LIOC benefitting from CPC finance cost
Lanka Indian Oil Company (LIOC) is benefiting from the financial costs of Ceylon Petroleum Corporation (CPC). As automotive fuels are a highly substitutable duopoly with CPC taking the dominant position, LIOC must follow the pricing of CPC. With CPC facing considerable financial costs, LIOC is benefiting with a higher net margin.
The company announced their coverage of the stock in an initiation report via webinar on November 26.
Capital Trust notes that new entrants into the sector would take multiple quarters to establish themselves. CPC currently has a finance cost of between Rs 14.44 to Rs 16.62 per litre for their products. CPC is also expected to lose market share thereby spreading its fixed costs over a smaller revenue pool. They further forecast that LIOC will earn in excess of Rs 4 billion in finance income in the year 2023 through their cash holdings.
“The main differentiator between the two entities is LIOC’s low finance cost per litre. This is a key contributor to the higher profit margin per litre,” said Capital Trust Head of Research Hasitha Leanage. Leanage predicts that LIOC will use its branded fuel products to garner a high-profit margin in the period ahead. The company also is expected to add 96 new filling stations in the next 12 months at 8 stations a month from November onwards and increase its market share well over 20%.
The 61 oil tanks under the Trinco Petroleum Terminal are expected to be developed shortly.
LIOC will also remain a beneficiary of a BOI agreement which will allow it to be taxed continuously at a rate of 15% compared to new entrants taxed at the prevailing tax code. LIOC is also the market leader in Bitumen.
LIOC is also the second-largest player in the lubricant market. The company has seen year-on-year growth in its market share from 20.5% in 2021 to 22.41% in the 1st half of 2022. The company’s lubricant plant is operating at full capacity. The company has also entered the grease market and is expected to gain the entire market share for that product as it is the only established firm. Sri Lanka imports an estimated Rs 2.1 billion in grease annually and the new plant shall cater to this entire demand.
LIOC’s SERVO lubricant brand has seen a growth in distributors from 27 to 31 and seen shops increase from 485 to 525. The company is going to continue to increase the reach of its products.
LIOC holds 33% of the bunkering market and is the only operator currently working in the Trincomalee port.
LIOC has entered the petrochemical industry with the launch of the propel brand.
(DP)