Lockdown impacts Sourcing and Distribution business
* EBITDA miss was due to weak performance in the Sourcing and Distribution business, as PSUs reduced LPG imports over May–June due to the overbooking of LPG cargoes in Apr’20. Higher imports in Apr’20 were attributed to an expected boost in demand led by PMUY scheme, which did not pan out as estimated. Also, refiners ramping up throughput led to a domestic LPG supply glut.
* AGIS expects some improvement in LPG volumes from the current quarter (2QFY21), highlighting 1QFY21 as a trough for FY21. On the other hand, expect a boost in gas volumes in 2HFY21 from the Uran–Chakan pipeline and Pipavav Railway Gantry.
* The company has been a key beneficiary of the government’s initiative to boost the penetration of LPG in the country. Although, for AGIS, investors have been wary of capacity utilization amid increasing competition.
* In light of the same, we highlight the potential for increase in LPG imports (by ~2.7x to 36.5mmtpa) despite a rise expected in domestic refining capacity (by ~1.5x to 367mmtpa) by FY31. Moreover, per connection consumption of gas by domestic consumers could boost demand incrementally by 6.7mmtpa.
* Despite some minor delays in project developments, led by nationwide lockdown, the company is expected to see a jump in gas throughput by ~1.0mmtpa over the next two years (on a base of 3.0mmtpa in FY20). We remain positive on the company’s Gas division, and reiterate Buy.
EBITDA miss led by higher impact of lockdown
* AGIS reported sales of INR6,364m (-67% YoY), 42% below est., weighed by multi-decade low LPG prices and lower-than-expected sourcing volumes.
* EBITDA stood at INR674m (-34% YoY), 53% below est. This was primarily due to the impact of poor performance in the Sourcing and Distribution business on account of the lockdown.
* The company recognized ESOP expenses of INR0.4b during the quarter (~50% of the planned INR0.93b for FY21). Thus, only INR0.7b of ESOP charges remain (of the total INR3.35b).
* Other expenditure also includes an INR30m provision of commission to the Managing Directors (v/s INR80m recorded in FY20).
* Lower interest cost was offset by lower other income. Net interest cost was nil during the quarter owing to the benefits of lower interest rates and continued higher cash generation – expect it to remain the same going forward.
* PAT stood at INR298m (v/s est.: -65%; -48% YoY), with the tax rate at 26.5%.
Segmental analysis – LPG inventory build-up affects logistics growth
* The Gas division’s normalized EBITDA stood at INR780m (-3% YoY; -36% QoQ).
* LPG logistic volumes were at 700.3tmt (+19% YoY; -4% QoQ) as terminals on the western and southern coasts suffered a huge impact from lower LPG imports, while the eastern coast fared comparatively better.
* LPG distribution volumes were at 13tmt (-65% YoY; -72% QoQ) as demand was lower from auto sales, commercial, and industrial customers amid lockdown, coupled with decline in migrant labor LPG sales. AGIS added three new LPG stations during the quarter, totaling 118 outlets.
* LPG sourcing volumes were at 158.3tmt (-65% YoY; -63% QoQ), impacted by high inventory buildup and lower-than-estimated demand.
* The Liquid division’s normalized EBITDA stood at INR399m (+25% YoY; +8% QoQ). The Liquid business held up well owing to storage requirements, and supported overall profit for the group during the quarter.
Outlook for FY21 – expect normalcy from 2HFY21
* The government is projecting growth of 6% in LPG consumption for FY21, in line with AGIS’ expectations.
* LPG distribution volumes would support overall growth in FY21, with 2HFY21 seeing higher volumes (led by the pipeline at Mumbai and railway gantry at Pipavav). Factoring the same, we have built-in LPG logistics volumes at 3.2mmt and sourcing volumes at 1.9mmt for FY21.
* However, the Retail LPG segment would take some more time to revive due to the further imposition/extension of lockdown across various states (especially Karnataka – the prime market for AGIS in auto sales). Considering the guidance, we model-in distribution volumes of 173tmt on the expectation of normalization in auto sales demand by 4QFY21.
* The above adjustments result in EPS change of -32% for FY21 and -5% for FY22. Although, EBITDA and EPS for the company are expected to see a CAGR of ~21% over FY19–22.
* BPCL’s Haldia terminal is likely to be commissioned over the next six months. However, for AGIS’ Haldia, HPCL is the biggest anchor customer (throughput mix of 80% HPCL and 20% BPCL). The Panagarh bottling plant is currently operating at only 50% capacity; thus, even if BPCL’s 20% is taken away, expect ramp-up at Panagarh to offset the impact for AGIS.
Gas logistics – the next leg of profitability
* AGIS’ EBITDA breakup currently stands at: 75% Gas and 25% Liquid. We believe the EBITDA pie is set to incline more toward the LPG segment, which also enjoys increasing impetus from governmental schemes (such as PMUY). AGIS further plans to set up an additional LPG terminal in southern India.
* Logistics is expected to contribute ~60% to the Gas division’s total EBITDA in FY22, led by improving utilization at the Mumbai and Pipavav LPG terminals. Kandla would add to sales volumes from FY22 as the company is already in talks with OMCs to pre-book volumes.
* Even on a conservative basis, we expect logistics volumes to post a CAGR of 16% over FY20–22, with a Logistics EBITDA CAGR of ~18% over this period. The logistics enhancement is also expected to help the company ramp-up its market share.
* We expect strong free cash flow generation of ~INR7.5b over FY21 and FY22 combined (FCF yield of ~12%). RoE is expected to improve from 17% in FY19 to 20% in FY22. Also, the non-cash expense overhang of ESOPs at ~INR3.35b is behind, while only INR0.7b remains to be recognized.
* AGIS trades at 16.1x FY22E EPS of INR11.8 and 8.8x FY21E EV/EBITDA. We value AGIS using the DCF methodology to arrive at a fair value of INR250/share. Maintain Buy.
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