Aegis Logistics - Can It Be Exception?

[rupeshtatiya]

Q1 FY21 UPDATE

Liquid Business

The liquid business was very good in Q1. The business model in this business is based on fees for storage tanks. Even though there was less economic activity, companies still needed storage tanks to store chemicals etc.

The company is doing liquid business for 40 years and there are 50-60 clients like traders, chemical companies etc. This business does not have client concentration risk as gas business. The main advantage company has is land/infrastructure at prime locations in ports. e.g. Mumbai port volumes are still growing, even if someone new wanted to come, there is no land.

The entire capacity at Mangalore liquid terminal is pre-booked.

There is consolidation happening in liquid terminals business and there are few distressed players. The company might considering acquiring one or two.

Gas Business

Sourcing Business
The gas business was particularly pulled down by sourcing business. Sourcing business was impacted due to lowest crude prices and corresponding gas prices in a decade. In addition to this, there were high inventories leading to lesser imports. Government had announced 3 free LPG cylinders during lockdown period. In anticipation of additional demand, PSUs had overbooked the imports. But the demand did not go up as expected and hence the additional inventory.

Near Term Growth Triggers

The company is planning to take LPG throughput capacity from 5mn to 9mn in next 1-2 years. Current utilization throughput is at 3mn. The expansion is primarily happening at Kandla for capex of 350cr with throughput capacity of 4mn. This will come online over next 6 to 12 months.

Mumbai-Uran-Chakan-Shikrapur (Pune pipeline) is at 50% throughput and expect throughput to reach good levels from Oct onwards. This should help in profitability meaningfully from Q3.

Pipavav railway gantry will come online from Q3 and that should help to vacate more volumes and should help to boost earnings.

The margin in LPG throughput services is around 1000rs per tonne and it is a small part of overall transport cost to customer.

Haldia Gas Terminal

• There is a BPCL gas terminal coming up in Haldia which will be commissioned over next 6 months.
• The anchor customer in Haldia is HPCL which consumes 80% throughput. Rest 20% is consumed by BPCL. Once BPCL terminal comes up, BPCL share will be taken over by HPCL.
• Gas penetration is low in east and northeast and HPCL is building out distribution network. Don’t see much demand disruption.

Medium/Long Term Growth Triggers

• The company is planning to take gas stations from ~110 to 200 over 3-5 years.
• The company is planning to build the retail business state by state. Even if company achieves its plan by 2025, its share in retail business would still be only 1%. This business requires very little capital and has EBITDA margin of 2500-3000 per tonne which is margin accretive.
• Pipelines across India till 2025 -

1. Kandla - Gorakhpur, 2800 kms, planned completion of 2024-25, largest pipeline in the world
2. Uran - Chakan - Shikrapur, 168 kms, completed
3. Paradip - Haldia - Durgapur, most probably completed
4. Kochi - Coimbatore - Salem, work in progress

• The LPG consumption is expected to grow at 6% over a decade as per various reports and that serves as underlying supporting trend.

BPCL Privatization
We need to see if BPCL really gets privatized. Aegis feels that if profitability is main objective of new owner, he would find relationship with Aegis beneficial.

My View

Over next 18-24 months, I see 2-3 things happening.
First off, the impact of ESOPs will wear off and PAT numbers and corresponding optical valuation would start to look better.
Then I see a growth trigger pretty much every 6 months for next 2 years - Pune Pipeline, Pipavav Railway Gantry Line, Kandla Capacity Coming online, then various liquid terminal projects and growth on retail/commercial side.

We need to do more work on promoters (history, background, ambition etc.) as well as competition mapping. The sector has lost fancy long time ago and it remains unexciting for investors. Can Aegis become an exception?

Disc - I have < 5% allocation and I am still tracking and understanding the business. This is not a buy/sell recommendation.

[Donald]

LPG Throughput/Static Turns

Any comparable datapoints for OMC and other LPG Competition?
Evacuation Costs (road, rail, pipeline) efficiency plus Freight Costs (port related) decides Sales Volume growth (as mentioned below in Aman’s Transcript Notes). The sunk Capex costs obviously makes the base difference.

@desaidhwanil - perhaps you will bring in more granularity/insights by way of
a) Port/Freight costs - Deep Draft VLGC compliant berths - does that Make Mundhra Port better/more competitive
b) Aegis seems to suggest Kandla location/evacuation has better competitive advantage?
c) Storage Capacity - bigger tanks make a difference? Over and above say a more or less fixed Turn (Throughput/Static). If you have a Pipeline, throughput should be high because of faster/cheaper evacuation. Haldia operates at almost twice the throughput of Mumbai - modes of evacuation being same Road & Pipeline (no rail). Mumbai is the least efficient? Reasons? (Assuming utilisation levels are similar as these are older plants) Any others - older technology or some such thing?
d) Linkage of increased Storage to Increased Throughput? (Q3FY2017 Transcript)

Looks like this is more or less same Turns ( so throughput is higher just because you can have higher turns because of larger capacity)?
You might have some insights to offer?

[Donald]

Is this picture the right way to dissect possible competitive heat?

[Rokrdude]

I had 3 data points to share:-

1. On Competitors (From Q3FY19 Earning call)

If I did say I will talk a little bit about competition. I think it is very clear. Anyone who has done
a little homework that a number of LPG project announcements have been made for putting up
terminals in Gujarat in the last year or so. And one of the reasons for coming out with our project
announcement and actually starting construction now, as soon as possible, for us in Kandla was
to also signal to some competitors who we think are not very credible that they have chosen ports
which do not have pipeline evacuation and who have very difficult evacuation which are far
away and therefore, will have higher evacuation costs from where the customers want LPG such
that they will be uncompetitive. And our project cost of Rs. 350 Crores compares to, I will not
mention names, but I can tell you that there have been announcements of another terminal 5x the
cost of Aegis, Rs. 1,500 Crores is a figure I have seen. How can they be possibly commercially
viable if they are trying to build a project 5x the cost of Aegis, Rs. 1,500 Crores versus Rs. 350
Crores, not quite 5x but you get the drift, it does not make sense. Plus, they do not have solutions.
They have no track record, etc.

So without going into details of project by project, we certainly feel, and everyone can make their
own judgment, that some of these projects, which have potentially been announced or have been
announced, they are not credible. But obviously, Gujarat and this territory does need more LPG
import capacity, which is why people have been coming up. We simply feel that they are in the
wrong ports, and they are completely uncompetitive and therefore, will be commercially
unviable. Plus their groups have never built LPG terminals in India. They do not have a track
record. But I think it was important for us, and I was pushing our management to come out with
this announcement of Kandla that Aegis is building an important, large 45000-ton, 4 million ton
throughput capacity terminal as fast as possible. We were losing time. I was getting little
frustrated at how long it was taking for us to make our final technical and commercial decisions.
But finally, we were able to agree internally that we can announce this today, because there are
two potential competitors that look within 18 months, Aegis will have a massive terminal in the
right location where, as I said, at the origin of two major pipelines.

IOCL cost of project expansion

Augmentation of LPG Import facility at Kandla
Approved Project Cost: Rs. 588.20 Crore
Brief Description:Augmentation of LPG Import Terminal from 0.6 MMTPA to 2.5 MMTPA at Kandla, Gujarat.

Aegis has spent 350cr to set up 4MMTPA terminal at Kandla

2. On Adani Mundra Project (From Q3FY19 Earning call)

I would also like to comment on Adani Mundra project, which many of you have asked me about, and it is absolutely correct, that there terminal has been under construction in Mundra and will be completed this year, probably in a few months’ time. What I would like to say is our project of Kandla, 45,000 tons, is taken with full recognition that there will be a Mundra LPG terminal project from Adani, which is going to be commissioned. But I would fully - of course, their project cost is much more than ours, etc., so less competitive, etc. But I would say that it is, therefore, a reality that there will be two LPG - two confirmed LPG terminals, new terminals in Gujarat, which will be the Adani Mundra LPG terminal and the Aegis Kandla terminal that will be operational. I am not convinced that either any or even one of the other terminals that have been, so called will be put up, especially, with the announcement today of Aegis that we are putting up this terminal. But it could be the case that there will be two terminals that will be the Adani Mundra and Aegis.

However, as I explained in my earlier discussion of the territory that we are catering and the kind of volumes that will need to be imported into this territory, which as I said, we forecast by year 15 from today, 40% of India’s total LPG imports will come through in this territory that actually the good news is the industry actually requires both these terminals of Adani Mundra and Aegis to cater to all those imports. Remember those two pipelines, are going to take 10 million tons per year. So our terminal will be up to 4 million tons and Adani is there as well. So I think we take this decision of building this terminal with full recognition that there will be at least two terminals in this territory. But we are very comfortable with our project costs, extremely competitive, and we are also very comfortable with our position in Kandla in terms of the hooking into these two pipelines from the future that this is really the fundamental competitive advantage. And as we have seen from our 20 years of experience in Mumbai, location, location, location, is very key in terms of generating the sales volume. And ultimately, as I said, what is becoming even more important for the industry as a whole, this applies even to our existing terminals in Mumbai, in Pipavav and along with Haldia that the game has changed in the last few years which we fully recognize, which I have been espousing very clearly to both our management as well as to investors. What is now key is the deliberate cost of LPG. That is what, ultimately, is going to be the competitive edge that you need. The delivered cost of LPG, not only the freight cost that is bringing the LDCs into a particular port, but - which has, obviously, been a very important factor in the past few years. But it is also the evacuation of the LPG at lowest cost, which means most of evacuation, like pipeline, railways, etc., which are much cheaper. Actually, the current estimate is 50% cheaper than road. That makes a huge cost saving, delivered cost saving of the LPG to the bottling plants. And I am saying that we have found a very good solution in Kandla in terms of location with that.

3. On Industry LPG Demand

Aegis as well as Industry ppt’s talk about LPG consumption/Import in India increasing to 40MMTPA/25MMTPA in base case and 50MMTPA/38MMTPA (CAGR 4%/CAGR 6%) bull case from around 26MMTPA/15MMTPA (CAGR 3%/CAGR 4%) in 2020.

Even last 3 year CAGR of LPG Consumption/import has been close to 7% and 10% respectively. So it might be prudent to assume LPG import growth in India going ahead will be mid to high single digit.

[Donald]

Thanks @Rokrdude for the very pointed excerpts. You actually rock, dude

[rupeshtatiya]

Since Aegis is widely tracked company, several reports are available.

Following trendlyne link puts few of them in a single place and one can see how things have progressed with these -

https://trendlyne.com/research-reports/post/AEGISCHEM/35/aegis-logistics-ltd/

There are Equirus and UBS reports, which are not in public domain, are some of the good ones - in laying out domestic production, import growth over the years, Ujjwala Yojana progress etc.

One of the major takeaways is - the tailwind the LPG industry is having due to Ujjwala Yojana (no matter that we are 5 years late to the story !). The domestic production is not going to grow commensurate with demand and most of this demand has to be met by imports.

[Donald]

It’s important to understand the Product Mix pattern at each Port to understand the Risks? Some ports we can be sanguine about, and some like Pipavav we cant. Do we have a good handle on this?

[Donald]

Thanks Rupesh. Think most of us interested would have these shared already by Ankit. The LPG import/domestic production gap (rising consumption for many years) part I think is very well understood and forms part of the big picture story for Aegis.

What is more important NOW is to quickly highlight data points at a much more granular level - about the vulnerabilities/competitive advantages of the Assets/Location, choices led by strategic vision, competition at Port and/or region pipeline level.

There may be many others. As Ankit said, if we go through most of the Concalls quickly, we should be able to cover most of the angles/challenges faster. Am doing the older ones first - to look for historical issues - like issues with Pipavav is still continuing but might finally get over - how much of an impact does that make?

[Donald]

Port by Port - Competitive Advantages.
Congestion free/Demurrage, multiple berths for different products, higher rentals.

We could try and understand this better for Kandla vs Mundra?
That might be possible @desaidhwanil? might be there will be more clues in other Concalls. Ankit - what have you come across from your extracted notes of 5 year concalls? Any comments off-hand?

[rupeshtatiya]

Few things that need more work -

• History of Promoters
  I have not been able to spend meaningful time on it. But how did they get to be in such a strong position and have prime real estate in these ports - that would be interesting to understand. Also Chanderias are more like owners but would be good to hear more from key operational guys.

• B2PSU Business

1. GAIL has in-principle agreement with Aegis for 1mn throughput for Jamnagar Loni pipeline at Kandla terminal. More work needs to be done to understand this agreement (duration, repeatability, price increase clauses etc., scope for more growth etc.).
2. Also similar agreements need to be tracked for Kandla Gorakhpur pipeline.
3. Another area is - total potential of 2 big pipelines is 10mn. What is the PSU’s plan to acquire this volume - how much of this is domestic production (RIL reducing volumes) and how much of it is going to be imports? How much of this would be natively imported by PSUs and how much would be outsourced importing? Outsourced importing is only through tenders or there is some scope for direct agreements?
4. Another thing that should be factored in calculation is delays that are inevitable in B2PSU businesses. Uran-Chakan pipeline volume uptake story is easily delayed by 6-9 months in my tracking.

• Sourcing Business

1. Although sourcing business contributes quite a bit to topline, its contribution to EBITDA is not a lot (2$ per MT) - as witnessed in last 2 quarters where revenues fell a lot but EBITDA did not. But this business is of strategic importance. If more and more volume is sourced through Aegis-Itochou, that would guarantee the terminalling volume which is where money is.
2. Would be good to understand how competitive this business is and if more and more volume can be sources though this. Also if Adani has sourcing business and how that works.
3. Aegis has imported ~10% of imports volumes traditionally and handles around ~20% of total import volumes in terminalling business i.e. 10% volumes are sources from non-Aegis sources.

• Cost advantage
  One example is 4mn throughput capacity cost of Aegis is 350cr vs. 630cr for Adani based on Mundra LPG Terminal debt rating report. I do not understand why is there so much cost difference - I am assuming this cost excludes land ?

• Alternate Fuel Sources

1. Autogas has EBITDA/MT of ~10,000 Rs. Non-household, non-auto segment has EBITDA/MT of 2000-3000 Rs. This is far higher than throughput business EBITDA/MT of ~1000. I have read reports which say that LPG is cheapest fuel for auto and also have heard that switching between fuels for commercial entities is not so easy. But I do not have granular handle on this part LPG vs. CNG story. Also what is terminal value/future of Autogas business once electrical cars start to pick up?
2. My understanding is that all of the CGD uses PNG which is different than LPG and Aegis plays no role in PNG side (I may be wrong on second part). Some reports peg that LPG households would go from 54L to 4.5Cr as CGD come online. This would be loss of ~4Cr households in LPG segment? How does this impact end demand scenario?
3. Finally, a (very) long term potential disruption would be caused by electrification of kitchens a la western countries. Although this trend is not at all visible in India as of today.

[rajats]

Some more commentary by Aegis’ management on competition from oil & gas PSUs, Q4’FY17 cc.

[ankitgupta]

@Donald

Mix pattern at each Port to understand the Risks? Some ports we can be sanguine about, and some

These are for the liquid storage terminals. The product mix will change for every quarter depending upon export/import of those products during the period. Chemical products have higher charges while petroleum products have lower charger and hence lower EBITDA. Once a company puts a new (incl. brownfield) capacity for liquid storage, they usually start with low margin petroleum products to fill the capacity and over the period move to higher margin chemical products.

[ankitgupta]

@Donald

ld have been super useful for me they were supposed to send us the group account this weekend

Turnaround time and efficiencies at a well run private port of Adani will always be better than a Government Trust run port like Kandla or even JNPT, Mumbai. However, over the past few years, efficiencies have improved significantly at some of these trust run ports especially after Gadkari took charge. In fact, he pushed many of them to start expansion of capacities to reduce congestion at ports. However, it will be great if @desaidhwanil can talk if the management of a private LPG terminal like Aegis is handled entirely by them (lesser involvement of port trusts) including giving them access to private jetties which isolates them congestion at other parts of port.

Attaching press releases of both Kandla Port and JNPT port CRISIL_PR_Jan 2020.pdf (170.1 KB) Deendayal Port Trust-04-01-2020.pdf (746.5 KB)

[ankitgupta]

Management’s view on competition from Mundra port mentioned in their Q4FY20 concall:

This reply was given by management when they were asked about predatory pricing from Adani’s LPG terminal at Mundra:

[spartan]

Under SATAT policy Govt plans to set up 5000 CBG stations and produce 15MMT of compressed biogas by 2023. OMCc have offered a long term price contract for CBG and Govt has included it in the priority sector and offering financial assistance.
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1633560

At 62-mt potential output, CBG can replace entire CNG demand - ET Auto

Recently Petronet LNG has signed a MoU with Govt to set up CBG plants.

Can this be a threat to Aegis by reducing imports into the country.?(If it reaches sufficient scale)

[desaidhwanil]

@Donald,

As per my understanding what matters is the delivered cost of LPG to the OMCs who supply LPG to the end customer and hence OMCs try to optimize the same.

Delivered cost of LPG will include

LPG FOB price + shipping charges (through ship) up to Indian coast + port handling and storage charges (where Aegis/Adani would come in) + transportation/handling cost to the bottling facility.

Coming to your question, VLGC may be cheaper on shipping cost side, it is not always the optimal option as one needs to synchronise demand with supply - so let us say if one VLGC brings 45-50 K Ton of LPG, but end bottling capacity is only 1K Ton then the cost of storage is much higher and it may be sub-optimal to bring VLGC. Hence to infer that just because one terminal has VLGC handling capacity, it wins hands down is not appropriate to infer. However having ability to handle VLGC does increase the flexibility of an importer and hence is surely a positive.

Between Mundra and Kandla - Kandla does not have enough draft to handle VLGC while Mundra has capability to handle VLGC. However as it stands today, Kandla is connected through pipeline to many major bottling facility in north through Jamnagar-Loni line and the central/ central-north will get connected through Kandla-Gorakhpur (under implementation) line. Mundra still needs to be connected to Kandla through pipeline for evacuation (which I think is under implementation too). On the other hand, Pipavav has good draft and is a deep water port so handling VLGC is surely a possibility and if railway gantry part is complete, they will do dredging to ensure handling of VLGC. One factor that we must consider that when anybody plans a large pipeline like Kandla-Gorakhpur (roughly 8 MMTPA) capacity, they ensure that pipeline can be operated at decent capacity utilization hence OMCs must be seeing enough LPG import need on Kandla/Mundra region so as to put up this kind of capacity. I think this is a very good lead indicator to suggest that both terminal may get reasonably well utilized.

Storage capacity: Throughput of a terminal is not only a function of storage but also of ship turnaround time, unloading rate, evacuation rate and potential evacuation mode. Hence in general higher storage means higher capacity but one can handle more throughput with same storage through maximizing the other factors mentioned. At times operational efficiency that comes into picture while at times the nature of port operation become constraint. For example Mumbai and JNPT ports have such high congestion that ship scheduling and turn around time is a big challenge. Also if the connectivity of the terminal is only through Road transport (i.e. Mumbai till now) then the turns on storage capacity is likely to be much lower. If one is connected to pipeline/railway the turn is likely to be higher.

[desaidhwanil]

I think the excerpt that you have taken is with reference to liquid handling and not LPG. Liquid cargo handling dynamics is very different that of LPG terminal as the demand/supply dynamics, mode of evacuation and variety of product basket is totally different. So are you referring to this in context of gas terminal or liquid terminal?

[Donald]

Product Mix is obviously only for Liquids handling - where no of berths to handle hazardous chemicals vs petroleum vs other liquids. Is there a hierarchy of rentals, what? What else is important to understand for Liquids handling capabilities of each terminal operator?

But on other aspects Port by Port if we have a handle on all aspects (mentioned above n more if there are) it would be really useful to have a grip on things?

[ankitgupta]

Another important point in the operating efficiency of LPG Terminal business is the number of turns for throughput. Some discussion of that in Q4FY17 concall:

[Donald]

Thanks Ankit.
Actually the whole Q4FY17 Transcript/Presentation is very interesting. I finished my Notes and uploading them here.

Those interested - including the skeptics @basumallick @Anant will do very well to study in detail. That should stoke them to work harder on the bear case. We are hoping to draw in more to the same page quickly - so we can have a great discussion.

Very good pointers herein, as Ankit prompted us time and again. Will also upload selected excerpts to save you all precious time - kab download karoge, kab padhoge …bhai aaj…abhi . The excerpts are that good guys n gals!!

How am I doing selling ?
Q4FY17_Transcript (2)_Notability.pdf (2.0 MB)