Chevron Lanka cuts prices to salvage market share

• Company jettisons its price-driven growth model for a volume-based growth model
• Slashes prices by as much as 25% on a 210-litre oil drum
• Oil drum/loose oil market contributes to about 40% of Chevron’s volumes

Chevron Lubricants Lanka PLC (LLUB) has abandoned its strategy of defending the product prices amid losing market share and is shifting gears towards increasing its volumes, absorbing the imminent hit on the margins.     

Chevron’s sales have been languishing for four quarters in a row as the low-cost operators such as Lanka IOC PLC and Laugfs PLC have slowly been eating into Chevron’s market share. 

During the three months to September 2017, sales at Chevron fell by 12 percent to Rs.2.85 billion over the same period last year. 

This is the fourth consecutive quarter where the company’s performance was affected by lower disposable incomes and unfavourable weather conditions, which resulted in a drop in demand for vehicle services. 

In this backdrop, the company jettisoned its price-driven growth model in August for a volume-based growth model as the market leader realized it’s no longer viable to hang on to higher prices at the expense of market share. 

Chevron leads Sri Lanka’s lube market with a share of 45.29 percent (2016), which has been coming down from over 50 percent a few years ago, while its closest competitor Lanka IOC upped its market share to 16.4 percent from 12.59 percent in 2014. 

Laugfs Lubricants also had little over 5.0 percent market share in the 64,585 kL volume market, which grew by 11.4 percent year-on-year (YoY) to Rs.26.11 billion. 

Feeling the heat, Chevron Lanka slashed its prices by as much as 25 percent on a 210-litre oil drum (the loose oil segment) from Rs.85,000 to Rs.65,000, setting the prices almost on par with the IOC and Laugfs lubricants, Bartleet Religare Securities (BRS) said in a brief research noted. 

“Oil drum/loose oil market contributes to about 40 percent of LLUB’s volumes and the recent loss of volumes in this segment resulted in LLUB’s market share dwindling year after year. The new prices would be maintained going forward and the company is seeing surge in demand from this segment,” said the stockbroking firm.   

The company is already seeing the results after the price reduction as there has been a surge in demand after the price revision.  On a quarter-on-quarter (QoQ) basis, sales in the September quarter rose 23 percent YoY with the recovery of flood-related losses and partly due to the price reductions made in August. 

Chevron has long been conducting a consumer awareness campaign to educate the customers on product adulteration and benefits of using branded oil over loose oil. 

But BRS said the company appears to have fallen victim to its own communication campaign as it cut sales of Chevron’s own loose oil. 

The analysts at BRS forecasts that Chevron Lanka’s profits would not recover until 2019 as the margins come under pressure due to the reduction in the average selling price. 

But they remain comfortable on the performance as they welcome a more sustainable level of margins backed by a healthy volume growth. 

BRS forecasts a gross profit margin of 37 percent for the next three years for the company, against 44 percent recorded in the past three years. 

“We expect a profit after tax of Rs.563 million for 4Q FY 18E (a drop both QoQ and YoY), due to the impact from the drop in margins due to lower average selling price. We expect FY 2018E also to be a testing period and expect profits to start recovering from FY 2019E,” the analysts said giving a ‘buy’ rating on the Chevron stock.

BRS gave a valuation of Rs.136 for the Chevron Lanka stock in three years over its current trading value of Rs.119. 

For the nine months ended in September, the lube blender and distributor posted revenue of Rs.8.25 billion, down by 10 percent YoY and a net profit of Rs.2.0 billion or Rs.8.35 a share, down from Rs.11.62 a share a year earlier.