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Focus has shifted away from LPG Logistics.

Establishes JV with a leading global player – Royal Vopak of the Netherlands

* AGIS has established a JV – Aegis Vopak Terminals (AVTL). Both LPG and liquid storage terminals at Kandla and Pipavav, and liquid storage terminals at Mangalore, Kochi, and Haldia have been brought under AVTL. AGIS will hold 51% stake in AVTL, with the balance held by Vopak. AVTL will also hold the existing 250,000kl liquid terminal of Vopak at Kandla.

* AGIS, via its wholly owned subsidiary – Aegis Gas (AGL), used to hold 75% stake in the Haldia LPG terminal. It is divesting 24% to Vopak (separate from AVTL).

* Mumbai LPG/liquid storage terminal, gas retailing, and marine fuels remain with AGIS. It has also retained the LPG sourcing business.

* The partnership certainly opens up a host of new opportunities for the company. The increased demand for storage facilities in India, due to rise in the production of chemicals and petrochemicals, is expected to result in a demand for additional storage facilities. The deal is expected to be completed by early 2022.

* A capex program of INR25-45b is planned for the JV over the next five years, starting FY23 (in the seven areas as highlighted in Exhibit 6). It would be funded via internal accruals, debt, and some cash injection by both the shareholders.

* Such a high and ambitious capex would burden AGIS’ Balance Sheet, with the focus shifting away from the LPG business, which in our view may increase uncertainty. Factoring in the same, we downgrade the stock to Neutral with a TP of INR375.

Vopak a global leader in independent tank storage

* The search for a strategic partner commenced with the need for new products, larger terminals, better inland logistics capabilities, and availability of storage facilities at more ports and inland depots. Vopak – a global leader with 70 terminals across 23 countries, operating gas/industrial/chemical/oil terminals, and a market capitalization of EUR5b – was the best fit.

* The management said in the analyst call that the deal was valued at 23x FY22 EBITDA for the assets transferred to AVTL, while the Haldia LPG terminal was valued broadly at the same valuation at which Itochu acquired an incremental (~5% ) stake in the LPG terminal in Apr’21.

* As per our estimates, the transaction was valued at 16x FY22E EBITDA (as highlighted in Exhibit 1 and 2), while Vopak ascribes 11x FY22 EBITDA (as per the company’s press release).

* The cash consideration also includes certain milestone payments that are tied to the achievement of certain financial projections over the next three years

Way ahead for AGIS and valuation

* The company expects growth in its Mumbai assets, in which it has a 100% stake. Further growth opportunities would include VLGC compliant jetties; further expansion of the LPG/liquid assets; multi-modal transport for LPG; inland depots; new LPG terminals in the south; storage facilities for other gases like ammonia, propylene, butadiene etc.; and a greenfield liquids terminal dedicated to industrial customers.

* We remain positive on LPG consumption and the import story in India (as consumption per LPG connection rises in poor households, given the government’s continued impetus) and show our faith in AGIS’ retailing and distribution business (which the company plans to expand to over 200 retail outlets from 125 at the end of FY21).

* The stock is up 35% in CY21 YTD on the back of developments in the LPG Logistics business like debottlenecking of Uran Chakkan pipeline (in Mumbai) and commissioning of the railway gantry at Pipavav, which would result in higher LPG throughput at these terminals, aiding growth. With the recent JV announcement, the focus would shift away from the LPG logistics business.

* The company is trading at 21x FY22E EV/EBITDA. We value the company using DCF and arrive at a TP of INR375. However, a stretched balance sheet due to INR25-45b capex and change of focus away from LPG is likely to raise uncertainty over earnings. We downgrade the stock to Neutral.

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