Below is my Stock Pick for Investomania 2 with the details and investment thesis for the stock in consideration.

Company Name: Tide Water Oil

Listed on: BSE, NSE

Country: India

Market Capitalization: US$ 138.0 million

Investment Thesis:

Tide Water Oil is a company focused on manufacturing and distribution of Auto and Industrial lubricants in India. The company has a strong presence in Heavy Vehicles lubricant segment through a well-known brand – Veedol.

Indian Automobile sector story is not unknown to anyone of us. We are in a bull phase for infrastructure sector as well. Both of these sectors are driven by machinery, and these machines are thirsty for fuel and lubricants. As infrastructure grows, we will need more cranes, more heavy machinery and ultimately increasing volume of lubricants to keep them running smoothly. It’s roughly estimated that at about every 5000.0 kilometres of usage the lubricants in automobile engines needs to be replaced, as they thicken and burn out at the end of this long run.

The automobile lubricants market in India is estimated to be approximately US$ 2.5 – 3.0 billion. Tide Water Oil is all set to ride the wave of booming auto sector and increased industrialisation in India. Tide Water enjoys approximately 7.0 – 8.0% market share in auto lubricants in terms of sales. Its closest peer / competitor Castrol is trading at 20.0x LTM earnings and EV / Sales of ~4.00x. Tide Water Oil being a debt free company trades at 10.0x LTM earnings and EV / Sales less than 1.0x.

Castrol has a market cap close to US$ 2.5 billion and enjoys 22.0% – 23.0% market share in terms of sales, whereas Tide Water Oil enjoys a share of 8.0% – 9.0% in the lubricants market, with a market cap of only US$ 138.0 million.

Also, as India is on its way to become a developed nation and overtake the likes of USA, we are witnessing increasing amounts of plant additions and capital expansions by companies operating across all sectors. These are the machines needing industrial lubricants regularly, and looking at such huge capacity additions in the country demand for industrial lubricants is all set to increase manifold. Tide Water Oil can be a huge beneficiary of this potential demand.

Recently the company has announced a strategic collaboration with Japan based Nippon to manufacture Hi Tech lubricants for auto and industrial sector which will help the company absorb Nippon’s technology. The company has also been following the ‘market push’ strategy whereby the distributor and the retailer tries to push the company’s products to fleet owners and truck drivers which has proved successful for the company. Castrol has been growing at 3.0% in terms of volume whereas Tide Water Oil has grown more than 16.0% in terms of volume for the past 2 years. Other new brands like ‘Prima, Turbo and Take off’ under Veedol umbrella are doing well as company got into alliance with Nippon. Company has also been constantly increasing its R&D expenditure (US$ 0.18 million in FY09 v/s US$ 0.32 million in FY10).

The company has maintained ROCE of more than 30.0% and ROE more than 22.0% for the past 3 years. Veedol is a brand which still has a potential to strengthen a lot and gain much more of lube share in India. Unorganised lubricant market is estimated to be of the same size as that of the organised market in India. This unorganised market still remains to be tapped, which gives a tremendous opportunity for players like Tide Water Oil. Consumers in the rural parts of the country are slowly shifting to branded lubricants for their automobiles, be it LMVs or HMVs.

In terms of share price performance the stock has grown at CAGR of 49.0% during 2002 to 2011 from INR 1400.0 to More than INR 7100.0. Consequently from FY 2006 to FY 2010 the topline has shown a CAGR of 25.0% from INR 3047.4 million in FY 2006 to INR 7515.8 million in FY 2010, whereas the EPS has grown from INR 86.3 in FY 2006 to INR 663.3 in FY 2010, a CAGR of an impressive 66.0%.

Another distant but potential possibilities that may trigger a rally in the stock:

In terms of Indian rupees the stock is trading at INR 7170.0 which is quite bulky in terms per share price relatively in Indian market for retail investors. The stock seems to be ripe for a spilt and a bonus after which, historical data for splits and bonuses in Indian markets suggest a strong possibility of a rally in the stock. Also given the size of the company compared to scale of the operations, the company can be a soft target for any larger company, in this case Castrol for a takeover at very hefty premium given the company’ strong financials.

Let’s follow the ‘Oracle of Omaha’, when he buys Lubrizol for US$ 9.0 billion, we mirror a similar bet at a much lower base and ride huge waves to follow in Tidewater Oil.

With such strong historical growth and given the dynamics of the lubricants sector in India I don’t see any reason why Tide Water Oil cannot post a CAGR of 25.0% for the next three years and yield a 100.0% return on the investment.

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