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Mixed-bag results; Gas Logistics outlook remains unchanged

* Aegis Logistics (AGIS) reported a miss on our estimates, primarily due to a drop in the Gas business, while the Liquids business performed robustly.

* The Gas Logistics business was impacted as AGIS reported a shift in BPCL volumes from its Haldia LPG terminal to its recently commissioned terminal. Aegis clocked higher movement of LPG wagons at its Pipavav railway gantry and signed BPCL as a second customer (apart from IOCL). The Mumbai LPG terminal is operating at the maximum level since Dec’20.

* The Liquids business saw margin expansion in 4Q with the handling of higher margin products. The Mangalore (+50,000kl) and Haldia (+54,000kl) liquid terminals are expected to be commissioned in 1QFY22; Kochi (+20,000kl) is expected to be commissioned in 2HFY22. These expansions are likely to result in better margins as well, as capacity has already been presold (unlike in the past).

* AGIS believes lost volumes at the Haldia LPG terminal would be fulfilled by HPCL (which offtakes ~80% of the volumes), with a ramp-up in the utilization rate at the Panagarh bottling plant (currently operating at just ~50% capacity).

* Based on these factors, we keep our FY22/FY23 Gas Logistics volumes unchanged at 3.5mmt/4.3mmt in FY23, a jump of ~1.2mmt over FY21. Historically (over FY16–20, FY21 being exceptional), AGIS has clocked logistic volume growth of ~0.5mmt per year.

* AGIS indicated that it would announce its long-term growth strategy and new capex plans in Jun’21. We remain positive on growth and reiterate Buy.

Miss on estimates attributable to Gas business

* EBITDA came in 21% below our estimate at INR1b (+8% YoY). Employee expense under the ESOP plan stood at INR280m – only INR130m of the INR3.35b is remaining. PBT stood at INR0.9b, with PAT at INR0.65b (19% below our estimate; +92% YoY).

* FY21 EBITDA stood at INR3.9b (up 40% YoY on huge ESOP expense of INR2.4b in FY20). PBT was up 62% YoY to INR3.4b, led by higher other income and lower interest expense. PAT stood at INR2.2b (v/s INR1b in FY20, due to higher tax rate of 35.5%).

* The company declared a dividend of INR2/share.

Segmental analysis – Liquids drives growth

The Gas division’s normalized EBITDA stood at INR910m (-25% YoY).

* LPG logistic volumes were down 2% YoY to 714.9tmt (down 8% QoQ) as the Haldia LPG terminal saw the exit of BPCL volumes.

* LPG distribution volumes are still down 25% YoY to 34.2tmt as demand remains subdued due to extended lockdowns/restrictions. The second COVID wave is likely to delay recovery in distribution volumes to 2HFY22.

* LPG sourcing volumes stood at 374.3tmt (-54% YoY; -48% QoQ) as import volumes declined in OMCs as well. Normalization is expected by end-FY22.

The Liquids division’s normalized EBITDA stood at INR540m (+46% YoY) as a change in the product mix at the Mumbai and Kandla terminals led to better margins.

Valuation and view – strong growth prospects ahead

* India’s LPG consumption stood at 27.6mmt in FY21. Assuming a consumption CAGR of ~7% (as recorded over the last decade), LPG demand in India would reach 31.6mmt by FY23, implying incremental demand of ~4.0mmt. Despite domestic refinery expansion (~4% by FY23) and new LPG terminals at Mundra (Adani) and Haldia (BPCL), we believe AGIS would easily meet our forecast volume growth of 1.2mmt by FY23 (if not exceed it).

* AGIS has additional land at the Kandla and Haldia terminal sites; thus, it has the option to set up additional liquid terminal projects of 100,000kl and 30,000kl, respectively. The development of these sites would take the total Liquids division capacity to ~950,000–998,000kl over the next 3–4 years.

* AGIS currently has 125 LPG stations (in 10 states) and plans on increasing this to 200+ (in 20 states). The company aims to achieve volumes of ~300kmt from cylinders, ~50kmt from autogas, and ~100kmt from industrial/commercial over the next five years. Thus, distribution volumes are likely to reach ~450kmt (v/s ~115kmt in FY21, down 30% YoY due to COVID-induced lockdowns).

* Even on a conservative basis, we expect a logistic volume CAGR of 20%, coupled with a logistic EBITDA CAGR of ~20%, over FY21–FY23. We expect strong free cash flow generation of ~INR15b cumulatively over FY22–23 (FCF yield of ~13%), with over 20% improvement in return ratios.

* AGIS trades at 25.5x FY23E EPS of INR13.3 and 15.0x FY23E EV/EBITDA. We value AGIS using the DCF methodology to arrive at a fair value of INR400/share. Maintain Buy.

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