Likhitha Infrastructure: CNG Infrastructure Play in India

Hi All,

Starting my first topic in ValuePickr on a small-cap company by the name of Likhitha Infrastructure (BSE 543240, NSE LIKHITHA, CMP 354, PE - 16x, PS - 2.8x, EVEBITDA - 11x). Listed on exchanges in Oct, 2020. Claims to be only listed company in CNG pipeline laying space.

I discovered this company while running a screener of small-cap companies with significant promoter holding with a consistent history of Sales Growth over a decade and ROCE and ROE growth of > 20% for the last 5 years which were optically cheap (PE < 10x or PEG < 1x). This threw up a list of ~30 companies, of which Likhitha was one. Likhitha came to my attention once again when I noticed there was a possible CNG theme developing in India for the next 5-10 years and when Likhitha filed in BSE on 2nd Jan stating they had bagged a fresh 250 Cr order in Q3 from CGDs (City Gas Distribution Orgs).

Past performance details

Thesis for investment: CNG usage as % of India’s energy mix is supposed to go up from 6% to 15% by 2030. MoPNG is aggressively increasing number of CGDs across the country to increase supply of PNG to households and industries and CNG to automobiles. Govt push for CNG is to achieve carbon goals for 2030 as CNG causes less harmful emissions compared to gasoline/diesel. Unlike gasoline/diesel, India has the capacity to supply 50%+ of its own CNG demand, thus CNG adoption will reduce forex outgo and increase energy security to an extent. Strong tailwinds appear to be present in favour of CNG for this decade in India. Likhitha being in the CNG infra space, will gain from CNG growth and adoption across industries - automotive, industrials, household.

Understanding the business:

Likhitha operates primarily in 3 verticals

1. Cross Country CNG Pipeline Laying - Company n its 20+ years of history claims to have laid 1000 KMs+ CNG pipeline in India
2. Pipeline laying for CGDs - MoPNG is aggressively increasing number of Geographical Areas under CGD services. O&G companies bid for these tenders and winning companies sub-contract the pipeline laying and project management work to specialist 3rd party companies like Likhitha. A list of Likhitha’s current projects and completed projects can be accessed via the links.
3. O&M Contracts (Operating and maintenance contracts) - Company provides maintenance services for already laid CGD networks.

Claimed competitive advantages/strengths of business model:

1. Access to growth capital being the only listed company in this space. Promoter stake is 74%, which can be diluted to an extent to raise growth capital for capturing larger projects
2. Claims to do capex in machinery used for pipeline laying as opposed to opex (machinery on rentals) by other companies giving them a cost advantage while quoting for tenders
3. Business model is inherently asset and capital light - Client (O&G) company sources max raw material and makes it available for laying work at site. Company’s procurement of raw materials are of low intensity and thus claim to be protected largely from r/m price fluctuations.
4. Number of projects and prestigious clients under their belt, which boosts their credentials in tenders. Their clients include - IOCL, GAIL, Indian Oil-Adani, AGL, IGL, ONGC, HPCL, Torrent Gas

Points in favour of company’s performance:

1. Consistent topline and bottom-line growth in 3-5-10 year horizon
2. Increasing operating margins - OPM has expanded from 11-13% pre FY19 to 20%+ since then. This coincides with the start of the expansion in the O&M segment which company claims is high margin
3. Order book of 1250 Cr (5x TTM revenues) with 20% belonging to O&M segment
4. Prestigious clients which are giants in the O&G/CNG space.

Red flags/Corporate Governance HLs:

1. Very poor EBITDA to cash flow conversion. Conversion had improved in FY 20, but dipped badly in FY 21 owing to huge increase in WC
2. Company in its latest AR claimed to bring down Account Payables to almost 0 stating that they get 5-10% cash discount, but the cash discount doesn’t clearly reflect in COGS reduction from FY20 to FY21
3. Huge jump in inventory days from FY19. This coincides with expansion in O&M business but may not explain this steep a rise. In past also, WC discipline has been wayward in the company.
4. The daughter of the promoter has been appointed as CFO in the last few months. She seems adequately qualified (MS from Illinois University and experience in PWC) but is inexperienced. The last CFO was also appointed internally just before IPO, when the then CFO quit.
5. Present CEO salary is very low (17 LPA) compared to promoter (MD) remuneration (370 LPA). Makes one question the seriousness of CEO appointment.
6. No concalls/investor presentations - high opacity

Key risks:

1. Requires sustained Govt. policy push for tailwinds to sustain
2. Max business dealings with PSUs, can put pressure on WC, margins
3. Corporate Governance risks as highlighted above

Status: I am tracking with a small position. Wait and watch approach right now.

I am trying to reach out to a Project Engineer/Site Engineer at one of the O&G companies where Likhitha has an ongoing Project to get their feedback. Will update if I receive some info. Looking forward to community members doing their own study to build on this and hopefully some folks in this forum can bring in some feedback on company operations on ground or feedback on management, which seems elusive to me right now.

Cheers!

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