Hi-Tech Lubricants Limited

Hi-Tech Lubricants Limited (PSX: HTL) has been marketing lubricants in Pakistan for the past two decades. The firm has been involved in the sale of imported lubricants, greases, specialty oils etc manufactured by S.K Lubricants, Korea under the brand name ZIC Lubricants. SK Lubricants of South Korea owns the world’s largest petrochemical complex according to the company. HTL has been focusing its marketing efforts mainly in the retail markets. Its brand ZIC is available in more than seventy-two cities across Pakistan through a wide network of distributors.

HTL’s key feature has been to offer high-end synthetic products in a price conscious market looking for quality. The firm has been able to gain competitive edge over other players in the market due to its availability of imported lubricants with a wide-spread channel. In 2011, Hi-Tech Lubricants partnership (AOP) was bought over by Hi-Tech (PVT) Limited and converted into a Public Unlisted corporate. The company went public for forward integration last year in January.

HTL is keen on expanding its retail presence and aims to have its own service centres across the country. The expansion is progressing with the concept of one-stop-shops with services like car wash, oil changing, realignment, rebalancing, availability of accessories etc. These investments worth Rs1.25 billion are the rationale for public listings, and the firm expects to IPO proceeds to fund this plan; the remaining will likely be financed through internally generated resources.

Blending plant

Hi-Tech Lubricants Limited has recently ventured in lubricant blending with the plant starting commercial production in 2016. The idea for a state of the art blending plant was conceived by the group back in 2013. The rationale for setting this plant in Pakistan was backward integration to reduce the cost of lubricants to end customer and create different avenues for marketing. It is an integrated unit producing international standard lubricants in HDPE bottles, filling, capping & labelling of finished products on an automated high accuracy filling line. The firm plans to continue importing some of its high-end products, whereas it will be importing base oil and blending in Pakistan.

Recent financial performance

The performance of HTL has been exciting with the jump in revenues in FY16 of almost 28 percent as compared to the previous year. In addition, the gross profit also increased by a decent 53 percent during the period. The growth involves volume growth of 30% with overall prices falling. The gross margin during the year showed improvement of five percent.

This was due to reduction in custom duties on non-synthetic products along with freight charges. The effective rate of tax has increased by 7% as the company moves from normal tax regime to final tax regime following Finance Act 2015. The company’s flagship range of ZIC registered sales growth of 23 percent during FY16.

During the first quarter ended June, 2016 the company achieved net sales of PKR 1,569 million against net sales of PKR 1,407 million of corresponding period of last year representing sales growth of 11.50%. The net margins decreased by almost 2.2% due to increase in cost of lubricant products internationally. The profit after tax shows a decrease of PKR 5 million mainly due to increase in Income taxes where after promulgation of Finance Act 2015, the company moves to final tax regime. The EPS for FY16 was Rs5.43 and the company is still growing rapidly. The growth comes on the back of increased margins and increased capacity.

For 1HFY17 the company witnessed sales growth of 10 percent with the gross margin decreasing marginally. This was due to an international increase in product prices coupled with government taxes and provincial infrastructure cess. The company notes in its director’s report that these increases have not been passed on to consumers due to the prevailing market condition. However, HTL still managed to post an impressive 30 percent increase in its earnings as compared to 1HFY16 and announced an interim cash dividend of Rs1.35 (13.5%) per share.

Stock performance

Even though HTL stumbled initially after the IPO compared to the benchmark KSE-100 index, its performance has been nothing short of remarkable since July, 2016. It has consistently outperformed the benchmark index by a wide margin given the strong fundamentals of the company. In addition, it has beaten investor expectations when it comes to earnings growth which has propelled its stock to new heights. The recent dip could be attributed to the generally negative sentiment prevailing in the market due to political uncertainty and the crackdown on margin financing by the regulator explaining the reduction in volumes.

Outlook

Impressive growth in the automobile sector both via import and local manufacturing has resulted in an increase in the demand for lubricants. HTL is nicely positioned to take advantage of the increased demand and the firm has invested in establishment of Hi-Tech blending and bottling plant. The plant is currently operating at 40% capacity but is expected to grow steadily in capacity utilization in the coming years.

The firm has also applied for OMC license amid plans to diversify operations within the oil industry. As far as the retail presence is concerned, planning and design phase of the development of HTL’s state of the art retail outlets across Pakistan with has already been completed, and several suitable locations have been locked in Lahore, Karachi and Islamabad. The firm is also undertaking plans to open 300 petrol pumps nation-wide by 2020 making its future even more promising. The first station is planned to be operational by the end of this year.

=========================================================


Hi-Tech Lubricants Limited


=========================================================


                    FY12    FY13    FY14    FY15     FY16


=========================================================


Gross Margin        22.8%   24.9%   24.7%   24.5%   29.2%


Operating Margin     9.2%    9.0%    8.8%    9.7%   12.8%


Net Margin           6.2%    5.9%    5.7%    6.2%    7.6%


EPS-restated (Rs)      3     3.1    4.03    4.37     5.43


Current Ratio        1.8     1.8     1.5    1.35     3.96


Return on Assets    26.7%   20.9%   16.0%   16.8%   13.3%


Return on Equity    56.1%   40.4%   33.3%   27.4%   15.9%


=========================================================