Chevron Lubricants Lanka PLC (CSE: LLUB) reported a net profit of Rs1 billion in the September 2024 quarter, a 14.3% increase year-on-year and a 37.9% rise quarter-on-quarter, driven by improving gross profit margins, rigorous cost control, and increased net finance income, even as the company faces intensified competition and a volatile economic landscape, First Capital Research noted in a recent report.
First Capital attributed the gross profit margin improvement to increased demand for high-margin products like canned and loose oils, which drove a 316 basis-point increase. Chevron effectively capitalized on this shift in product mix, partially offsetting a modest revenue decline of 2.5% year-on-year due to price reductions aimed at retaining competitiveness. This strategic pricing move helped maintain market share while bolstering sales volumes and profitability.
Cost management further bolstered Chevron’s performance. Administrative expenses declined by 3% year-on-year, reflecting a continuous focus on operational efficiency. Finance costs dropped by 59.6%, attributed to lower lending rates now in single digits, which lifted net finance income by more than 100% year-on-year. These financial gains created a cushion against a 19.8% rise in sales and distribution expenses, helping to sustain the bottom line.
In its 2023 annual report, Chief Executive Bertram Paul provided context on the economic challenges impacting Chevron and the broader lubricant industry. Coming out of near-hyperinflation in 2022, Sri Lankan consumers faced increased income taxes and lower disposable income due to higher tax rates and reduced tax-free thresholds, which dampened demand through much of 2023.
The Sri Lankan lubricant market contracted 36% in the first half of 2023, adding to a 26% decline in 2022, as Paul outlined. Fuel quota restrictions limited vehicle usage, impacting lubricant consumption at service stations and for retailers. The construction sector, a large consumer of lubricants, faced similar setbacks, with cement sales dropping by 17% in 2023, following a 36% drop in 2022.
Paul said that Chevron passed on the benefits of a strengthening local currency, which appreciated by 2.2% in the third quarter of 2023, through price reductions across its product portfolio. This decision to reduce prices by up to 45% attracted customers who had shifted to less expensive alternatives due to economic pressures. The strategy was well-received, especially among buyers of small branded packs.
Despite facing a mature market and intensified competition, First Capital maintains an earnings forecast for Chevron, projecting Rs3.8 billion for 2024 and Rs4.2 billion for 2025. With potential gains from lifted vehicle import restrictions and improving prospects in the rubber industry, Chevron stands to benefit. However, First Capital cautions that while these macroeconomic tailwinds may support growth, volume increases could remain modest as the market matures.
Chevron continues to operate in an increasingly competitive market, with the number of licensed players having nearly tripled over five years, growing from 13 to 35 as of 2023. To maintain its position, Chevron has offered discounts and promotions, strategies that may challenge future margin expansion even as the company benefits from improved economic conditions.
Paul also noted regulatory developments that could impact the industry landscape. In 2023, the Ministry of Energy announced a new regulator for the petroleum industry, replacing the role of the Public Utilities Commission of Sri Lanka (PUCSL). During this transition, Chevron anticipates that a fully empowered regulator will stabilize the market, though the current oversight gap may encourage unauthorized operators, adding complexity to its competitive challenges.
Chevron responded to market conditions—through pricing, cost management, and a strategic product mix—enabling it to outperform forecasts despite a challenging environment. Future performance, however, will likely depend on balancing these strategies with evolving external factors, including regulatory shifts and economic recovery. As First Capital maintains cautious optimism, continued success may rest on Chevron navigating a maturing industry amid intensifying competition and an uncertain economy.
Chevron’s 2023 Annual Report further highlights industry contraction, with market volumes shrinking by 22% in the first nine months of 2023, following a 25% decline from 2021 to 2022 amid the economic crisis. Data from the PUCSL points to reduced motor vehicle registrations, which fell by 49% in Q1 and 12% in Q2 of 2023, before rebounding with 25% growth in Q3. This slight recovery hints at potential demand stabilization.
The company recorded a return on equity of 50% in 2023, down from 66% in 2022. Earnings per share declined by 2%, reaching Rs15.01 compared to Rs15.28 a year ago. Dividends per share stood at Rs6, delivering a dividend yield of 6.6% based on the share price at the end of December 2023, slightly lower than the 7.3% yield in 2022. Capital growth was affected as the market share price dropped by 6.4%, a more moderate decline than the 14.6% decrease in 2022. Total shareholder return also registered a 0.21% decline in 2023, an improvement over the -8.41% drop recorded in 2022.
Market liberalization also continued in 2023, with nine new players increasing the total licensed operators to 35. Consumer demand remained subdued, impacted by inflation and high import tariffs. The ongoing vehicle import restrictions further compressed lubricant demand, with the Sri Lankan vehicle composition remaining largely static—dominated by motorcycles (57.7%), three-wheelers (14.2%), and cars (10.9%).
Reduced construction activity further constrained lubricant needs, and fisheries demand dropped due to market-based pricing for kerosene. Rubber product exports, another large lubricant consumer, decreased by 7.7%, with rubber exports falling 32% year-on-year due to weak global demand. Industries also implemented technological efficiencies, like longer oil drain intervals, reducing lubricant volume needs.
Thermal power generation stabilized lubricant demand in the first three quarters of 2023 but shifted toward hydropower in Q4 due to rainfall. Meanwhile, port activities experienced marginal growth, with a 1.3% increase in container handling and 3% in cargo handling, according to the Central Bank, supporting lubricant demand in logistics.
Chevron responded to these conditions with targeted strategies. The retail segment remained its core, accounting for around 70% of business, supported by a network of 17 distributors island-wide. The company adjusted promotional schemes and distributor targets in early 2023, aligning volume growth with channel partner profitability. Chevron also launched training programmes to maintain product quality across its network, combating risks from unauthorized products.
In response to declining volumes in branded packs, Chevron reduced prices on selected SKUs in Q2 2023, regaining demand and stabilizing its portfolio. Promotional schemes ensured competitive pricing across channels, with tailored incentives for distribution outlets.
Chevron pursued product development initiatives, including a new grease formulation in response to rising lithium costs, launching this revised product in December 2023. In the commercial and industrial segments, Chevron focused on value-added services, providing technical guidance for sectors with stable demand, such as public transportation and power generation. Strategic partnerships with government bodies contributed to stable volumes in uncertain times.
In Bangladesh, Chevron expanded its retail presence in 2023, increasing distributor penetration and launching premium products in key segments. In the Maldives, Chevron leveraged the tourism-driven economy to broaden brand reach, anticipating further growth in 2024.
Operationally, Chevron prioritized supply chain resilience, achieving nearly 100% fulfilment of blending and filling requirements with a 97% on-time-in-full rate. Cost efficiencies included using recycled and thinner drums, which cut material costs and reduced steel use. Lean Six Sigma methodologies drove additional gains in manufacturing and logistics, with local sourcing partnerships for raw materials.
Chevron also enhanced logistics through its Chevron Business Point (CBp) online ordering platform, enabling direct order placements. New freight providers allowed competitive bidding, and a Lean Six Sigma Green Belt project streamlined processes, managing import demurrage costs. Expanded warehouse capacity, with 200,000 litres of additional storage, reduced third-party fees and improved logistical efficiency.
Chevron blended strategic price adjustments with rigorous cost management to withstand economic headwinds and fierce industry competition. As it continues to adapt to evolving regulatory frameworks and fluctuating demand, future growth will likely hinge on its ability to maintain this balance.