12/1/23, 8:06 PM Print

Adding Substance to Gas

3 min read. Updated: Oct 21 2023, 12:00 am

We missed you at the launch event of our new client Confidence

Petroleum last week. But you shouldn’t miss this exciting investment
idea. It’s high growth business with huge entry barriers, and strong mid
teen ROEs, available on undemanding valuation.

Before we get into details, let’s sample some of the statements made by the
management which really impressed us:

about:blank 1/6
12/1/23, 8:06 PM Print

LPG – fully integrated business model, capturing the full value chain
Confidence is one of the largest private sector player in LPG segment with
unparalleled presence across full value chain. Consider this:

1. Charters ships to import LPG.

2. Has it’s own fleet of 617 truckers/tankers for inland transport.
3. Has 68 bottling plants across India.
4. Makes it’s own gas cylinders – has 15 manufacturing plants.
5. Owns 250 Auto LPG stations to sell gas to consumers.
6. Sells packaged gas to retail consumer under it’s brand “Go Gas”.
7. Has 2000+ dealer network to sell this packaged gas.

about:blank 2/6
12/1/23, 8:06 PM Print

This fully integrated, pan India business model allows it to drive:

1. Economies of scale – sell excess production at every level from gas to

cylinder.
2. Run highly efficient operations – low transportation cost due to pan India
presence.
3. Provide customised solutions to it’s customers – like proper blend of gas.
4. Capture market share for the inefficient public sector.

Replicating success in CNG

Confidence after it’s success in LPG segment has started replicating the model
in Compressed Natural Gas(CNG) segment too. The company has entered into
a partnership with GAIL for setting up 100 CNG stations in Bangalore. Already it
has around 32 CNG stations in place. It is also in talks with other CGD players
in the country for other cities.
Given it’s penchant for fully integrated model, the company has set up 3 high
pressure cylinder manufacturing plants. Company is seeing a lot of increase in
demand for CNG cylinders post the government initiative of building 5,000 CNG
stations in India.

High Growth ahead –Auto LPG stations 2x; CNG stations 5x by FY25E
Indian government has set a target of increasing share of gas in the energy
basket of the country from current 6% to 15%. Confidence Petroleum has
established a strong platform and is all set for an explosive growth over the
next 2 years to play a big part here.
Confidence is looking to double it’s Auto LPG stations to over 500 by FY25E.
And as discussed above, it is also looking to grow it’s CNG stations by 5x to
around 200 by FY25E.
Over the last 5years, the company has grown it’s revenue by 22% CAGR. With
this strong expansion plan, Confidence is likely to more than double it’s
revenue in next 2years.

about:blank 3/6
12/1/23, 8:06 PM Print

Looks like a very promising story. So what were the issues raised on the call:

1. What are the economics of an Auto LPG station? Management

Response: Typical Auto LPG station costs Rs0.8-1cr per station and the
expected payback period is less than 18 months.

2. What are the economics around the CNG stations being built under the
partnership with GAIL? And what is the capex requirement for CNG
stations?
Management Response: Confidence Petroleum has signed an agreement
with GAIL as per which Confidence Petroleum will be doing the capex and
operating expenses, while the gas will be supplied by GAIL. Confidence will
get a fixed margin based on the total sale and the quantity breakdown given in
the agreement. For example, Rs. 11.25 per kg up to 6,000kg CNG.
Roughly the capex required for each CNG station is Rs 3.25 crore to Rs. 3.5
crore

about:blank 4/6
12/1/23, 8:06 PM Print

3. What is the segmental Revenue and margin?

Management Response: 85% of the topline is from the LPG segment which
includes LPG bottling, Auto LPG dispensing, bulk LPG and pack cylinder, and
the remaining is from Cylinder manufacturing and CNG retailing. In Auto LPG
there is a margin of 18-20%, in packed cylinder division it is 10-12%

4. Why have the margins come down in FY23?

Management Response: In March 2022 the company started importing LPG
from middle east. Apart from captive demand the company is supplying Bulk
LPG to big industries like Jindal, Bajaj and other cement industries. Due to this
topline is growing but margins have come down. The margins in bulk LPG are
lesser than the retail side.

5. Why has debt moved up sharply in FY23? How will you fund this large
capex? How much will debt go up further?
Management Response: The increase in debt in FY23 is due to increase in
working capital as company changed it’s business model and started importing
gas as against buying in local market. The capex requirement for Auto LPG
stations is around Rs0.8-1cr/station and for CNG station it is Rs3.25-
3.5cr/station. So for next 2 years almost Rs700-800cr will be required for
capex. Company will be able to large meet this from internal accruals. Some
minor increase in debt can happen.

In Conclusion, Confidence Petroleum is running a highly efficient

business with significant entry barriers. It is poised for strong growth and
likely to double it’s revenue by FY25E, largely funded by internal accruals.
Incremental business is high ROCE given that infrastructure is already in
place. And best part is company is trading at 10.5x EV/EBITDA on trailing
basis. Time to add fuel to your portfolio.

Happy Investing!

Investor Presentation

Please reply back on this mail if you like to get added in the mailing list for
getting updates on the company.

Click HERE to reach out to GIA Team for Additional Information.

about:blank 5/6
12/1/23, 8:06 PM Print

about:blank 6/6