Infrastructure: LPG - at the forefront of growth - Kotak

Our recent meeting with the Ministry of Petroleum and Natural Gas helps us better appreciate the preparedness for a sustained double-digit growth in LPG consumption. With a willingness to pay for LPG, BPL families have started contributing to its growth. Such impetus to growth will only strengthen, with increasing levels of urbanization and relevance of LPG beyond being a domestic fuel. Among the listed plays, Aegis Logistics is well-placed to collaborate with the government and materially outperform the growth in LPG consumption and imports.

Government preparing for a 10% medium-term CAGR in LPG consumption

The targeted 10% CAGR in LPG consumption targeted by the ministry is higher than the 7% historical five-year CAGR. The 23% growth in LPG imports in FY2017, which was primarily handled by oil marketing companies (OMCs), is testament to the preparedness for achieving such ambitious medium-term growth target. For the next leg of growth envisaged by the ministry, it is taking detailed reviews of the under-construction infrastructure projects on a monthly basis. The focus remains on projects of upcoming pipelines and bottling plants, essential to grow import and distribution capacities for LPG.

BPL families starting to contribute to consumption growth

In addition to the flagship Pradhan Mantri Ujjwala Yojana (PMUY), the ministry has focused in parallel on bringing out the behavioral change in BPL families. Proper communication of benefits of LPG (time, health) and other marketing initiatives of the ministry have led dominant majority of BPL families to opt for refills (refer). Such acceptance by BPL households would further aid the growth in LPG demand ahead of the 9% CAGR in non-BPL connections seen over FY2015-17. The subsidized cost of LPG at Rs5 per day per household is 3% of the Rs160 threshold of daily consumption expenditure of the poverty line (for a family of five); is similar to the ~2% share of spending on domestic fuels for an average Indian household.

Increasing urbanization and usage beyond domestic fuel can help sustain growth for longer

Our discussion with the ministry brought out the varied usage per household based on the nature of urbanization: four refills per annum by rural customer versus an average of eight refills for an average customer. This is a key reason among others of disparity in per capita consumption of LPG across states. Delhi has a higher Rs49 kg per capita consumption, discounting a penetration of 126%, high levels of urbanization and harsh winters. Maharashtra's average consumption is half of Delhi at Rs23 kg per capita, with a penetration of 85%, mild winters and lower levels of urbanization (versus a city in Delhi). National average is a further 25% lower at 17.5 kg per capita, at 73% penetration and even lower levels of urbanization. Such urbanization and potential usage of LPG beyond being a domestic fuel would add longevity to the LPG growth story beyond the penetration leg gains, that would get discounted in another five years of 10% CAGR, in our view.

Government open to collaborating with the private sector; Aegis Logistics a direct and able play

The focus of the government is to avoid stock-outs rather than gaining out of the LPG opportunity. It is open to private sector participation. The bottleneck in import capacities at ports, low share of private sector operators in such capacity mix and their cost competitiveness against the OMCs (time and cost) bode well for share gains. Aegis Logistics (M. Cap - Rs63 bn, NR) has a large ~41% share in near-term capacity additions (versus 10% share in throughput) and is well-placed to collaborate with the government in realizing LPG's potential in the country.

Source : Equity Bulls

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