December 13, 2021 [ventura1] – Renewables is a hot investment theme at present but does that make traditional fossil fuels redundant overnight?
It’s crucial to see the unfolding trends in the right context.
And instead of getting stressed out with market corrections and random pullbacks, why not focus on sector and style rotations?
If the value theme picks up indeed, some old economy businesses are likely to enjoy the spotlight.
Let’s talk about one such company, Aegis Logistics, which could be a potential beneficiary of India’s energy transition plan.
The contribution of natural gas to India’s overall energy mix is expected to rise to 15% by 2030 from 6% at present.
Aegis Logistics: Growth catalysts appear to be in fine fettle
Aegis Logistics is a leading player in India’s midstream and downstream oil and gas sector. Broadly speaking, terminalling and handling liquids and gasses is the mainstay of the company.
At present, Aegis Logistics generates approximately 80% of its revenue through Gas Sourcing which is a low margin business. Not so surprisingly then, the gas division contributes just 69% to the EBITDA while the remaining 31% comes from the liquid division.
Of late, the stock of Aegis Logistics has been buzzing on Dalal Street despite choppy market conditions.
What might be working in Aegis’ favour?
The integrated nature of the company’s business leaves it in a sweet spot to benefit from the on-going development of gas infrastructure in the country.
The first phase of the 2,800 Kms long Kandla-Gorakhpur LPG pipeline is likely to be operational by December 2022. Once completed, this pipeline will be the world’s longest LPG pipeline and will be capable of transporting 8.25 MMTPA of LPG—roughly 25% of India’s total LPG demand.
Aegis Logistics handles a little over 15% of India’s total imported LPG volume. The company, through its various partnerships, endevours to increase this market share to 25%.
The commissioning of rail gantry at Pipavav and the on-going construction of a new VLGC (Very Large Gas Carriers) compliant jetty at Gujarat Pipavav is going to offer further tailwinds.
Aegis Vopak Terminals Ltd (AVTL)—a game changer?
In July this year, Aegis Logistics and Royal Vopak decided to form a joint venture to exploit synergies to grow LPG, chemical storage and handling business.
With a total storage capacity of 9.6 lakh cubic metres, Aegis Vopak Terminals Ltd (AVTL) will become one of the largest tank storage companies catering to LPG and chemicals in India. Aegis Logistics will have a 51% stake in the JV while Vopak will hold a 49% share.
As part of this deal, Aegis will transfer its terminal assets at Mangalore, Kochi, Pipavav, Kandla and Haldia to the asset base of AVTL. Similarly, Vopak will also make its 100% subsidiary, the CRL Terminal which holds terminal assets at Kandla, a wholly owned subsidiary of AVTL.
As remains the question of Hindustan Aegis LPG—a JV between Aegis and Itochu of Japan, Vopak will acquire 24% stake. Aegis’ stake will be 51% and Itochu will continue to hold a 25% stake.
The formation of a new JV is cash positive for Aegis Logistics. Aegis is likely to receive pre-tax cash proceeds of Rs 2,766 crore in a piecemeal manner over the next 3 years.
The JV has guided for a capex plan of Rs 1,250 crore, which will be executed over the next 18-24 months. Taking a conservative stance on debt, the JV envisages capping its debt gearing at 0.6 times and it also intends to keep gross debt/EBITDA ratio below 3.5 times.
On this backdrop, India Ratings & Research (Ind-Ra) has affirmed Aegis’ long-term issuer rating of ‘IND AA’ and revised the outlook from Stable to Positive.
Going by the latest disclosures of Aegis to the stock exchanges, the process of it transferring assets to AVTL has already begun.
Aegis will continue to own its liquid and LPG terminals and LPG retailing business in the standalone entity.
Prospects for LPG retailing seem to be improving
So far we just talked about Aegis’ terminal and sourcing business but LPG retailing is an important area in the company’s future growth strategy.
Aegis commissioned three new bottling plants—one each at Udupi, Bengaluru and Hyderabad—in the quarter gone by.
With Puregas and Magna brands, Aegis wants to capitalize on the cooking gas opportunities in the commercial space. On the other hand, Aegis Chota Cikander caters to household LPG market in tier-1, tier-2 and tier-3 cities.
Its growing network of LPG distributors currently stands at 244, spread across 100 cities of India in 14 states.
Autogas network is growing as well
While we all know LPG more as a cooking gas, it can also power up automotives. It’s the third most widely used auto fuel globally with nearly 2.7 crore vehicles running on it. Auto LPG is nearly 40%-45% cheaper than petrol and is cleaner than other widely used auto fuels.
Aegis Logistics has a network of 129 autogas stations spread across 10 states. It aims to expand this network to 200 and add 10 more states to its tally.
On the flip side, uncertainties associated with government policies and the global geo-political developments in the oil and gas sector remain the key monitorable.
In the last multi-year bull-run between 2003 and 2008, infrastructure companies were in vogue. And a typical investment narrative used to be—if India has to grow, India’s infrastructure has to grow.
Some experts have found a flaw in such oversimplification, and rightly so. Still, macro themes do have their role to play in stock market investing.
The key is to avoid generalization and find the right companies, where the growth stories, management quality and balance sheets are equally strong.
Do you think Aegis can qualify as one such company?
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