Chevron Lanka Lubricants Plc

Recommendation : SELL
Can ‘FRICTION’ be controlled?

University of Moratuwa Team B 
CFA Sri Lanka Challenge : Financial Analyst Competition 2009
Company Background

• Holds the largest market share

of 70%

• Chevron is a manufacturer of
lubricants, and presently is only
involved in the lube industry.

• Main revenue segments include

automotive and commercial and
industrial (C&I) segment

• Part of revenue is from export

markets (10%), but mostly from
domestic sales

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 Investment View 
Current Price (as at Sep 30th) : LKR 151
Target Price ( 12 month) : LKR 124

The share is overvalued

Recommendation : SELL

Investment Arguments:
• Volumes in the Automotive and C&I Segments.
• Rising Raw Material Costs.
• Increased Competition.
• Threat on the distribution channel.
• Product Shift from Lanka to Caltex.
• Finance Income

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Automotive and C&I Segments  
Lubricant Industry & Product Segmentation

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Automotive Lubricants Downturn growth

• High tariffs on imported vehicles

• Limited provision of leases by financial

institutions

•The increase in fuel prices

• Vehicle maintenance cost which has

doubled over the past 5 years

• The ban on the import of 2T three-

wheelers and spare parts

• Car pooling – environmental issues,

to reduce traffic congestion, high cost
of living

• Widening of oil drain intervals due to

market education by firms such as
Chevron
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 C&I Lubricants : Emerging opportunities

• In 2008 and early 2009 the lube consumption from the defense forces has seen a
drastic increase of 45 - 47%. With the conclusion of the war a further increase cannot
be expected.

• Supply for the C&I segment is mainly through tender agreements, and we believe
that it is possible for Chevron to tap into these emerging prospects. However the
government arm CPC entering the market can influence the winning of these tenders.
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Rising Raw Material Costs 
Rising Base Oil & Additive prices
Base Oil:
• Base oil prices follow the same
trend as crude oil with a certain
time lag.

• The global long term annual

average growth rate for crude oil
is approximately 3.5%

• Ignoring unanticipated
movements, this trend is most
likely to follow in to the future.

• Base oil suppliers high

bargaining power

Additives :
The global annual expected
growth rate is around 1%
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 Impact on Cost of Sales

• Rise in raw material cost will be approximately 3.5%.

• Inventory will grow.
• This increases in costs are expected to be passed onto the consumer.
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Increased Competition and Threat on the 
Distribution Channel
 Increased Competition
• The present Sri Lankan lubricant industry 16 players.

• It is an oligopoly with Chevron being the price leader.

• LIOC is the main competitor of Chevron , and being the only two lube
manufacturers enjoying the same tariff advantage.
• Could Chevron retain its market share?

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 Reasons Behind the competition
• The issuing of licenses is controlled by the government with any
participant meeting the criteria, allowed to enter the industry.

• LIOC is a growing threat due to the potential expansion in it’s

distribution points.

• CPC holds the other distribution avenue which targets the automotive
segment, and Laugfs has a legal right to this channel.

Price

Low Barriers to 
Rivalry Distribution
Entry 

• These combined effects will result in Chevron loosing their market

share. 13
 CPC Distribution Channel – Not anymore?
• Availability is the key factor for automotive sector lube sales.
• Filling stations are the main stream of retail sales.
• CPC filling stations are Chevron’s main distribution channel.

• 88% of filling stations are CPC owned.

• 80% of automotive sales HDEO and 2T/4T oils which are sold
through filling stations.
• A disruption of access to the CPC channel will result in a significant drop
in Chevron’s volumes.
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Product Shift from Lanka to Caltex
 Product shift
Chevron’s
Strategy

Possibility
What would a cost conscious
consumer do?

• HEDO & 2T/4T

¾ Less brand conscious
¾ More price sensitive
¾ 80% of Automotive demand
¾ 50% of Total demand

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 Impact on the Operating profit 
of Chevron

Operating Profit 
Volume
per unit

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 Impact on the Operating Profit per unit?

• Sales prices

• Cost of sales

Minor increase in
Operating Profit per unit

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Customers’ shift to High priced lubes?

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Customers’ shift to High priced lubes?

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 Reduction In Volumes

• Low brand conscious customers

• Price sensitive customers

• Go for the low price products – Not Caltex 

Decrease in 
Sales volumes

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 Impact on the Operating Profit

Minor increase in Decrease in 
Operating Profit per unit Sales volumes

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Finance Income 
 Finance Income

• Approximately 7.38% of operating profit in 2008

•The treasury bill rate is on a decreasing trend due to external borrowings

and likely to continue in the short run

• However, after the effects of the borrowings we expect that it will pick up
on a natural rate in the long run
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Financial Impact and Valuation 
 Financial Forecasts
5 year CAGR Levels for the forecast period:
Revenue : 2.29%
Net Income : 3.13%

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Valuation – DCF 
Target Price ( 12 month) : LKR 124
Optimistic (Ke=8.58 %) : LKR 215
Pessimistic (Ke=20.58 %) : LKR 89

SELL

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Thank You ! 
 Potential Questions
• Revenue Growth
• Volume Change Expectations ‐ Automobile and C&I segments
• Sri Lankan Stock Market
• Effect of Grey market
• Export market and impact from North & East
• Stake of Service stations and retail outlets
• Are consumers Brand Conscious or not?
• Does LIOC and Laugfs have Limited Distribution?
• Dividend Valuation Model
• Target price in the current interest rate scenario 
• Financial Ratios
• Working Capital Ratios 

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Revenue Growth
Revenue growth is mostly
attributable to the rising
product prices rather than
volume changes.

Even though revenue is

growing in absolute terms, it
is not to the extent that has
been shown in the past few
years.

The growth in 2011 is due to

our belief that the industrial
sector should pick up by
then.

Thereafter with increased

competition Chevron’s
revenue will settle at a
terminal growth rate.
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Volume Change Expectations ‐ Automobile and C&I segments

Automobile Segment:
With the continuation of higher
tariffs on vehicle imports, rising
fuel prices and maintenance
costs the growth based on
volumes is limited.

The high competition is mostly

on this segment, impacting
Chevron’s volumes.

C & I Segment :
There will be industrial growth
and Chevron will gain a share of
this due to its dominant position
in this segment.

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 Sri Lankan Stock Market
Compared to the levels of the ASPI
at the beginning of 2009 we can
see a drastic increase since the
middle of the year, due to over
expectations of investors on the
higher level of economic growth in
the country.

This has created a demand and

supply imbalance driving up the
stocks in the market.

This phenomena can be seen in the

price movement of Chevron as well.

We believe that based on our

financial model from a fundamental
point of view the share value of
Chevron’s share is LKR 124.
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 Export Market

• Approximately 10% of Total Revenue

• YOY growth during 2008 :
• Bangladesh – 80% Not sustainable
• Maldives - 20% Marginal room for growth

Impact on sales from the North & East
• Chevron already operates in this area
• Probable expansion in agricultural and fisheries sector
• Slight positive impact on C&I sector

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 Effect of Grey market
• Grey market products are mostly available for greases.

• The oil consumer is more conscious about using a ‘particular brand'.

Therefore there is a limitation for grey market with regard to lube oil.

• However if some legal actions are not in place, there is potential growth in the
grey market.

• Established brands will be affected (E.g. Caltex)

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Stake of Service stations & Retail outlets

• These two channels only account for nearly 20% of the total distribution of
Automotive lubes.

• At present the main distribution is through filling stations.

• The above two avenues are the main selling points for the premium brand
Caltex, in order to reach the brand conscious consumer.

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 Are consumers Brand Conscious or not?
• A limited group of the automobile segment is
brand conscious.

• However the largest consumer segment of this

sector is price conscious, which is the
commercial vehicle users, heavy diesel and
three wheelers/bikes.
Luxury vehicle 
• Therefore the higher impact on volumes is user
through the cost conscious consumer.

• The C&I segment is mostly concerned of the Normal passenger 

ability to meet the wide range of lubricant Car user
requirements.

HDEO & 2T/4T

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 Does LIOC and Laugfs have Limited Distribution?

• LIOC is an expanding competitor

o Many CPC filling stations are taken over by LIOC
o New filling stations
o Emerging out of city suburbs
• Laugfs gained legal permission to sell through CPC filling stations

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 Dividend Valuation Model
• The DCF valuation was
conducted using a dividend payout
ratio of 70%
Target price (12 month)
LKR 107

• If a large dividend were declared

to reduce the cash balance,
considering a maximum of Rs 34
(dividend for 2009)
Target price (12 month)
LKR 128

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Target price in the current interest rate 
scenario 
The present decline in rates
could be a temporary effect.

It is due to government
intervention rather than
supply and demand
principles.

Whether it is sustainable is a
question.

Since this is an arbitrary

phenomenon, our 12 month
forecast rate uses the most
realistic possibility to arrive at
the target price.

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Financial Ratios 

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Working Capital Ratios 

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