Nice summary thread on this business.
Posting India’s quarterly LPG import numbers from now on, instead of monthly. The idea is to look at the broader trend and match the narrative of increasing LPG imports with the actual numbers.
| Apr-Jun '22 (MT) | Apr-Jun '21 (MT) | YOY change |
|---|---|---|
| 4246 | 3495 | 21.4% |
The source of the 2022 data is here and the historical data is here
The above numbers are not exactly comparable as Apr-Jun 2021 was the peak of Covid 2nd wave in India and the growth numbers may look inflated. However, even if we look at 2019 or 2020 numbers, there has been a growth in LPG imports. The “Apr - Jun '19” imports were 3258 MT and the “Apr - Jun '20” imports were 4063 MT.
India’s quarterly LPG import numbers for Q2 below:
| July - Sep '22 (MT) | July - Sep '21 (MT) | YOY change | Apr - Jun '22 (MT) | QoQ change |
|---|---|---|---|---|
| 4463 | 4687 | -4.7% | 4246 | 5.1% |
So, a 4.7% drop on a YoY basis but 5.1 % increase QoQ.
In Q1, FY23, Aegis did 637 MT of gas volumes (slide 5 of investor presentation). With India’s total import volumes at 4246 MT in Q1, that implies 15% market share.
Aegis has been hovering around the 15% market share for a while now. It will be interesting to see how that number moves with VLGC compliant jettys coming in at Pipavav and Kandla terminals getting operational.
There are two threads on Aegis, realised it today. Not sure, but will add updates on this thread. Some immediate term good news is that Aegis might get boost in gas distribution volumes due to probable pice differential increase between LPG and Natural gas.
Two news - Govt cuts agri cess (15%) on LPG and Gujarat Gas hikes natural gas rates by ~6%. this might benefit Aegis gas distribution volumes.
Aegis Logistics
ALL is present in 2 segments, Liquids and Gas. In liquid division, ALL provides import, export, storage, and logistics services, as well as all types of chemicals, petroleum, oil, lubricant (POL) products and vegetable oils. In gas division, ALL captures the complete logistics value chain starting from sourcing, terminaling to distribution of LPG. The consolidated LPG static storage capacity is 115,000 MT & total liquid storage capacity of 1,603,000 KL, to import/export LPG, chemicals and petrochemicals, across Mumbai, Haldia, Kochi, Pipavav, Kandla, and Mangalore
| Date of report: | 01-07-2024 | Competitor PE | 53.5 | Sector | O&G (Mid and Downstream) |
|---|---|---|---|---|---|
| CMP: | 859 | Current PE | 50 | No of Years | 68 |
| Market Cap: | 28312 | Highest PE | 53.5 | Key Products | Gas and liquid fuels’ logistics and trading |
| ROCE / ROE | 15% / 15% | Lowest PE | 3.5 (2013) | Key Competitor | Confidence Petroleum, GSPL, Petronet LNG, IMC, Petregaz, Kiran Group |
Business Model and Industry Analysis
Overview:
Aegis primarily operates in 2 segments, viz. Liquids and Gas.
Liquids Terminals - 3rd Party liquid logistics provider for oil and hazardous chemicals serving oil marketing co, refineries and other MNCs. In Liquids, contracts are usually 1 year - fixed price Take-or-Pay, providing revenue visibility for the capacities. Some spot contracts and sales do happen though. Nature of liquids store largely govern revenue (Vegetable oils are lowest revenue, whereas acids/hazardous chems might pay 8-10x more than vegetable oils). Liquids contribute to 5% of the revenue and ~33% of EBITDA
Gas Terminals - 3rd Party Gas logistics providing storage and terminal solutions for LPG, Propane and other gases. This division, along with other gas business contributes to 95% of the revenue & ~67% of EBITDA
Other Gas business - Gas sourcing and trading (60% JV with Itochu), LPG distribution (Home, Commercial, Industrial, Auto LPG)
Other business – Supplying Bunker (Marine) fuels (Negligible contribution to revenue/EBITDA
Aegis has also started constructing Ammonia terminal of ~36,000 MT at Pipavav catering import/export. EBITDA potential for the plant is ~120 Cr at max asset turn (3x). Growing demand from chemical sector is expected to further increase demand for Ammonia handling capacity. Currently, all major chemical and fertilizer plants have their own storage facilities
Industry Growth:
Aegis is planning to play on transition to cleaner fuels (Primarily LPG and CNG/PNG. Aegis plays in LPG). Currently, 17% of India’s energy needs is catered by biomass. Bulk of the industrial fuels used are dirty fuels (45% being coal). Government’s policy push towards a more gas-based economy is also expected to play a large part. The largest benefit of LPG over CNG is portability, where LPG can be transported by pipeline, rail, road etc, natural gas can be transported only by pipelines, limiting its reach.
Currently, domestic LPG demand is ~31 MnT, of which ~67% is being imported (Till 5 years ago, domestic production exceeded imports). This is further expected to grow at ~6-7% pa. LPG is also used in production of fertilizers, apart from its use as fuel
The consumption of chemicals in India is expected to rise by 9-10% annually over the next few years
Capacity Utilisation:
Gas terminals are currently being utilized at ~50%, whereas liquids are being utilized at ~87%. Further capacity utilization is expected in gas business
Opportunities:
Growing chemicals and fertilizers sector, government’s push towards gas economy, LPG’s inherent benefit in terms of cost and portability over CNG as well as government’s policy push towards cleaner fuel all are big tailwinds for Aegis. The group has demonstrated execution capabilities in the past as well and has made their JV with Itochu work. Same can be expected with Vopak JV, where bulk of the business is being housed and all future growth is expected
Risk:
- Policy risk – Strong policy support for LPG and clean fuels have driven gas segment’s growth. Also, liquid division is dependent on policies regarding ports and infrastructure, chemicals business as well as trade agreements. Should the push turn towards NG instead of LPG, it can hurt Aegis. However, Aegis is entering gases other than LPG (Ammonia to begin with) and LPG has some inherent operational and cost benefit over CNG
- Higher calorific value - 12500 kcal/scm against 10,000 kcal/scm of NG
- Easy storage requirements - Natural gas requiring -160°C and 200-bar pressure
- Portability – Can be transported over road/rail/pipeline against NG (Only Pipeline)
- Cost – LPG is ~6-7% cheaper than CNG
- Geopolitical risk – Geopolitical issues impacting O&G, chemicals trade will impact the terminals business in a significant way. The Liquids division is generating ~33% of the EBITDA and bulk of its revenue comes from ~1-year fixed price take-or-pay contracts, so part of this risk is mitigated.
- Exchange rate risk – Company has managed to keep its foreign exchange losses to a minimum. Bulk of the foreign exchange risk comes from the gas sourcing business, where the company has managed to enter back-to-back contracts with common pricing terms, forex rate, and credit period terms. Further, balance open exposure is hedged using derivatives
- Business Model Risk – Company faces threat from following areas -
- PSU refineries are also building LPG and liquids storage terminals. They are key customers of Aegis
- CGD penetration pushed by PNGRB can lead to increased use of PNG over LPG
Future Expansion:
Aegis usually incurred 200-300 Cr capex/year till now. Post merger with Vopak, JV plans to incur 500-600 Cr/year over the next 5-6 years to execute “Chain of Pearls” strategy of terminals across India’s coast
Currently, it is undergoing expansion at Kandla (Lq), Mangalore (Lq), Kochi (Lq), Pipavav (LPG). It is also constructing new LPG facility at Mangalore (85,000 MT) and new Liquids facility at JNPT (110,000 KL)
Post expansion, total liquids facility is expected to be ~2.3 Mn KL by FY25 and Gas facility to be 245,000 MT
Competion:
Currently, Aegis is the dominant player in liquids and gas handling business. Although, it faces significant competition in LPG distribution business from OMCs. Further, OMCs are also building their own liquid and gas handling capacities at the port
Management:
- Management is clear and genuine on communication. Further, their acquisitions are all on point, and fit well in overall story. Capex are done with IRR target of 25%
- Positives: Salary in line with profits (<5%), no anti-minority shareholder decisions, RPT (No significant RPT), resignations, family and succession planning, excessive salaries and other extravagant spends, civil/criminal cases, fraud/scam involvement, royalty/brand fees/other means to defraud minority holders, complex business models, unnecessarily complex/flowery language in communications, consistent dividend payment
- Concerning Points – Lack of clarity on debt reduction plan. Company has long runway to invest additional capital at ~20-25% IRR, however debt reduction plans are not mentioned in communication as such
Institutional Investor:
FII and DII continue to hold 23% (17% in Jun’21)
Historical Data and Financials
Profit N Loss Account:
* Sales have historically grown at **7%** over last 10 years and at **22%** over the last 3 years
* Margins have expanded from 4% in FY15 to ~13% in FY24
* Earnings have historically grown at **21%** over last 10 years and at **37%** over the last 3 years
* Ammonia terminal and added capacities are expected to grow EPS by 25% over coming 2-3 years
Balance Sheet:
* AVTL has taken on debt to fund the purchase of assets from ALL. Historically, the company has managed to keep debt well within the limits. Interest coverage ratio is at 8. Similar increase in cash balance can also be seen, and net debt/equity is at ~0.2
* Receivables have fallen from 19% 3 years ago to 6% in FY24
Cash Flow:
CFO/PAT good (124%) over long term
Valuation and future potential:
| Particular | Current | 52W High | 52W Low | Historical High | Historical Low | Industry Median |
|---|---|---|---|---|---|---|
| Price | 807 | 888 (06/2024) | 106 (5/2023) | 888 (06/2024) | 2.8 (2009) | - |
| PE Ratio | 50 | 51 | 19.5 | 96 | 3 | - |
| EPS | 16.2 | 16.2 | 16.2 | 16.2 | - | - |
| Price/Book | 7.3 | 7.4 | 2.8 | 14.1 | 0.7 | - |
| EV/EBITDA | 26.2 | 26.6 | 10.7 | 41.2 | 1 | - |
| ROCE | 15% | - | - | - | - | - |
No direct competitor listed (GSPL, Gujarat Gas, Confidence, Petronet etc are competing in few segments)
Valuation:
- Company is growing revenue (22% CAGR over last 3 years) and profits (37% CAGR over last 3 years) at good rate, however, it is valued at a PE of ~50, with no growth/re-rating scope left
- Risk for this band being company might revert to mean-valuation of ~25-30 (Last 3 years) which presents a downside of ~40-45% (Considering increase in EPS as well)
Future Potential:
- Company is expected to grow and hit ~10,000 Cr revenue by FY26 with maintained OPM margins
- At current valuation, there is no scope for re-rating. For me personally, having entered at ~400 in early Feb, that provides some margin of safety
Soft factors for consideration:
- Company has good management and has executed capex well in past
- Long runway for additional capital investments with high IRR (~25% is management’s usual target)
- Company has prudently used inorganic acquisitions & JVs to grow, partnering with the big names in respective industries
Disclaimer: This is a study report prepared to track a personal position, not for any decision making or investment advisory.
Made by: Yash Chandak (72193 98497)
Date:1st July 2024