Aegis Logistics

Investors can consider buying the stock of Aegis Logistics, which offers a unique exposure to the growing business of liquid logistics and auto gas retailing.

The company appears well placed to capitalise on these opportunities, given its established business presence and well-timed expansion strategies; it proposes to ramp up its autogas retail presence and liquid logistics capacity significantly.

Strong fundamentals notwithstanding, the recent market sell-off has seen the stock price fall considerably, rendering its valuations attractive.

At the current market price of Rs 210, the stock is available at about eight times its likely FY-09 per share earnings. This offers a good entry point into the stock for long-term investors.

Business


Aegis Logistics has a presence across two business segments — liquid logistics and gas. The liquid logistics segment provides supply chain services to importers and exporters of petroleum products and chemicals.

The gas division, on the other hand, imports, markets and distributes bulk propane and liquefied petroleum gas (LPG) to a variety of industrial customers and sells autogas through retail outlets.

While Aegis’ liquid logistics division may benefit considerably from the increased need for oil and gas logistics solutions, its autogas retailing business may attain critical mass sooner than expected.

Any hike in domestic petrol price in the future may only hasten the penetration of autogas usage given its favourable cost economics.

Capacity expansion


The company has embarked on an expansion drive to augment its presence in both segments. Its Mumbai operations added capacity of over 75,000 kl to its existing 162,000 kl after it acquired Sealord Containers in September 2007.

Further capacity will be added when Aegis’ third Mumbai terminal becomes operational (expected to commence operations by FY-10). Besides this, Aegis has a presence in Kochi. Currently, the company is looking at expanding presence across cities.

It has acquired land in Haldia and Mangalore and plans to set up facilities there (likely to become operational by FY-11). An expansion of Aegis’ geographical footprint will help it improve the scope of its existing operations.

Aegis also proposes to aggressively ramp up its autogas retailing presence. From over 27 outlets in December 2007, the company plans to increase the number to 100 by FY-09. The management seeks to achieve this using a predominantly franchise-based model.

The autogas dealers, under the franchise model, will be provided with a fixed margin and will be able to sell gas at the same price as oil marketing companies.

This way, Aegis would be able to accelerate its network expansion even as it limits additional capital expenditure. The franchise model may not require Aegis to provide for significant incremental investments.

Aegis recently acquired Hindustan Aegis LPG (HALPG), which owns two refrigerated gas tanks of 20,000 tonnes capacities each. It has issued 36 lakh new shares to the shareholders of HALPG and will assume a debt of about Rs 30 crore. With this acquisition, the company appears to have circumvented its gas storage capacity constraints, which could have limited its expansion plans for the autogas retailing segment.

Results


For the quarter ended December 2007, helped by the addition of capacities, Aegis reported a 73 per cent increase in earnings on the back of a 40 per cent growth in revenues. This was driven by a 1.7 percentage point expansion in operating margins to about 14.2 per cent.

However, since the company’s revenue model is volume-driven and may not be able to sustain any price hikes, margins may not see any drastic improvement.

Considerable growth in volumes handled, however, may offset this. In terms of risk, delays in the rollout of expansion plans and waning of demand for LPG may affect the company’s earnings negatively.