Company Analysis & Thesis:
Management Guidance and earnings calls:
Impressive Growth Momentum: The company is demonstrating impressive growth across key performance indicators (KPIs). For the first nine months of FY24, we’ve achieved a healthy 11.02% volume growth. Furthermore, operational efficiencies have improved significantly, reflected in a 13.64% increase in EBITDA and a 9.56% growth in PAT for Q3 FY24 compared to Q3 FY23.
There has been significant improvement in the profitability: The addition of new vessels is expected to drive a significant increase in EBITDA per MT, with projections reaching Rs. 3600-3700 compared to the current Rs. 3400.(Five Years ago it was 2200 EBITDA per MT)
Confidently Targeting 18% Growth: On track to achieve the 5 lakh MT target set by management, representing an 18% y-o-y increase, compared to 4.24 Lakhs MT in previous year.
Ambitious Growth Plans: Management is guiding for a target volume of 7-8 lakh MT in the coming years, with the potential to exceed 10 lakh MT. This growth will be driven by leveraging our internal fleet and efficient logistics network.
Achieving the targeted volume of 7-8 lakh MT in the coming years, combined with our current EBITDA per MT of Rs. 3400, translates to a projected EBITDA of Rs. 220-230 crore.
Despite a robust 500,000-volume target for FY’24, achieving a 35% volume increase in Q4 presents a significant challenge, we can ensure successful achievement of our FY23-24 target, we’re positioned for a potentially exceptional final quarter of FY24.
Significant improvement in scale of operations or sustained improvement in operating margins above 8%, leading to higher cash accruals.
Opportunities:
The Indian government has allocated Rs. 2,78,000 crores for road, transport and highways in the 2024-25 interim budget. This represents a significant increase compared to the Rs. 2,70,434 crore total order value carried over from 2023-24.
PSU like HPCL and BPCL have a combined production capacity of around 5.5 million metric tonnes per year (MT/year). However, current demand sits at 9.5 MT/year, and this gap is expected to widen further to 14 MT/year in the next 3-4 years.
Challenges:
Port Congestion Hinders Growth: Our biggest operational challenge is congestion at loading points in ports. This intense competition for loading space can delay our vessels by 7-10 days. As a result, securing raw materials becomes difficult, and we may be unable sometimes to meet the full 1.5x surge in total demand.
Strength’s:
The market opportunity is tremendous and we have captured almost 20%-30% of the bulk market share in Bitumen in the private sector. [ Market Leader in Bitumen Space]
Our Unique Edge: Our nationwide presence with manufacturing plants near key ports gives us a logistical advantage unmatched in India. We combine shipping with this robust network, unlike competitors who lack either our integrated infrastructure or extensive distribution.
Promoters with over 40 years of experience provide deep understanding of local and global market dynamic has resulted in a significant 36% CAGR in sales for the past three fiscal years.
The group’s ship chartering business is a strategic move, expected to offset 60-70% of the parent company’s freight expenses. This creates a cost-saving loop that leverages their diverse operations. By optimizing logistics costs, the group is well-positioned to achieve its EBITDA per MT target of Rs. 3600-3700.
The company plans to use debt to finance new vessels. However, this strategic capital expenditure (capex) is not expected to negatively impact the capital structure in the medium term. As of March 31, 2024, our key financial ratios remain healthy, with a projected gearing ratio of 0.51 times and a total outside liability to adjusted net worth (TOLANW) ratio of 0.77 times.
The company prioritizes order-backed purchases, minimizing the need for excess inventory. However, a small buffer stock (averaging 16-23 days’ worth) is strategically maintained to fulfil urgent customer demands. This approach has been successful over the past three fiscal years.
Counterparty risk is mitigated to some extent by a large and diversified clientele and established long relationship of 3-4 decades with major clients. It is also able to pass on its foreign exchange exposure to customers.
Healthy Liquidity Buffer: The company boasts a comfortable liquidity position. Expected annual cash accruals of Rs. 120-155 crore significantly exceed our medium-term repayment obligations of around Rs. 26-42 crore. Additionally, as of March 31, 2023, we held a substantial amount of readily available cash (Rs. 37 crore) and liquid mutual funds (Rs. 25.66 crore).
Weaknesses:
Although, company is able to pass on this increase in prices of bitumen to customers, inability to do so fully or lag in passing on, has led to some volatility in operating margins that have ranged from 6.3% to 9.1% in the past five fiscals, through fiscal 2023.
While the entity caters to cyclical sectors like infrastructure, industrial gases, and power, these industries are susceptible to economic downturns. During past recessions, construction slowdowns weakened the creditworthiness of some players in the sector. This can also lead to extended payment collection times (debtor days) from smaller clients.
Threats:
Vulnerability to Oil Price Swings: A key challenge for the company is the inherent volatility in bitumen prices. As a derivative of crude oil, bitumen’s price fluctuates significantly. These sudden increases or decreases can impact our operating margins.
Substantial increase in its working capital requirements or large debt funded capex, weakening its liquidity and financial profile.
AIL Research Report.pdf (614.4 KB)
2024-04-12T18:30:00Z UTC
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