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Reality check (part II): LPG v/s PNG – favors AGIS

* Aegis Logistics (AGIS) has outperformed the Nifty by ~15% in the last six months – on the back of the government impetus to increase the use of LPG in households after the great success of the Pradhan Mantri Ujjwala Yojana (PMUY) scheme – which achieved 99.8% coverage. Also, the stock has held strong despite the recent dip in the markets owing to the following inflection points:

* Increased LPG throughput at Mumbai and the Pipavav terminal post the technical debottlenecking of the Uran-Chakkan pipeline and commissioning of the railway gantry (respectively)

* The likely commissioning of the Kandla LPG terminal in the current quarter, which would further boost throughput volumes for AGIS

* That said, the recently commissioned BPCL LPG terminal at Haldia may not have any drastic impact on volumes, as for AGIS Haldia, HPCL is the biggest anchor customer (~80%). The Panagarh bottling plant operates at just ~50% capacity, and the expected ramp-up is likely to offset volumes (even after excluding 20% of BPCL’s volumes).

* Despite the COVID disruption, LPG imports in India grew ~12% YoY in FY21 and consumption was up ~5% YoY – driven by the snowballing of the PMUY scheme. The government has further extended the distribution of free LPG cylinders for PMUY scheme beneficiaries for three months in FY22. Additionally, the next leg of the PMUY scheme would focus on LPG affordability, the Oil minister of India stated.

* As highlighted in our July report – Reality check on LPG demand v/s imports – favors AGIS – LPG imports would increase ~2.7x to 36.5mmtpa by FY31. Our estimates are similar to the latest Wood Mackenzie report – which states that LPG demand in India would reach ~34mmtpa by 2030 (it would overtake China as the largest consumer).

* In this report, we reflect on the lack of impact on LPG demand from the increasing coverage of CGDs in the country. Factoring in the above-mentioned fundamentals in favor of the company, we reiterate our Buy rating on AGIS, with Target Price of INR350

LPG v/s PNG – a tale of two tails

* The government plans to launch the XI CGD bidding round (emphasized during the FY22 Budget as well), following the completion of X round – which covers ~53% of the total area and ~70% of the total population of India.

* As per PNGRB’s minimum work program, awardees under the IX-X bidding round are required to connect ~42m PNG households – against ~289.5m active LPG consumers in the country (forming just ~15% of LPG consumers).

* This would hold ground if 100% of the mandated connections are reached. Since the inception of CGDs in India (in 1995–96, i.e., over the last 25 years), only ~7.6m households currently have PNG connections (i.e., ~2.6% of total LPG connections). This is despite proliferation of incumbent CGDs in the metro cities of India, where the high raise towers and townships are relatively easier to connect. Thus, PNG connectivity in rural India would remain the biggest challenge for CGDs, and the use of LPG would remain the most feasible.

* Even assuming potential loss of ~15% connections to PNG (over the next 7–8 years of gestation), the rising incomes of the lower-middle income group would boost the annual consumption of cylinders per household. As per our study, there is a huge gap in LPG consumption per user compared to FY15 (potential demand of 6.9mmtpa – i.e., ~25% of the current consumption).

Reiterate Buy on AGIS – biggest beneficiary of rising LPG impetus

* AGIS enjoys a long-standing relationship with OMCs, while concurrently enjoying the strategic positioning of its terminals. LPG bottling capacity has increased by 48% to 25.8mmtpa over the last two years. Moreover, AGIS’ terminals are well-placed with enhanced connectivity through pipelines (Mumbai and Kandla) or rail transport (Pipavav) to service the additional capacity.

* Reflecting over FY11–21, despite a ~34% increase in domestic refining capacity, the percentage of LPG imports increased to ~61% in FY21 from ~21% in FY10 (clocking double the demand CAGR at ~18%). Our calculation highlights a similar story going into the next decade as well.

* We have built in gas logistic volumes of 4.3mmt in FY23E – a jump of ~1.2mmt over FY21E (flat YoY at 3mmt). Historically (over FY16–20), the company has clocked logistic volume growth of 0.4–0.5mmt per year.

* Even on a conservative basis, we expect logistic volumes to post a 12% CAGR and a ~15% CAGR for logistics EBITDA over FY20–23E. We expect strong free cash flow generation of ~INR10.8b over FY21–23E (FCF yield of ~11%), with return ratios rising above 20%.

* AGIS trades at 21.5x FY23E EPS of INR13.3 and 12.9x FY23E EV/EBITDA. We value AGIS using the DCF methodology to arrive at a fair value of INR350 per share. Maintain Buy.

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