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MOSL: AEGIS LOGISTICS (Buy)-EBITDA hurt by lower logistics volumes-Distribution strength comforting

AEGIS LOGISTICS: EBITDA hurt by lower logistics volumes; Distribution strength comforting

(AGIS IN, Mkt Cap USD0.9b, CMP INR187, TP INR255, 37% Upside, Buy)

 

• AGIS reported 1QFY20 results based on Ind-AS 116 accounting standards. Reported revenue was in line with our estimate at INR19.5b (+92% YoY). However, EBITDA of INR1.0b missed our estimate by 18% due to the absence of logistics volumes of ~75kmt at Haldia. AGIS took a provision (commission to directors) of INR20m in other expenses during the quarter. However, other income was higher than the recent quarters at INR62m. PAT increased 10% YoY to INR570m (~27% miss).
• We note that the company enjoys tax incentive under the 'infrastructure holiday provision'. Despite this, the tax rate was higher than the recent trends at 25.7% due to past MAT credit. Nevertheless, AGIS expects the tax rate for the remaining three quarters of the year to be ~20%.
• Liquids EBITDA increased 10% YoY to INR320m in the quarter owing to an improved product mix at Kandla. Gas EBITDA was up 29% YoY at INR800m.
• Logistics volumes rose 2% YoY to 588.1kmt. However, volumes were down ~10% QoQ as the customer at Haldia (BPCL) stalled volume take off due to the lack of renewal of approvals. BPCL has received approval in Jul'19, and AGIS expects a revival of ~75kmt in volumes from 2QFY20.
• Sourcing volumes were at 452.5kmt (+110% YoY), largely led by the new (1.5mmt) gas sourcing volume contract from IOCL.
• Distribution volumes increased 71% YoY to 37.2kmt, driven by strong dealers distribution push in south India. Going forward, further boost to volumes would be led by the company's plan to distribute gas cylinders in the north-eastern part of India from its Haldia terminal.
• Autogas volumes declined 7% YoY to 6.4kmt, as some retail stations held back on buying LPG in anticipation of lower LPG prices. AGIS operates 113 stations and plans to take this number to ~125 by end-FY20.
• Ind-AS 116: As at 1st Apr'19, AGIS recognized INR2.6b worth right-to-use assets, a corresponding lease liability of INR3.2b by adjusting retained earnings net of taxes of INR173m (net of deferred tax), and capital work in progress of INR225m. Lease rentals accounted ~5% of total expenditure (17% of other expenses) in FY19. Depreciation and interest expense were higher by ~30% YoY (+20% QoQ) due to the accounting change. Factoring in Ind-AS and the poor 1Q performance, we cut our FY20 EPS estimate by 8%.
• Valuation and view: AGIS has several ongoing projects, which will likely support future growth, while the lack of competition may boost project utilization.
• Expansion of liquid capacity (40,000KL) at the Kandla port is likely to be commissioned in 2QFY20. The entire capacity is already tied up (presold).
• Uran-Chakan pipeline is likely to be completed by Dec'19 (only the last 25km is remaining toward Chakan), with HPCL planning to start moving LPG volumes to Uran. Even IOC has shown interest in using the pipeline.
• AGIS trades at 19.1x FY20E EPS of INR9.9 and 11.7x FY20E EV/EBITDA. We use the DCF methodology, with WACC of 11.8% and terminal growth of 3.5%, to arrive at a fair value of INR255/share (~37% upside). Maintain Buy.