SINGAPORE (Jan 23): The Tantallon India Fund closed up +1.82% in December with markets remaining volatile into the year-end with civil protests against the introduction of the new Citizenship Law, and muted consumption and manufacturing data raising questions on the structural growth narrative.
The Citizenship Amendment Act, approved by India’s Parliament on Dec 11, 2019, creates an expedited path to citizenship for minorities — meaning non-Muslim refugees — fleeing to India from religious persecution in Pakistan, Bangladesh and Afghanistan, prior to 2014.
The controversy centres around the Act’s rejection of guaranteed "safe harbour” for Muslim refugees who might have fled to India, and concerns in the North Eastern states bordering Bangladesh, China and Myanmar that the law would make it easier for refugees to become citizens, potentially marginalising the native ethnic communities in those states.
Opposition politicians have further instigated nationwide protests, cynically playing on fears that the Citizenship Amendment Act might be used in conjunction with a proposal to update the National Register of Citizens (the NRC, an official record of legal Indian citizens and eligible voters, has not been updated since the 1951 Census, and is currently only in effect in the state of Assam) to marginalise the Muslim community in India.
Despite the relentlessly negative narrative and the hand-wringing in the western media, and the clear and present danger posed by geo-political risks and higher energy prices, Indian equities would seem to have bottomed in September with Prime Minister Narendra Modi’s transformational corporate tax rate cuts. We expect policy decisions to revive growth and the earnings cycle, while ongoing structural reforms will support risk appetite and market multiples.
Meanwhile, the Soleimani assassination is potentially a “Black Swan” event and the risks of unintended consequences are real. For Ayatollah Khamenei, Soleimani’s death is personal so there will be “retaliation”. That said, even the most zealous hardliners would acknowledge that any Iranian “retaliation” would likely need to stop short of “war” and even more debilitating US economic sanctions and resultant economic hardships would likely trigger further street unrest, similar to the massive public demonstrations this past Fall that Soleimani put down with brutal force.
Posturing on both sides notwithstanding, the caretaker government of Prime Minister Mahdi has neither the power, nor any real intent to expel US-led coalition forces from Iraq – doing so, would reward the Iranian-backed militia’s violent campaign over the last several months, jeopardise the fight against the Islamic State, create significant unease within the local Kurdish and Sunni communities, and call in question the Sunni Arab support from Saudi Arabia and the United Arab Emirates.
The bottom line is that the repercussions of the Soleimani assassination will continue to reverberate though the region and on markets. The markets have been remarkably poised thus far, with crude prices and global equities recovering from their early declines. The markets would seem to be voting for “limited” Iranian retaliation. However, we are intensely mindful of the risks of geo-political “miscalculations”, escalating military confrontation, and sharply higher oil prices triggering a broad market selldown. Watch the price of gold and oil.
The stock we like to highlight this month is Aegis Logistics, India’s largest oil, gas, and chemicals logistics company. Aegis operates a bi-coastal network of bulk liquid terminals, liquefied petroleum gas (LPG) terminals, filling plants, and pipelines on a “build, own, operate” basis to service the national oil companies and other local industrial companies. Aegis offers us a unique combination of strong, highly predictable, annuity-type cash flows from long-term storage and terminal rental contracts, boosted by the significant business opportunity as India accelerates its nation-wide LPG roll-out programme.
We expect Aegis to compound earnings at a 25%+ CAGR over next three years, well ahead of consensus expectations of earning compounding in the 15%-18% range. This is due to the ramp-up in capacity utilisation at the Haldia and Kandla terminals and the doubling of LPG throughput at Kandla will drive significant operating leverage.
Significant mix improvement on the back of the growth in the high margin LPG business thanks to the significant upstream investments with Itochu Corp, and downstream, in developing a national retail LPG distribution network.
A structurally lower effective tax rate of 18% on the back of the new tax incentives for new capacity creation also helped.
