AEGIS LOGISTICS

AEGIS LOGISTICS

The Rs 244-crore Aegis Logistics provides services including port handling and storage of oil, chemicals and petroleum products. Recently, it has increased its focus on auto gas retailing. Given its thrust on organic as well as inorganic expansion, investors can add the company to their portfolio with a horizon of two years.

Business : The company has two business segments — liquid logistics and gas divisions. The latter is a major contributor to Aegis Logistics’ topline — its contribution has increased from around 60% in FY02 to 80% in FY07. The company has its own terminals at ports in Mumbai and Kochi. It recently acquired land at Haldia port and expects the terminal to be operational by FY11. Under the gas division, Aegis provides logistics services to industrial consumers.

The company distributes industrial gases; the consumption of such gases has been increasing at a steady rate of 12-14% per annum. Aegis enjoys the benefit of having a storage capacity for gas at its terminal in Mumbai. Further, it follows the dealer owned dealer operated (DODO) franchise models for auto gas retailing. So, it has not incurred any major capital expenditure following its entry into the auto gas segment.

Growth Drivers : Imports and exports (combined) of crude and petroleum products have increased at a compound annual growth rate (CAGR) of 11% from FY02 to FY07. This is the primary growth driver for Aegis, which provides logistics services for such products. Moreover, the government provides subsidy to petroleum and petroleum products in India. As a result, there was no slowdown in Aegis’ liquid logistics business even when international crude oil prices were ruling at historically high levels. Further, public sector units can pass on the increase in gas prices to consumers.

This makes it easier for Aegis to pass on the price hikes to final consumers in auto gas retailing. The acquisition of Hindustan Aegis will increase the company’s gas capacity from 2,00,000 metric tonnes (mt) to 4,50,000 mt and the resulting increase will come in handy for its auto gas retailing business. As part of its auto gas initiative, the company is targeting mid-sized towns having vehicle population of 10,000-15,000.

It expects that cheaper gas will make people shift from petrol and diesel to gas in the near future. The company plans to commission 35-40 stations by March ’08 and 100 stations by March ’09. The potential in auto gas retailing can be gauged from the fact that out of 70 lakh vehicles in India, only 2 lakh vehicles are gas-based.

Financials : Aegis Logistics’ net sales and net profit have witnessed a CAGR of 25.9% and 21.7%, respectively, in the past three years. Its net sales grew by 48% for the nine months ended December ’07, compared to the corresponding period last year. The company plans to expand its liquid logistics division either by acquiring interest in other companies or by foraying into greenfield projects. The company’s debt-equity ratio on a standalone basis stands at 0.2, and on a consolidated basis at 0.6, which shows there is a lot of room for expansion.

Valuations : Aegis Logistics’ stock is trading at a P/E of 12. The estimated EPS for FY09 and FY10 are Rs 24.9 and Rs 47, respectively, which translate into forward P/E multiples of 10.1x and 5.3x, respectively. The company doesn’t have any peers in the strict sense. It is expected to witness a sharp growth in sales in the next two financial years. Its sales are expected to increase by 33.3% in FY09. As revenues from auto gas retailing start accruing from next year onwards, the company’s sales are likely to grow faster at 70% in FY10. Investors can consider the stock at current levels of Rs 250.25 with at least a two-year horizon.