Aegis Logistics: Buy

Investment with a two-three year perspective can be considered in the stock of Aegis Logistics, a leading player in oil and gas logistics. Established in the business of handling, storage and distribution of oil, chemicals and petroleum products, Aegis appears well-placed to benefit from the expanding business opportunities in the oil and gas space. Its presence in autogas retail also holds promise, given the rising oil price scenario.

An expansion in the liquid logistics capacity, a strong presence in Mumbai and the company’s foray into service contracts with oil marketing companies suggest potential for ramping up revenues. At the current market price of Rs 228, the stock trades at a PE of about 12 times its trailing 12-month earnings. Investors, however, can buy the stock in lots given the broad market volatility.
Liquid logistics

Aegisprovides supply chain services to importers and exporters of petroleum products and chemicals. With a strong presence in Mumbai and plans to expand base across other ports, Aegis could gain considerably from the increasing demand for liquid logistics. Its three-pronged strategy of expanding across both existing and new capacity appears promising.

One, Aegis’ plan to strengthen presence in Mumbai (with the acquisition of new facilities) holds potential given the port’s location. Two, expansion to other locations is likely to help Aegis establish a pan-India presence. Notably, Aegis has acquired land in Haldia and Mangalore for setting up facilities in future and plans to extend its presence to Chennai and Kandla also. Besides, the company’s Kochi facility (slated to commence operations by March 2008) also holds potential. Three, its foray into service contracts with oil marketing companies such as Mangalore Refinery and Petrochemicals and Bharat Petroleum Corporation, although insignificant in terms of revenue contribution now, could turn significant in five-six years.
Autogas foray to drive growth

The gas-trading segment of Aegis, which involves import and distribution of liquefied petroleum gas (LPG) from Saudi Arabia appears to offer good potential given the firming oil-price scenario. Further, the favourable cost economics of autogas over petrol and the increasing availability of LPG variants of cars in the market offer opportunities, given Aegis’ presence in autogas retailing. Notably, it intends to scale up the number of autogas dispensing stations from the current 22 to over a 100 in the next two years.

This expansion with a focus on Tier- II cities will be predominantly franchise-based, thus helping the company expand presence without significant incremental investment. Further, gas storage capacity could also expand with the acquisition of Hindustan Aegis LPG unit, pending court approval (expected by March 2008).

For the quarter ended September 2007, Aegis reported a 62 per cent growth in earnings on the back of a 43 per cent growth in revenues. Operating profit margins dipped marginally to about 13 per cent. On a segmental basis, the gas terminal division contributed to about 85 per cent of revenues while the liquid terminal division made up for the rest. However, the latter, owing to higher operating margins, contributed about 54 per cent of the bottomline.
Concerns

Aegis’ earnings stand exposed to any volatility in gas prices. Any fade out in the market appeal for LPG could pose a risk to the company’s revenue stream. Further, given the high gestation period of its expansion plans, the full benefits of expanded capacity (Mangalore and Haldia) are likely by FY-11 only. Besides, any delay in expansion plans could affect the company.