Aegis Logistics: new capacities provide an opportunity and a challenge
The Aegis Logistics Ltd stock hit a new 52-week high this week, after the company reported a robust performance for the September quarter. Growth in both revenues and profits during the past one year has been very strong. Moreover, as new capacities come on stream, the company is expected to maintain the momentum in volumes. The only question that investors need to ponder over is about the returns from the fresh capacities.
A note from SBICap Securities Ltd points out that while liquefied petroleum gas (LPG) terminal capacity is slated to expand rapidly in India, LPG imports are estimated to increase only gradually. “Government estimates suggest LPG imports would merely double from around 10 million tonnes (mt) at present to around 20mt by FY35, implying a modest CAGR of 4%. Aegis alone is adding around 4mt of additional throughput by FY18, and has plans to pursue two more LPG import terminals this year. With competition (Adani Ports, etc.) also anticipated to set up a high ROCE, low gestation period project, the returns are likely to moderate from the current high levels,” the broking firm said in a note. CAGR is compound annual growth rate and ROCE is return on capital employed.
The firm provides port logistics solutions in the oil and gas sector. It does gas sourcing, offers terminal (provides storage and allied services) and distribution services with a wide presence in LPG. Capacities at Haldia, Pipavav and Mumbai ports are seeing major expansion. Aegis Logistics expects existing and new customer relationships to drive volumes at the fresh capacities.
Of course, the LPG import demand projections are not watertight and can change. With steadily rising LPG usage in India, Aegis Logistics should find no difficulty in achieving threshold utilization levels at the new capacities.
Does that, however, justify the stock’s premium valuations? The Aegis Logistics stock trades at 34 times one-year forward earnings estimate. To maintain the premium, the company will have to continue to deliver a robust performance, which, argues SBICap Securities, is a tough task. According to the broking firm, for Aegis Logistics to grow faster than the LPG import market, it will have to take market share from incumbents like Indian Oil Corp. Ltd, a dim possibility, not to mention the impending competition from new entrants.
Another aspect investors need to keep track of is the development and adoption of electric cookers and vehicles. In a separate note on the energy sector, Kotak Institutional Equities warns about a possible slowdown in demand for compressed natural gas in major urban areas (Delhi, Mumbai) if electric vehicle adoption gathers pace. Aegis Logistics straddles several business segments (including business-to-business). But it also has a retail (auto) LPG distribution business where a change in consumer preferences will influence demand.
In short, investors will have to keep an eye on how demand shapes up compared to supply.