The Hindu Business Line : Aegis Logistics: Buy

EXPOSURE can be considered, especially on price declines, in the stock of Aegis Logistics, as its growth prospects appear bright over a two/three-year period. Logistics as a sector is also likely to figure prominently in the calculus of institutional investors.

Aegis Logistics has the potential to emerge as one of the preferred plays in this space and this will be a positive from a valuation perspective.

The principal risk in the near term is pressure on margins due to a shift in the composition of revenues. Revenue growth has, however, partly neutralised the impact and this trend is likely to continue.

We had recommended a `buy' on this stock last July, when it traded at Rs 100. We maintain our positive view on the stock; earnings growth is, however, likely to more moderate and not match the scorching pace of the past couple of years.

The stock trades at a price-earnings multiple of less than 15 times its likely FY-07 earnings, based on a conservative estimate of growth.

As business opportunities are likely to expand in the oil, gas and chemicals space, the valuation levels are not demanding.

Robust cash flows from operations, declining interest costs and the scope for debt reduction place the company's fundamentals on a strong footing.

The availability of expanded facilities, which has removed capacity constraints, the ability to handle a wider range of products with buoyancy in the industry, are likely to be key drivers of growth.

Aegis Logistics is in the business of storing, handling and distributing oil products, chemicals and gas. It has a strong foothold in Mumbai, where it owns facilities to provide such services. Aegis' forte is handling liquid products.

Given the vantage location of its facility, the imminent expansion in port facilities in Mumbai and the likely expansion in the usage of oil/gas products in the western markets, growth prospects in its home territory appear promising.

With the increasing thrust on usage of gas in automobiles, industrial and domestic sectors, the prospects for handling, storing and distributing gas also appear encouraging. Aegis also has a fledgling presence in the auto LPG retailing business.

The gas division accounts for about 75 per cent of revenues and a third of operating profits.

Though its profitability is lower compared to that of the liquid handling and storage business, the pace at which revenues have been scaled up has helped spur earnings growth. This also explains to a large extent why margins have slipped in recent quarters.

Aegis has also entered into an understanding with the Adani group to provide support services for handling the latter's cargoes in Mumbai.

The company also plans to expand its footprint by acquiring or setting up facilities in a few other ports. Plans in this regard are likely to have long-term benefits. With the robust accretion to cash flow and moderate debt levels, the company is well-placed to bankroll its expansion plans.

It also has a high degree of flexibility in raising funds through the equity route, as it has never tapped this source for more than a decade now.

Aegis has also completed its exit from the chemicals business and a joint venture. The process of cleaning up the balance-sheet by absorbing one-time charges and pocketing cash flows for sale of assets has been completed in the last quarter.

It is now a pure logistics play and bereft of the cyclical element imposed by the chemicals business. The principal risks are cost-pressures that could affect margins, equity expansion to fund projects/acquisitions, which will, however, have long-term benefits and costs of regulatory compliance.

Buy this small-cap stock with a one/two-year perspective. Returns are likely to be attractive though a manifold rise in price of the kind seen over the past couple of years appears unlikely.

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