Sunday, April 13, 2008
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.
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.
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.
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.
The Gujarat State Petronet Ltd. (GSPL) stock has been very active in the last couple of weeks. It has gained about 20 per cent from the low of Rs 51 that it touched on March 19 even as other mid-cap stocks are languishing.
The stock had earlier undergone a drastic correction, halving in value from its high of Rs 109, registered in January, before the recovery over the last two weeks. At the current market price of Rs 63, the stock can be bought by investors willing to wait for returns over the medium term.
GSPL has a focussed business model as a transporter of natural gas in Gujarat without any exposure to commodity price risk. It is well-positioned in the Gujarat gas market with its pipelines connecting gas sources to existing and developing markets. GSPL is also venturing into city gas distribution through investment in group companies engaged in the lucrative and growing business.
However, the investment in rapid expansion of pipeline network is beginning to show up on the company’s financials.
Rising interest cost and depreciation charge are exerting pressure on profit growth. Besides, the regulatory policy on pipeline transportation and city gas distribution is evolving and is a risk to be taken note of.
Right place, right time
GSPL is fortunate to be in the right place at the right time. The mature gas market of Gujarat is set to witness all the action when Reliance Industries starts pumping out its KG Basin gas later this year. The company now transports about 18 million metric standard cubic metres of gas a day (MMSCMD) but this will double with volumes from just two contracts.
GSPL has signed a 15-year agreement with Reliance to transport 11 MMSCMD and another one with Torrent Power to transport 4.5 MMSCMD for 20 years. The long-term agreements lend visibility on usage of capacity and on revenues.
Supply of regasified LNG (liquefied natural gas) is also set to increase in a significant manner adding to transportation volumes for GSPL. Petronet LNG and Shell are expanding the capacity of their LNG regasification plants while BG India is planning to use Shell and Petronet’s terminals to bring in LNG on a spot basis.
GSPL’s existing pipeline network of 1,130 km will double in the next two years if the company’s expansion plans are implemented on time.
Importantly, they will connect high consumption, industrial areas of the State such as Morbi, Vapi, Pipavav and Mundra with gas sources or intermediate tap-off points of cross-country pipelines.
The company’s revenue model offers visibility over the long-term. GSPL’s transmission contracts are on a “take-or-pay” basis which means that the user has to pay a fixed charge if he fails to transport gas during the contract period.
GSPL has picked up strategic stakes in group companies — GSPC Gas, Sabarmati Gas and Krishna Godavari Gas Network Ltd — that are setting up city gas businesses in Gujarat and Andhra Pradesh. City gas distribution, which includes supply of compressed natural gas for automobiles, will be a natural diversification for GSPL from its transportation business.
In the medium to long-term, the company also plans to venture beyond Gujarat into neighbouring States such as Rajasthan and Maharashtra to set up pipeline networks. Given the interests of its parent, GSPC, in the KG Basin where it has struck gas, a foray into Andhra Pradesh is also not ruled out.
Bottomline growth pangs
Though GSPL’s profit at the operating level is impressive, the company has posted a decline in net profits over the last few quarters. This is because of a rapid rise in interest cost and depreciation charge.
For instance, in the third quarter ended December 2007, interest cost doubled to Rs 20 crore following a similar trend in the previous quarter. Interest cost was higher by a third in the first nine months of 2007-08 compared to the whole of 2006-07.
Similarly, depreciation charges are also rising as the company capitalises its new pipelines. This trend is unlikely to reverse in the near term because GSPL is still in the investment phase. However, the higher charges should be absorbed comfortably as gas transportation volumes rise over the next few quarters.
Investors can buy the stock with a medium-term perspective