Buy Aegis Logistics - Nirmal Bang

Aegis Logistics Ltd (Aegis) is a leader in Oil, Gas and Chemical Logistics. In addition, it is also a leader in the Sourcing, Shipping, and Distribution of LP gases (LPG and propane) into India. The company is in the process of expanding its cash generating Liquid business's storage capacity from the current 324000 KL to 385000 KL in FY14 and further to over 500000 KL by FY15. It is also expanding its Auto Gas Retailing business which would augur well for the company with GoI's decision to put a cap on the subsidized domestic cylinders. We expect margins of the company to remain firm with increasing proportion of high margin businesses like liquid (53% margin) and Autogas retailing (10% margin). We expect EBIDTA of the company to grow at a CAGR of 20% during FY12. At CMP, the stock is trading at EV/EBIDTA and a P/E of 2.9 x and 6.0 x respectively for its FY14E earnings and looks attractive. We initiate coverage on the stock with a BUY recommendation and a target price of Rs. 203 which is 49% upside from current levels.

Expansion in the cash cow division of Liquid Terminals to drive margins

Aegis presently has three operating port terminals, two in Mumbai with a capacity of 273000 KL and one in Kochi with a capacity of 51000 KL. In Haldia, it is adding up capacity of 61000 KL which would be operational from Q1FY14 and by 120000 KL at Pipavav which would begin contributing to revenues in FY15. Liquid Revenues of the company have been growing at a CQGR of 8.8% in the past 4 quarters and the margins in this segment have been as high as 58% and generally waiver ~ 50-55%. We expect this division to grow by 16% and 20% in FY13E and FY14E respectively on the back of addition of capacities.

Boost in the Gas revenues with cap on subsidized cylinders

GoI set a cap of 9 subsidized cylinders for domestic consumption recently. This move has already seen a jump of 30-40% rise in the AutoGas and Commercial Gas consumption volumes. We believe while this move would in near future affect Aegis's sourcing business; however it would on the other hand be positive move for a higher margin Retail and commercial gas distribution business.

Change in hedging policy - to reduce earnings volatility

Aegis had seen huge volatility in its quarterly result due to its earlier hedging policy of buying option contracts. However, it has now changed its hedging policy and has begun to take only plain vanilla contracts of 15-20 days payment cycle for the LPG cargoes. The outstanding old options had expired in Mar 2013 and the premium of this would be amortized till Q4FY13. This will bring stability in reported results.

Source : Equity Bulls

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