Aegis recommended a STRONG BUY by tyndale


									Romil Singla                                                                                14 Apr 2008

 AEGIS LOGISTICS LIMITED                                                      CMP 207| BUY

 Market Cap           411 Cr                                    •   Only listed player in liquid
 BSE                  500003
                                                                    and gas logistics.
 NSE                  AEGISCHEM
 52 wk high           403
 52 wk low            115                                       •   On its way to become
                                                                    national level player in
Shareholding Pattern
As on 31/3/2008
                                                                •   Huge untapped opportunity
                                                                    in auto LPG retailing.
                                                                •   Aggressive expansion plans

       Institutions          Promoters,
                                                                •   Compelling valuations.
         , 4.98%

Business Overview
Aegis Logistics is engaged in the business of handling of liquid petroleum products/chemicals and
gas storage/distribution.

Liquid Logistics:- Plans to become a national player
The company owns and operates one of India’s largest private sector liquid terminal located on a
20-acre plot at Mahul,Trombey. The terminal can handle all products, classified under the
petroleum act as Class A, B and C and can also handle variety of specialty chemicals. It is
connected to three jetties of Mumbai Port- Old Pir Pau Jetty, New Pir Pau Jetty And Butcher
Island (Jawahar Dweep). The total storage capacity of the terminal is 165000 KL.

The company manages the entire integrated supply chain of petroleum and chemical
companies. Most of the big oil and chemical companies such as IOC, Bharat Petroleum,
Hindustan Petroleum, Reliance and Supreme Petrochemicals are their clients. The main products
handled by company are Naptha, Diesel, Caustic Soda, Motor Spirit and EDC etc.

Strategic location of Mumbai facility

The company is the largest private sector port terminal operator in the Mumbai port in terms of
capacity as well as volume of traffic handled. The terminal is strategically located in an area
surrounded by two of the largest refineries (HPCL & BPCL). The terminal has long distance
(25km to 70km) pipeline evacuation and receiving facilities to/from actual consumers. The
terminal is one of the only terminal directly connected to the clients (BPCL, HPCL refineries)
thorough dedicated pipelines, which insulates it from any competition. Recent CAPEX in
BPCL, HPCL refineries would lead to increased demand of company’s facilties. To meet this
demand, the company has been increasing its capacity by about 50% by acquiring majority stake
(75% stake) in Sealord Containers, which owns liquid terminal at 17 acres of land at Mumbai.

On the way to become a national player

In FY07 the company acquired a controlling stake (75%) in Adani group’s Sealord Containers
Limited located at Trombay with a storage capacity of 75,000 KL. In FY07 it also acquired Konkan
Storage Private Limited, Kochi (storage capacity of 51000 KL) making it a 100% subsidiary of the
company. With the commencement of operations at these two sites, the liquid volumes are
expected to go up higher in coming years.

The company is setting up a third terminal in Mumbai (56,000 KL) which is slated to commence
operations by FY10. It is acquiring land at Haldia and Mangalore ports which are likely to
operational by FY11. It is also eyeing the other port sites such as Chennai, JNPT, Vizag and
Kandla. So it is on way to build a national network of liquid terminals.

Gas Division:- Auto LPG Future growth driver
Aegis imports, markets and distributes bulk propane and LPG to a variety of industrial customers
in the western region and is one of the largest private sector suppliers in India. It operates a
20,000 MT fully refrigerated LPG terminal. The terminal is connected to Pir Pau Jetty. The
terminal is owned by Hindustan Aegis LPG, a joint venture between the promoters of Aegis
Logistics, Vitol and others.

There are two type of models in the gas business.
1. Direct Marketing:- Storage of gas and then direct marketing of gas to industrial and retail users.
2. Through-put charges:- Under this model, the company charges from third parties for usage of
its facilities.

In the direct marketing model, the company has been storing and markets the gas to variety of
industrial users. However the margins in industrial segment has been low given the huge illegal
diversion of subsidized domestic LPG to industrial segment. Couple of years back the company
started marketing of LPG to retail users through auto LPG stations. The company views this
business as a huge business opportunity. Auto LPG retailing is presently at the take-off stage
with vehicles being increasingly converted into gas-based vehicles. The profit margins in this
segment are very lucrative as compared to industrial segment.

Auto LPG:- Big profitable opportunity

The company has huge ambitions in the auto LPG retailing segment. However in order to keep
the capital intensity on the lower side, the company plans to set up around 90% of the stations
under the dealer owned dealer operated (DODO) model, with only 10% under the company
owned dealer operated (CODO) model. In the DODO model, each dealer will build and operate
the LPG Dispensing station under the “Aegis Autogas” brand name with the company (Aegis)
holding the operating licence in its own name. However, the company would also extend other
ancillary activities like marketing and brand building, in order to augment the sales. In the DODO
model, the dealer gets a fixed margin of around 5% from the company.

Currently 27 Auto LPG stations are under operation. The company is targeting 100 such stations
to be operational by end of FY09 and 150 stations by FY10. The 101 DODO agreements have
already been signed. However the bureaucratic delays may slow down the planned expansion of
auto LPG stations.

Amalgamation of Hindustan Aegis LPG Bottling Company

Till now the company has been using the LPG facilities of Hindustan Aegis LPG for its gas
division. The company used to pay tankage charges to Hindustan Aegis LPG for usage of their
facilities. Hindustan Aegis LPG is a joint venture between the promoters of Aegis, Vitol SA and

Given the huge growth expected in volumes of gas division, the company has entered into a
scheme of arrangement for the takeover of Hindustan Aegis LPG, by issuing of 3.6 million equity
shares to the shareholders of Hindustan Aegis LPG and also taking Rs 30.64 crores of the debt
on its books.

After the merger, Vitol SA has become a strategic investor (with 4.18% stake) in the company.
Vitol SA is an oil marketing firm with worldwide coverage, whose experience in the industry will
help the company in its future plans.

Other developments

It has recently forayed into third party O&M service contracts with oil marketing companies such
as Mangalore refinery and petrochemicals and Bharat Petroleum Corporation. Though currently
not much in terms of revenue contribution, this segment can turn significant in next few years.

It has incorporated new overseas subsidiary in Singapore to pursue business opportunities
outside India in the Port Infrastructure and to assist in procurement of petroleum products.

Aegis is also exploring the possibility of expanding its business into propylene gas storage and
logistics. If it sets up a propylene tank, it will be India's first propylene storage facility.

External Opportunity
India at present spends nearly 13% of its GDP on logistics which is far higher than the other
countries. The biggest hurdles in achieving logistics efficiency at par with global level are
infrastructure (e.g. roads, ports, etc) related bottlenecks. The logistics industry can reach same
efficiency as seen in the other countries if infrastructure issues problems are settled. The
government thrust on infrastructure and implementation of VAT is generally positive for
overall logistics industry in India.

With the economy growing at a fast pace, there has been a significant increase in the volumes of
imports and exports of bulk liquid chemicals, oil and petroleum products in India. The liquid
sector, which is presently constrained by capacity and certain entry barriers, is expected to grow
at 20%.

Moreover in India, a chemical company has to deal with half a dozen different service providers,
e.g. Shipping Agent, Surveyor, CHA Agent, Octroi Agent, Port based bulk liquid terminal operator
and transporters to manage its supply chain. In Europe, North America and Far East, bulk liquid
logistics companies such as Vopak Logistics (the world’s largest liquid/chemical logistics
company) provide total logistics service. Many of the chemicals handled are hazardous and toxic
and if not handled, stored or transported in a right way, can pose substantial hazard. This
provides huge untapped opportunity to integrated logistics players like Aegis.

Auto LPG Retailing

With approximately one million vehicles presently running on LPG in India, the auto LPG
consumption in India is very small (around 1.7%) as compared to the world average of around
8.3%. With more and more automotive OEMs increasingly launching LPG variants of their
vehicles, the demand for auto LPG is going to boom in coming years.

Operational Performance

                Revenues (FY07)                                            PBIT (FY07)



The gas division contributes the major portion of the overall revenues, where as the liquid division
contributes the major portion of the PBIT. This is because the margins in liquid division are very
high as compared to the gas division. Liquid division contributed 20.3% of overall topline in FY07
where as it contributed 72.8% to the overall PBIT.

Liquid Logistics

The company handles the complete supply chain for import/export of the liquid petroleum and
specialty chemicals. The company does not undertake any direct marketing of liquid petroleum
and chemicals. The margins in this business are pretty high (PBIT margins in range of 50-60%).
Overall the last couple of years, the revenues of this division has been stable at about Rs 45-50
crore annual contribution.

The company is expanding this division by putting in the facilties at multiple port sites and also
expanding the current facility at Mumbai port. The company expects to have an operational
capacity of 350000 KL at four different sites in FY10 as compared to 165000 KL in FY07. This
division is expected to grow significantly in next couple of years.

Gas Division

In Gas division the company also undertakes the direct marketing of LPG to industrial and retail
users. In Gas marketing as the company first imports the LPG and then sells into domestic
market and hence in case of increasing prices the profit rises sharply and in case of decreasing
prices, the profit margins dips substantially.

However with the increasing contribution from auto LPG segment (which has higher margins than
industrial segment), the margins in gas division are likely to pick up. Over the last couple of years
the gas division has been the volume driver of the company (62% revenue contribution in FY05 to
79.80% in FY07). With expected roll out of auto LPG stations in the future, the volume growth of
this segment is expected to remain strong.

Recent Quarterly Results

             100                                                                  7
              90                                                                  6
              70                                                                  5
              60                                                                  4
              40                                                                  3
              30                                                                  2
              10                                                                  1
               0                                                                  0
                                                                                      Revenues      Quarterly Results







                                                                                      EPS        (Standalone, in Rs Cr.)

    •   Great opportunity in logistics space:- In India currently the amount of logistics
        outsourcing is very low as compared to other countries and this represents the
        tremendous opportunity for companies like Aegis Logistics. To grab the opportunity, it is
        becoming a national player by creating chemical and gas terminal infrastructure in a
        phased manner.
    •   Entry barriers in the business:- In Liquid/Gas logistics, many of the chemicals handled
        are hazardous and toxic and if not handled, stored or transported in a right way, can pose
        substantial hazard. This presents significant entry barriers for a new player entering the
    •   Low client risk:- The company has impressive list of customers such as BPCL, HPCL,
        HLL, Tata Power, IOC, Reliance, IPCL and Deepak Fertilizers etc. The company is
        directly connected to its major clients through dedicated pipelines which mitigates the risk
        of new competition. Moreover, no single customer accounts for more than 10% of total
    •   Auto LPG at tipping point:- Auto LPG is presently at the take-off stage with LPG based
        variants of new vehicles being launched and older vehicles being increasingly converted
        into gas-based vehicles. The company is now aggressively looking at this segment and
        recent takeover of Hindustan Aegis LPG indicates that the huge ambitions that the
        company has in the auto LPG space.

The company is expected to post strong growth in coming years. In addition to strong earnings
growth, the following characteristics of the scrip can lead to further upside in the stock prices.

        •   Only listed player in the liquid/gas logistics space:- In a growing economy, the
            logistics sector is a direct proxy to the economic growth. Aegis is the only listed
            player in the liquid/gas logistics space. Other players in this sector such as Indian
            Molasses, Indian Oil Tanking are not listed. Thus it provides unique opportunity for
            exposure to Indian liquid/gas logistics space.

        •   Low institution holding:- Currently the financial institutions holds a very small stake
            (4.98%) in the company. As the company attains size by expanding its logistics
            terminal infrastructure and auto LPG division, it can lead to significant interest from
            the institutions which can lead to substantial re-rating of the stock.

        •   Vitol SA as strategic investor:- After the merger of Hindustan Aegis LPG with the
            company, Vitol SA has become a strategic investor (with 4.18% stake) in the
            company. Vitol SA is an oil marketing firm with worldwide coverage, whose
            experience in the industry will help the company in its future plans. Though currently
            Vitol has not indicated any intentions to increase stake in the company, but in the
            long run the stake increase by Vitol in the company can not be ruled out.

    •   The company plans to set up liquid/gas terminals at multiple port sites. The performance
        of the stock will be linked to the execution of these plans by the management.

    •   In storage terminal business, the competition from any new facilities at nearby ports may
        lead to shrinkage of margins. However as its terminals are directly connected to its key
        clients, hence it is relatively insulated from competition.

    •   Currently the operations of the company are mainly concentrated around Mumbai port.
        Most of its revenues comes from two Pir Pau jetties. Though new chemical berth at
        Mumbai port (expected to be open in 2009) and company’s diversification to other port
        sites will alleviate this concern, but still any negative development with respect to its
        operations at Mumbai port can severely impact the overall business.

    •   In Gas marketing as the company first imports and then sells into domestic market
        (import gas for one month and sell it the next month) and hence in case of increasing
        prices, the profits may rise sharply and vice-versa. This may lead to some lumpiness in
        the quarterly earnings of gas division. However over the long term, the gas division
        should post good earnings growth given the changing mix in favor of auto LPG.

The company is expected to post strong earnings growth in coming years. The company expects
the revenues to grow from Rs 240 crores in FY07 to 825-850 crores in FY10 (CAGR 50-52%).
Though any delay in implementation of planned expansions may slow down the expected growth,
the company still looks set for good growth in the coming years.

The company is expected to post an EPS of around 22 in FY08. The stock is currently trading at
less than 9.5 times its trailing earnings. Though it is difficult to pin down the exact numbers for
FY09 and FY10 (since the business can be analyzed only over a period of time and it is virtually
impossible to predict the next quarter and next year earnings with accurate precision), it can
easily post approximate EPS of Rs 30-35 in FY10, which makes it available at less than 6-7
times FY10 earnings. With the expected strong growth in next couple of years and unique
nature of the business, the stock can give significant upside in coming years.

The currently low level of outsourcing in liquid/chemical logistics represents tremendous
opportunity for Aegis Logistics. The company is planning to become a national player by creating
liquid and gas terminals across major ports in the country. The management has been quiet
prudent in its expansion plans and has been mainly funding it through internal accruals and
marginal debt. The management is also expanding its auto LPG retailing business mainly under

franchisee model to contain the capital intensity, which mitigates the risk of any aggressive equity

With the strong growth expected in coming years combined with low institutional holding and
compelling valuations the stock provides the potential for windfall gains from current levels. A
STRONG BUY is recommended at current levels with time horizon of next couple of years over
which it can turn out to be potential multibagger from current levels.


PROFIT AND LOSS ACCOUNT (Standalone)                          (All figures in Rs Lacs)

                                                      FY07      FY06             FY05
Net Sales                                             24035    15450            12054
Other Income                                            339      438               134
Gross Income                                          24374    15888            12188
Increase/Decrease in Stock                              201     -253                26
Consumption of Raw Materials                          16719     8707             5976
Staff Cost                                              843      729               558
Total Expenditure (Excluding Other Expenditure)       17763     9183             6560
Other Expenditure                                      3282     2684             2496
Total Expenditure                                     21045    11867             9056
Interest                                                172      261               816
Profit(+)/Loss(-) Before Depreciation & Taxes          3157     3760             2316
Depreciation                                            381      373               467
Profit(+)/Loss(-)Before Tax                            2776     3387             1849
Add : Extraordinary Items                                 0      196               157
Net Profit before Tax                                  2776     3583             2006
Provision for Taxation                                  416      563               698
Other Provisions                                          0         0                0
Misc Expd.w/o                                             0         0                0
Net Profit(+)/Loss(-)                                  2360     3020             1308
Face Value of Share (in Rs.)                             10        10               10
Paid-up Equity Share Capital                           1631     1631             1629
Dividend (%)                                             25        25               12
EPS (in Rs.)                                          14.44    18.31              8.02

Segment Wise Performance

                                                      FY07     FY06              FY05
Liquid Terminal Division                              4878      5280             4597
Gas Terminal Division                                 19157    10170             7457
Others                                                   0          0                0
Total                                                 24035    15450            12054

Liquid Terminal Division                              2668      3123             2553
Gas Terminal Division                                  998      1059               912
Others                                                   0          0              -16
Sub. Total                                            3666      4182             3449
Less : Interest (net)                                  172       261               816
        Other un-allocable expenditure (net)           718       534               784
Add : Gain on disposal of fixed assets                   0       196               157

PROFIT BEFORE TAX                                     2776      3583             2006

BALANCE SHEET (Standalone)                                               (All figures in Rs Lacs)

                                                     FY07        FY06                       FY05

Shareholders’ funds:
(a) Capital                                       1,630.63    1,630.62                   1,628.78
(b) Reserves and Surplus                         10,222.84    8,339.79                   5,776.64
                                                 11,853.47    9,970.41                   7,405.42
Loan funds:
(a) Secured Loans                                 2,899.97    1,947.68                   2,217.38
(b) Unsecured Loans                                 569.6       696.7                       846.6
                                                  3,469.57    2,644.38                   3,063.98

Deferred Tax Liability (Net)                       756.63      725.63                      689.88

TOTAL                                            16,079.67   13,340.42                 11,159.28


Fixed Assets:
(a) Gross Block                                   9,035.78    8,737.02                   8,419.60
(b) Less: Depreciation                            2,453.82    2,164.94                   1,835.10
(c) Net Block                                     6,581.96    6,572.08                   6,584.50
(d) Capital Work-in-Progress                          13.4      88.14                               -
                                                  6,595.36    6,660.22                   6,584.50

Investments                                       1,650.32    1,697.49                   1,140.29

Current Assets, Loans and Advances:
(a) Inventories                                    645.60      770.39                      437.39
(b) Sundry Debtors                                2,479.98    1,512.83                   1,164.93
(c) Cash and Bank Balances                        2,200.38    1,491.78                   1,348.29
(d) Loans and Advances                            6,073.98    3,551.89                   2853.86
                                                 11,399.94    7,326.89                   5,804.47
Less: Current Liabilities and Provisions:
(a) Current Liabilities                           3,035.68    1,835.58                   1,534.42
(b) Provisions                                     530.27       508.6                      835.56
                                                  3,565.95    2,344.18                   2,369.98

Net Current Assets                                7,833.99    4,982.71                   3,434.49

TOTAL                                            16,079.67   13,340.42                 11,159.28

This report is based on information obtained from public sources and sources believed to be
reliable, but no independent verification has been made nor is its accuracy or completeness
guaranteed. The securities discussed and opinions expressed in this report may not be suitable
for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. The author and his family members
may hold positions in the above-mentioned companies from time to time. The views expressed
may change. The author does not accept any liability arising out of use of the above information/
article. The recipient should independently evaluate the investment risks.


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