An Investment Delicacy Made Using 'Gas'
Undiscovered investment Idea to play India's voracious appetite for Gas
In our previous article, while discussing a new addition to our portfolio, we also discussed the need to raise the bar high for investment esp. in small caps. As happens amid every bull market, investors tend to move down the quality curve in search of alpha generation. However, with the aging of the bull market, it becomes extremely important to focus more on the certainty of cash flows and earnings. There are businesses that provide the same, but such opportunities would generally be fully discounted and trade at higher multiples for e.g. FMCG companies with little scope for alpha generation.
We recently added a Company to our portfolio which along with cash flow certainty provides an opportunity for high alpha generation. Due to SEBI regulations, since our clients are currently building a position in this company, we would refrain from writing the name of this company.
The Company provides logistic infrastructure for storing liquids at the largest port of India along with a couple of other smaller ports. The storage terminals are like any other annuity business where you have long-term contracts or relationships with customers. The company gets a lease/rent on these storage facilities with an annual escalation clause of 5-10%. This gives certainty of earnings growth. While it has other business verticals, in the overall context of earnings, its contribution would be insignificant going forward. At India’s largest port, the company is the market leader in liquid storage with a share of over 50% and is running at near 100% utilization. Even at other ports, the utilization levels are high. To drive future growth, the Company had been planning to do a massive capex for a petrochemical storage terminal.
What attracted us to this Company/sector was one of the interviews last year by the world’s largest petroleum gas shipper where they had said that “out of the ten busiest petroleum gas ports in the world, five of them are in India and in terms of the longest waiting times, five of the ten globally are also in India.” The shipper had been aggressively scouting opportunities in India to build an ecosystem as India’s demand for petroleum gas is burgeoning with companies looking for cleaner fuels moving from dirtier alternatives. Modi government’s push for the usage of cleaner cooking fuel especially in rural areas is also leading to a higher appetite for petroleum gas. All of this necessitates higher petroleum gas imports, but at the same time, growth is hampered by constrained infrastructure for the unloading and storing of petrochemical cargo at ports. Ships have to wait for days to unload such cargo, and this increases the cost of such products.
We have been monitoring the Company since then to see if they can capitalize on the opportunity. Access to large parcels of land at the largest port provides a significant entry barrier and the Company already has substantial land available to them. While it had already obtained the necessary statutory approvals for the development of the storage tanks, it had been waiting for long-term contracts/certainty of quantity from customers.
Very recently, the Company has announced a JV with the aforementioned shipper along with a large customer in India to build a state-of-the-art LPG import terminal. The terminal would be able to handle the largest of the gas carriers in a single discharge. The massive capex would be completed over the next 2 years and will add to a big delta in the earnings of the Company.
Further, we believe once the partners in JV make substantial progress with the current planned capex and understand the relationships better, they would want to benefit from each other’s expertise and expand to other ports as well. For this, the balance sheet strength of the world’s largest petroleum gas shipper and cash flows from the new terminal would come in handy. This provides visibility to growth beyond the next 2-3 years in addition to the annual escalation clause as discussed earlier.
We believe as and when uncertainties in the markets rise or the Company’s capex progresses toward completion, markets would start looking at this Company. Post completion of the capex, the company’s FY 27 earnings would be at least 2x of FY24 PAT in the worst case while it can be 4x-5x in the bull case scenario. The return ratios of the Company would also improve significantly.
We have not discussed the other segment this company is present in. While this segment has a decent contribution to revenue, at the PAT level it is small and going forward the contribution would be quite immaterial.
The company has had issues in the past, but things have improved a lot with generation change. There is a risk of delay in the planned capex due to ongoing litigation, but after going through public material on the case and various hearings of the case, we don’t find it to be a substantial risk. Therefore, it fits perfectly into our framework of buying less risk high-reward opportunities.