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Aegis Logistic-In a sweet spot

Introduction

Aegis Logistics, Indiaâs leading oil, gas, and chemical logistics company operates a network of bulk liquid handling and gas terminals. It enjoys location advantage of having two liquid terminals in Mumbai of 273,000 KL and one at Kochi of 51,000 KL. Aegis Logistics Ltd has initiated a major Project at Pipavav Port, Gujarat for setting up a Bulk Liquid and Gas Storage Terminal. The ground breaking of the Project has been completed and project activities started. Company has obtained the requisite approvals for setting up the Project.

Why the company is in a sweet spot

**1). **Capacity Expansion in Liquid terminals -steady cashâflow

Its Liquid Division capacity is likely to increase by 18.5% i.e. 60,000 KL to 384,000 KL by Q1FY14 with a CAPEX of Rs.640 million. With Pipavav project the company will scale up its liquid divisionâs capacity to 500,000 KL and gas divisionâs capacity to 25,400 MTPA in the next 15â18 months with a capex of Rs.1360 million. Liquid Division is a steady cashâflow generating business with high EBITDA margins of around 58%.

**2). **Cap on Subsidized LPG Cylinders (9 cylinders per household)

This cap will help prevent the illegal diversion of cooking gas cylinders to commercial and Auto gas segment. The company has already seen a good spurt in Retail Auto gas & Commercial Cylinder space. In Q3FY13 its Auto gas volumes have spurred by 30â40% Y-o-Y.

**3). **Gas Sourcing Business â Import volumes back on track

In the wholesale LPG business, the confusion over the cylinder cap policy and KYC norms (Know Your Customer) has impacted LPG import volumes severely since October 2012. However, the welcome policy change to nine subsidized cylinders from April should stabilize LPG demand and imports in 2013 and get the business back on track.

**4). **Margin Improvement due to Liquid division and expiry of Hedging contracts

In FY12 the company had loss on forex of Rs.555.1 million and Amortization of premium on options of Rs.601.7 million, which resulted in loss at EBITDA level. The company has now decisively stopped using options for all new cargoes from 15th Septâ12, moving on to taking plain vanilla forward contracts. The outstanding old options contracts would expire by Marchâ13, thus reducing the volatility in earnings from FY14E.

5). **Oil Price Deregulation: **Government of India, continuing its policy of reforms in the Oil and Gas sector, partially deregulated the diesel price, allowing for a hike of 40-50 paisa a liter per month for retail customers and nearly Rs 11 for bulk consumers.

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**Dealer expansion and market Share: **The Company is continuing to expand its dealer network of Auto LPG stations and is expected to touch 100 stations by this fiscal end. In December, the Company became the biggest private marketer of Auto LPG in India. The Companyâs brand âAegis Puregasâ cylinders is also gaining market share, with an entry into a third state, Karnataka, and the addition of more distributors in the South.

**7). **Aadhar Cash Subsidy Transfer Scheme â A True Game Changer:

We look forward to the implementation of the Aadhar cash subsidy transfer scheme for LPG, as this will lead to a single market price for cylinders and would be a true game changer for private players.

**Financials-**The operating cash flows and return ratios are likely to see a good spurt going ahead because of lower hedging cost and higher contribution from high margin Liquid Division, Retail Auto gas and Commercial cylinder space. The working capital as percentage of sales is also likely to decrease.

Risks: - The Company is likely to see a dip in its Revenue in FY13 by and a low growth of around8-9% in FY14E as its wholesale low margin gas business is witnessing short term blip because of lower off take from National Oil Companies.

**Investment Rationale: - **

PAT is likely to grow from March quarter and FY14E due to higher contribution from the higher margin business i.e. Retail Auto gas & Commercial cylinders coupled with vanishing derivatives losses. This would thus result into sharp improvement in return ratios, better operating cash flows and stability in earnings.

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Maverick,

Nice summary. A few queries

What is the amount of hedging loss in dec quarter?

It had 80cr pat in mar12 quarter. Are you saying it will have greater than 80cr pat in mar13 quarter?

Raskem,

re: Hedging loss

The outstanding old option contract will expire by March13 and premium of which will be amortized till Q4FY13.

As of 9monthsFY13

Amortization of premium: - Rs. 2067 million

Forex Gains: - Rs. 492 million

Since this contracts were expired on Dec12 management would most likely be reporting a hedging loss of around Rs. 100 million the coming quarter also. Thus after the next quarter we will see this flowing to the bottom line…

PAT: -

I dont have a straight no to point at but it will depend on how quickly demand revives from Oil companies… i think it will take one more quarter…

Raskem,

found this as per a research report bu Sushil…

PAT is likely to grow 104% Y-o-Y in FY13 and 114% in FY14E due to higher contribution from higher margin business coupled together with vanishing derivative losses…

Dis:- A small position in Aegis and likely to add more if we can figure out some more positives and negatives…

Views Invited…

There seem to be too many variables in aegis.

biggest worry seems to be that of forex. We dont know what march quarter will throw up in terms of forex numbers. After that as management says these forex hedges expire but most of the times I cant figure out why these guys got into the mess in the first place.

The price has been beaten down to factor in a lot of negatives so there might be a treadable bounce but I am not too sure about quantum of bounce.

Anyone looked at KTIL ( Kesar Terminals and Infra) ? It basically operates bulk liquid storage terminals and is currently expanding.

It’s the only one standing if one applies ALL ‘top rated screens’ together on the screener :slight_smile:

http://neerajmarathe.blogspot.in/2011/07/kesar-terminals-whats-in-store-age.html

Hi,

Has anyone tracked Allcargo? Looks like a com with good parentage and good investor relation practices.http://www.allcargologistics.com/investor-relations/overview.aspx

Wouldn’t GST and better transportation infra investments favor the logistics sector in India?

Vinod

http://value-picks.blogspot.in/2013/03/aegis-logistics-buy.html?m=1

Recently valuepick guy has recommended aegis as a buy…

Would like members to have a look.

Aegis looks very interesting, especially considering the management is doing only a simple 15 day forward swap. No more forex hits. Here are some of my notes/observations on the business:

a) Haldia - They have already commissioned 15100KL. Will commission 23400KL in Q3FY14 and the remaining 21690KL in Q4FY14. They are seeing huge demand for Haldia and expect 100% utilization going forward. They have signed a 25% capacity sold out for a major petrochemical manufacturer at Haldia for 15 years, with escalation clause built in.

b) Pipavav - On schedule for 2014-15. The project may cost much less than 120 cr (projected before) as there has been slackening of demand in china - thereby leading to huge savings (in crores) on the steel and cement front. They have already funded 35% of the project thru equity (40 cr). The remaining expansion will be through debt from here on. Pipavav - there is huge demand and the capacity is already sold out (100%). The mgmt is trying to build this as soon as possible.

c) Kochi - 2nd jetty has been commissioned which has pushed up capacity utilization from 75% to 85%.

d) Rates for liquid terminals:

Mumbai - they charge Rs.250/KL/month. 100% capacity.

Kochi - they charge Rs. 100/KL/month - 75-85% capacity.

Haldia - they charge Rs.125/KL/month - initial year 80% capacity, slowly 100% capacity. Pipavav - Rs.180/KL/month - 100 capacity.

e) Mgmt had guided 71 cr EBITDA for the full year on liquidlogistics. Already done 42 cr in H1. With new capacity coming on board in Q3, they plan to do better than H1 (thereby, am expecting about 85-90 cr EBITDA here)

f) Mgmt had guided 85 cr EBITDA for the full year on gaslogistics. They are not going to meet it, primarily because retail+commercial issues. No issues on the sourcing and throughput business - in fact, they did more volume than projected. However margins are very low in these two. Retail - 3 stations were under maintenace and no new stations were added. In Q3, these 3 would come on board and 4 additional stations will be commissioned. Commercial - lower offtake due to recession + no addition of dealers. Plan to take dealers from 45 to 90 in H2 (there is already a long list of people - they just have to finalize). Each dealer would do 20-30 MT of sales per month. Thus, they expect better H2 than H1 in the gas business.

Anyway, have put in some projections till FY16 - especially when there is so much visibility on the liquidlogisticsbusiness.Based on my estimate of FY16E, it looks like above Rs.250 (on a 10x P/E) is a fair price.

Liquid Logistics business (simply amazing):


Liquid Logistics
(in Cr) 2009 2010 2011 2012 2013 H1 2014
Revenue 71 81 87 92 107 65
EBITDA 42 46 50 54 61 42.3
Margins (%) 59% 57% 57% 59% 57% 65%

Overall Aegis Logistics (blended margins are not so great as gas logistics runs of wafer thin margins):

Total Aegis Logistics FY13 FY14E FY15E FY16E
EBITDA 132 139 162 180
PAT 35.15 81 97 108
Minority Interest 1.55 6 7 8
EPS 10.06 22.36 27.09 29.97
Disc: Invested
Views invited.
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With clear growth plans , govt reforms in oil & gas divisions from past few months ,fee based revenue model , very good cash generation , debt free status , ten year dividend distributing track record and @8-9 times valuations of fy14 earnings makes it very interesting.

Some points raised by EquityMaster on the financial arrangements of the company

http://www.equitymaster.com/outsideview/detail.asp?date=09/11/2013&story=1&title=Aegis-Logistics-Greater-transparency-called-for-Luke-Verghese

I was just going through some numbers. As they did half year eps as 1.55 rs and they are expecting gas profit to be double now onward because of IOC contract. They may be able to generate (25 + 24 + 24 - 15) 60cr profit in Dec and same for march so it can reach figure of 120 cr/ 33.33 cr share so eps could be around 3.75 so full year eps could cross 5 rs.
If we consider second half year performance would continue then next year esp could be 7.5 + 20 % growth that comes to 9 rs around.
Any body tacking this stock?

Disc: Not invested

Guys, Can please anyone explain in detail the strategy of the company in terms of building a string of terminals across India. If anyone has access to a detailed report, will be super helpful.

Here is the latest call transcript and investor presentation from Aegis Logistics website. Though the current stock price is going down, I see there is nothing wrong fundamentally with this company.
http://www.aegisindia.com/Admin/Documents/Events_Pdf345.pdf
http://www.aegisindia.com/Admin/Documents/Events_Pdf344.pdf

As per the investor presentation submitted to BSE, many projects are now complete and that too was financed through Internal Accruals

image

During the quarter ended Sep 30, 2019, the Company has allotted 56,66,667 equity shares of the face value of Re. 1/- each to the eligible
employees upon exercise as per the stock purchase plan by them.
Consequent upon the said allotment, the total paid up equity share capital of the Company has increased to Rs.33,96,66,6671·
The Debt Service Coverage and Interest Service Coverage ratio have been calculated after considering expenses of Employees as per Stock
Purchase Plan aggregating Rs.15,451 lakh during the six months ended September 30, 2019. Further, the ratios after excluding expenses as per
Employees Stock Purchase Plan would be: Debt Service Coverage ratio would be 4.43 and Interest Service Coverage ratio would be 12.89.

Can anyone please explain What really happened last quarter . 154 crores spent for employee stock purchase , the numbers seems huge for a company of this size.

non cash charge…overall over 3 yrs would amount to around 4% dilution…mgmt super bullish on outlook and feels to reward senior guys (ex-promoter) accordingly…read last transcript on their website…number is high but not if they execute what they expect

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Q3 2020 Results Presentation

http://www.aegisindia.com/Admin/Documents/Events_Pdf10405.pdf

Disclosure - Invested

Charts also showing breakout with high volumes

Disclosure: Invested

Following is the summary of phone conversation I have had with our own oil & gas expert @desaidhwanil

Q - Why is Aegis a niche business?
A - The cost of putting new plants keeps going up. To put up a same plant compared to some other 5-6 year old plant might cost 2-3-4x. However, your end customers (HPCL, BPCL, IOC) will not pay the differential amount. Hence once you have the infrastructure at strategic locations and have customers, it is very difficult to get replaced.

Q - It seems like incremental return on capital might be low. How does one expand in such situations?
A - The best way is to strategically create infrastructure in newer locations or ports where pipelines are going to come in. If you are early mover, as explained above, it becomes pretty difficult to be replaced.
There are 4 major gas pipelines that are coming online in the medium term.

  1. Kandla - Gorakhpur, 2800 kms, planned completion of 2024-25, largest pipline in the world
  2. Uran - Chakan - Shikrapur, 168 kms, completed
  3. Paradip - Haldia - Durgapur, most probably completed
  4. Kochi - Coimbatore - Salem, work in progress

It looks like, Aegis will be able to supply to all of the above pipelines because they have infrastructure (present or coming up) in all of the above places.

Q - The customers of Aegis are OMCs - HPCL, BPCL, IOC. Lack of interest from them in third party terminals or distribution can break the company. Why will the not use captive infrastructure instead of going to third party? Further, there are bigger players (e.g. a big player in ports) which can get into this business. How do you look at these risks?
A - Yes, it is true that lack of interest from OMCs can break the company and we should try to observe relationship of Aegis with these players. But LPG is sort of non-core activity for OMCs. LPG capacity is usually 1-4% of oil refining capacity, so petroleum remains a much larger business and focus area for them. If Aegis has good track record and does not overcharge (OMCs pay 2.5% of LPG revenue to Aegis), they will continue to use this infrastructure.
Further, larger infrastructure players might be focused on petroleum/oil as that is the main fuel in India. Also, incremental cost of putting up new infrastructure is far more as explained above and hence competing at existing locations does not make sense. Yes, it is true that - at newer locations, Aegis might not have any advantage. So that is one of the major thing to look for - strategically choosing newer locations and early and buying land, putting up infrastructure. Also, setting up LPG handling infrastructure is not that simple for a new player to come in so easily. If Aegis becomes large enough, for larger infrastructure players, it might make more sense to do acquisition.

Q - How do you see current low/high crude prices impacting the business? How about changes in the LPG prices impacting the business?
A - Sourcing business might be impacted the most by low crude prices. As I understand, Aegis has JV with Itochou for sourcing business and latter is a large player in sourcing. As management claimed in one conf call, they are one of the most efficient players in the sourcing.
Large part of LPG demand comes comes from households and this demand is rather inelastic. The commercial component might get impacted when LPG prices go up compared to competing fuel. But LPG prices going up has to be a structural change and not one/two quarter change for commercial entities to make that decision. Most commercial infrastructure (furnaces etc.) are built for a sepcific fuel from a long term perspective and switching does not happen so easily.

One of the moniterable brought out by @desaidhwanil bhai was, what happens to long term contracts if BPCL was to be really privatized? How would new owner of BPCL look at third party infrastructures?

@desaidhwanil bhai, please add if I missed anything.

Disc - I have small position in Aegis < 5%. I have bought shares in last 60 days. This is not a buy/sell recommendation. I am not a SEBI registered advisor.

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