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 strategy 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.
Stock performance
HTL has mostly trailed the performance of the KSE-100 over the past year although it has mostly outperformed the index. There was a brief period of underperformance from Nov-17 to Feb-18 but the script has rebounded since then.
Recent financial performance
HTL saw its revenues in FY16 increase by 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. 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.
FY 16 also saw HTL's blending plant commence commercial production. 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 & labeling 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.
In FY17 HTL managed to increase revenues by almost 7 percent whereas volumetric sales jumped by 5 percent. Due to increased competition which resulted in discounts offered by OMC companies, HTL also had to decrease prices to retain its customer base. The company also witnessed a 15 percent increase in direct cost which added to the cost and reduced gross margins as compared to the previous year.
The company's ZIC top-tier operations grew by 6 percent which was achieved by an improved product mix coupled with fuel savings and engine efficiencies. HTL's ZIC mid-tier segment registered revenue growth of 8.5 percent on the back of increased awareness of consumers about choice of lubricants.
For the most recent quarter HTL has managed to increase its revenue by almost 30 percent whereas the gross margins dipped a bit due to discounts provided to diesel customers under a special trade scheme. The other reason for lower margins has been the increase in international market prices since July 2017. The company managed to increase its bottom-line by 35 percent and has been focusing on its expansion projects during the period. According to its quarterly report for 1QFY18 the company is setting up an oil depot at Sahiwal for storage and marketing products under the provisional licence from the regulator.
9MFY18 Snapshot
HTL's top-line grew by 19 percent continuing its volumetric growth trajectory of previous years. The company has seen a negligible increase in gross profit and gross profit margins for 9MFY18 have actually gone down by almost 400 basis points as compared to the previous year. The period also saw HTL's administrative expenses rise by 36 percent while other income also saw a marginal increase of 8 percent. In addition, the company's finance cost more than doubled. HTL ended the period with its PAT down 21 percent and EPS dropping to Rs3.81 as compared to Rs4.8 in 9MFY17.
The company's unutilized proceeds from its IPO stand at Rs938 million in short-term investments and Rs34 million as bank balances which will be used for OMC and HTL express centres. HTL also saw its total assets decrease by RS100 million on account stock selling. As far as expansion of its express centers go, the company opened another one in Lahore and it entered into a lease for another one in Karachi during 3QFY18. At the moment HTL has three operational express centres and another five are in the pipeline out of which two are expected online in the 4QFY18. During this period the company has also received permission from the Oil & Gas Regulatory Authority (Ogra) to apply for NOCs for up to 26 fuel stations in Punjab. HTL has also purchase six acres of land in KP for its storage infrastructure.
Outlook
HTL's strategy is to focus on growing its core lubricants business with additions to its existing product range. The company's blending plant has witnessed increasing profitability and will be a key driver of the HTL's growth in the years to come. At the same time the company continues to expand its retail presence and plans to incorporate the majority of its express centres with its fuel station sites. Overall, exciting growth in the automobile sector both via import and local manufacturing has resulted in an increase in the demand for lubricants and HTL is well positioned to take advantage of the increased demand.

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HI-TECH LUBRICANTS LIMITED

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Rs (Mn)                     9MFY18    9MFY17      YoY Chnge

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Net sales                     6727      5657            19%

Cost of sales                 5227      4209            24%

Gross profit                  1450      1448             0%

Distribution cost              547       530             3%

Administrative expenses        266       196            36%

Other expenses                  54        19           184%

Other income                    78        72             8%

Profit from operations         710       776            -9%

Finance cost                    61        23           165%

PBT                            649       752           -14%

Taxation                       207       196             6%

PAT                            442       556           -21%

EPS                           3.81       4.8           -21%

Gross margin                  21.6%     25.6%  down 404 bps

Net margin                     6.6%      9.8%  down 326 bps

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Source: Company accounts

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HTL Shareholding pattern (as of June 30, 2017)

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Shareholder                                             Percentage

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Directors and their spouse (s) and minor children            62.22

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of which

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Uzra Tahir                                                   24.64

Arifa Shaukat                                                21.41

Associated Companies, undertakings and related parties           -

Public Sector Companies and Corporations                      0.06

Banks, DFIs,NBFC, Insurance, modarabas, pension funds         6.27

Mutual Funds                                                   3.1

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General Public

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a. Local                                                     24.69

b. Foreign Investor                                           0.84

Of which                                                      2.47

Others                                                        2.05

Total                                                       100.00

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