Powering Growth On Energy Demand

Aegis is engaged in the terminalling of oil products, chemicals and liquefied gases, sourcing of LPG and retailing and distribution of LPG. These business segments require specialised infrastructure at key ports, such as specialised berths, fire-fighting equipment, pipelines, transit storage and handling facilities. Although the terminalling, retailing and distribution industry in India has many participants, very few companies possess the necessary technical credentials and infrastructure to sustain in the long run. HoweverAegis, with its experience of over 60 years, looks well-positioned for this market. The company has its major liquid terminals located at Mumbai, Pipavav and Kochi on the western coast. These terminals are well-connected to the major refineries and petrochemical companies through pipelines

AEG distributes LPG as auto fuel through a network of 108 auto gas stations in seven states. The company also distributes packed cylinders for commercial and industrial users through a network of 107 commercial distributors in seven states.

The company also has an engineering, procurement, and construction (EPC) services division to cater to the growing trend of outsourcing in the oil and gas sector. These services include building storage and distribution installations and to operate and maintain them.

Aegis also operates internationally through its sourcing and trading subsidiaries. The company last year announced a joint venture with Itochu Corporation of Japan, which is one of the big five general trading groups in Japan. The company’s major clients include Bharat Petroleum, Hindustan Petroleum, Reliance Industries, Jubilant Life sciences, Bombay Dyeing, among others.

AEG is planning to build a necklace of port terminals around India’s coastline from Pipavav to Haldia to Kochi. These inland oil terminals would be built on a 'build, own, operate' basis to service the public sector oil companies and develop a retail distribution network for the LPG business. It is expected that the work of necklace of terminals will be completed in the next three years by FY2021 which will boost the company’s earnings in future.

Although liquefied petroleum gas terminal capacity is slated to expand rapidly in India, LPG imports are estimated to increase only gradually. The government estimates suggest that the LPG imports would merely double from around 10 million tonnes at present to around 20 million tonnes by FY35, implying a modest increase of 4 per cent CAGR. Aegis alone is adding around 4 million tonnes of additional throughput.

CAPACITY EXPANSION

The liquid terminals division will see increase in revenues from Q4 FY18 as the company’s new Kandla liquid terminal, with a capacity of 100,000 kilolitres, will start operations. Also, Haldia, with extra capacity of 35,000 kilolitres, is expected to start contributing by Q1 FY19 to revenues and earnings. The company’s Mangalore terminal is expected to be completed by Q4FY18 and start contributing to the revenue in the next financial year from Q1FY19. The company expects its existing and new customer relationships to drive volumes of their new facilities.

The government has decided to cut GST tax on LPG sold by private sector from 18 per cent to 5 per cent. This could see a lot of new entrants into the Indian LPG market, including some mid-sized companies from overseas, especially LPG specialist companies, it is also possible that major international LPG trading companies might expand their presence in India and increase imports. India's LPG imports in November were at 1.246 million tonnes, up 2.6 per cent on the month and 23.4 per cent on the year, according to the latest provisional data from the country's petroleum planning and analysis cell. The growth in India's LPG imports will attract attention of the LPG shipping sector as well.

The development and adoption of electric cookers and vehicles will have to be watched. If electric vehicle sales gather pace, there would be a possible slowdown in demand for compressed natural gas in major urban areas. A change in consumer preferences will influence demand for the company’s retail (auto) LPG distribution business. Also, inadequate port infrastructure and changes in government policies on coastal regulations possess main threat to the company’s port-based liquid terminalling business. Further, the rise in crude oil prices internationally will impact the affordability and margins of companies in the gas supply chain.

The company’s revenues for FY17 were Rs3,938 crore versus Rs2,213 crore in FY16, increasing 78 per cent year-on-year. The company’s EBITDA for the year was Rs206.9 crore as against Rs185.3 crore in FY16, an increase of 11.6 per cent. The company’s net profit after tax for the year was Rs134 crore as compared with Rs126.1 crore a year earlier, an increase of 6.2 per cent. The liquid terminal division revenue for FY17 dropped 10 per cent to Rs154 crore versus Rs170.6 crore in FY16

The drop was mainly because of the underperformance of its Pipavav liquid terminal. The company’s gas division revenue in FY17 was Rs3,779 crore, as against Rs2,043 crore a year earlier and the EBITDA from the division for FY17 was Rs155 crore versus Rs123 crore, an increase of 26 per cent year-on-year.

During Q3FY18, AEG reported revenue of Rs1,442.1 crore, as against Rs1247.6 crore in Q3 FY17, thus registering a growth of about 15.6 per cent on a YoY basis. The revenue growth was supported by 16 per cent YoY growth in its gas terminal division. Also, AEG’s EBITDA improved by 20.6 per cent YoY to Rs71.7 crore, as against Rs59.5 crore and its EBITDA margin expanded by 20 bps YoY to 4.97 per cent. The company’s PAT grew 45.3 per cent YoY to Rs53.5 crore in Q3FY18 as against Rs36.8 crore in the same period previous year.

The company maintained a PE ratio of 51.14x. AEG has a return on equity of 21.70 per cent and a return on capital employed of 33.62 per cent. The company has a debt-to-equity ratio of 0.48x and price-to-book value of 9.20x. The company has good and consistent growth in profit of 43.53 per cent over the last five years and has been maintaining a healthy dividend payout of 26.76 per cent.

India is a net importer of almost all forms of energy. This fact, coupled with the country’s growing demand for energy, offers a huge potential for the expansion of pipelines, transportation and infrastructure. Also, the outlook for the gas sector has improved since the government has undertaken a slew of reforms to increase gas consumption. The terminalling and handling of liquids and gases is the main expertise of AEG and provides an important and stable source of profits by way of terminalling fees. This pattern is expected to continue in the near future. Also, with several projects planned in both liquid and LPG terminals, the overall business outlook for the company looks positive. We recommend our reader-investors to BUY the stock.