lube marketer in the industry. With a share of about 6 per cent of total world sales, India is estimated to be the third-largest lube market in the world after the US and China.

HPCL had increased focus on this business when the company was struggling to grow its petrol pump fuel business during the regulated price regime.

The company's retail lube business (bazaar trade) grew by 7 per cent annually between FY10 and FY15 to 100 million litres. Castrol's sales volume, on the other hand, shrank to 196 million litres in 2014 from 205 million in 2010.

Its wide pump network is an added advantage over its peers in terms of distribution. HPCL plans to double its retail outlets to 1 lakh in the next three years.

The growth in lube business is expected to reflect on the valuation of HPCL's stock, which currently trades at a trailing priceearnings (PE) ratio of 11. A rerating may be possible if investors view the lube business as consumer business.