CD EquisearchPvt Ltd. Quarterly Highlights ACCUMULATE. March 05, Aegis Logistics Ltd.

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1 March 05, 2018 Aegis Logistics Ltd. No. of shares (m) Mkt cap (Rs crs/$m) 8366/ Current price (Rs/$) 250/3.8 Price target (Rs/$) 286/ W H/L (Rs.) 301/170 Book Value (Rs/$) 29/0.4 Beta 0.5 Daily volume (avg. monthly) P/BV (FY18e/19e) 7.1/6.1 EV/EBITDA (FY18e/19e) 30.6/22.3 P/E (FY18e/19e) 40.6/35.1 EPS growth (FY17/18e/19e) 71.4/15.7 OPM (FY17/18e/19e) 5.3/5.5/5.3 ROE (FY17/18e/19e) 22.3/23.4/18.7 ROCE(FY17/18e/19e) 18.1/19.4/16.1 D/E ratio (FY17/18e/19e) 0.5/0.2/0.2 BSE Code NSE Code AEGISCHEM Bloomberg AGIS IN Reuters AEGS.BO Shareholding pattern % Promoters 60.5 MFs / Banks / FIIs/FIs 2.8 Foreign Portfolio Investors 11.3 Govt. Holding - Public & Others 25.5 Total As on Dec 31, 2017 Recommendation ACCUMULATE Phone: + 91 (33) E- mail: research@cdequi.com Quarterly Highlights Aegis s income from operations grew by 15.6% (y-o-y) in Q3FY18 to Rs crs ($222.8m) from Rs crs ($184.9m) mainly led by 16.0% uptick in gas terminal division, which was driven by increase in throughput volumes up by 25.1% (y-o-y) last quarter. Growth in volumes was chiefly because of Haldia LPG terminal which commenced operations in Q3FY18 and is expected to report stronger volumes going forward. Despite an increase in revenue booking, OPM managed to increase by no more than 20 bps (y-o-y) in Q3FY18 mainly because of 15.4% rise in raw material costs. PBT grew by 17.0% (y-o-y) but PAT before MI was up by 36.2% on account of lower tax liability due to transition to IND AS. Pipavav liquid terminal continues to remain weak and is expected to revive only if some development takes place in the agreement with Gujarat Pipavav Port Ltd. for construction of railway gantry to handle petroleum in that area. Growth in the liquid division is expected to be driven by 60,000 KL expansion at Haldia terminal and 100,000 KL expansion in Kandla, one of the busiest petroleum and chemical ports in India. The stock currently trades at 40.6x FY18e EPS of Rs 6.17 and 35.1x FY19e EPS of Rs 7.14.With several new projects nearing completion and both liquid and gas terminals operating at higher utilization, Aegis is poised for better growth. Its complete logistics value chain from gas sourcing and shipping to terminalling to distribution to industrial, commercial and auto-gas stations has made it a leading LPG sourcing player in India. JV with ITOCHU will help Aegis in attaining cost leadership in the LPG import market, which is already looking up, thanks to slew of reforms undertaken by GOI to push use of LPG in lieu of other fuels. Upsurge in gas connections under Pradhan Mantri Ujjwala Scheme is another positive step by the government which will uptick LPG demand in the country. Initiatives like Sagar Mala and Bharat Mala will give a leg up to the logistics sector and enable seamless multi-modal logistics services in India. However, development and adoption of electronic cookers and vehicles will have to be watched. Pipavavv liquid terminal continues to operate at a very low capacity utilization level. Also, inadequate port infrastructure and changes in government policies on coastal regulations poses threat to company s port-based liquid terminalling business of Mumbai, Kandla, Haldia, Kochi and Mangalore. We therefore maintain an accumulate rating on the stock with revised target of Rs 286 (previous target Rs 224) based on 40x FY19e EPS of Rs 7.14 over a period of 6-9 months. Consolidated (Rs crs) Income from operations Other Income EBITDA (other income included) PAT after MI and EO EPS(Rs) EPS growth (%) FY15 FY16 FY FY18e FY19e

2 Outlook & Recommendation Indian Logistics Industry According to Economic Survey 2018, Indian logistics industry is witnessing development and expansion of its existing infrastructure and is expected to grow by 10.5% CAGR to reach about USD 215 bn in 2020 from current level of USD 160 bn. Transport and Logistics sector is the backbone of country s development and a significant contributor to economic growth. Government initiatives like Make in India will be able to successfully transform India to a manufacturing giant only if a robust logistics sector exists. Logistics industry is expected to play a pivotal role in driving the Indian economy and the industry has seen rapid growth recently- it has grown at a CAGR of 7.8% during the last five years- due to increased planned government outlay, improved infrastructure and greater access to global markets. Infrastructure status granted to Indian logisticss sector is considered to be a major growth catalyst, having wide range implications. Its inclusion in the Harmonized Master List of Infrastructure Subsector under a new head Transport and Logistics will facilitate long term credit flow into the sector from banks and other financial institutions at reasonable interest rates, and also attract foreign investments. It will make it easier for logistics companies to access large amounts of funds as external commercial borrowings, access longer-tenure funds from insurance companies and pension funds and be eligiblee to borrow from India Infrastructure Financing Company Ltd. It will even simplify the process of approval for construction of multi-modal logistics facilities that includes both storage and transport infrastructure. In the recent Union Budget , Finance Minister Arun Jaitley announced that the Department of Commerce will be developing a National Logistics Portal as a single window online market place to link all stakeholders. The ministry is working on a comprehensive action plan to reduce exports, imports and domestic logistics costs in the country. The national integrated logistics action plan would focus on making logistics more efficient through easing of processes, induction of information technology and coordinated enhancement of logistics infrastructure in the country. The portal will also mean more focus on digitization, which will bring significant improvement in ease of doing business. Implementation of GST is already proving to be a significant trigger for the logistics industry to migrate from legacy supply chain models designed for optimizing tax considerations, to more efficient supply chain models that optimize operational considerations such as supply chain costs and lead time to market. Currently, the organized logistics segment is less than 25% of the total logistics segment. However, given the input tax credit will be allowed to supply from only registered tax payers (the crux of GST mechanism), businesses and stakeholders will insist on registration of their suppliers and traders, thereby increasing the share of organized logistics players. Reduced procedures and restrictions at state borders have eased inter-state movement of goods. Consolidation of warehouses to reap benefits of scale efficiency and faster and more efficient transportation can lead to ~20% savings on logistics cost, reckons Boston Consulting Group. In such a context, tremendous business opportunity arises for established end-to-end logistics players. 2 2

3 [ Outlook for LPG According to a January 2018 report by Research and Markets, global LPG consumption is expected to surpass 380 MMTPA by 2026, on the backdrop of increasing government initiatives to trigger LPG consumption, surging LPG demand as a cooking fuel, and planned refinery expansions of major petroleum refineries worldwide. Thanks to its cost effectiveness and minimal wastage, it is being increasingly used in both commercial and household sectors across the globe, especially in Asia-Pacific region. Surge in LPG imports and rising demand for cleaner fuel, predominantly by major developing economies such as India and China, is expected to fuel LPG consumption, globally, by In India, LPG demand continues to show robust growth boosted by government s drive to promote it as a reliable fuel through schemes such as LPG Subsidy Pahal (when customers join this scheme, LPG subsidies is directly credited to their bank accounts as soon as they book their LPG cylinder), Pradhan Mantri Ujjwala Yojana (aims to provide LPG connections free of cost to five crore poor households by 2019), Direct Benefit Transfer and Give it Up (which encourages well-to-do households to voluntarily surrender their LPG subsidy so that it could be channelized to the poor who remain reliant on polluting cooking fuels such as wood, dung, crop residues and coal). These initiatives have increased residential adoption of LPG. Indian LPG imports (~11m tones in FY17) have grown at a CAGR of 17% from FY07 to FY17. A rapid increase in urban population coupled with increasing LPG penetration in rural areas has made India the second largest LPG consumer in the world at 19 m tonnes per year. Research and Markets believes government s efforts to promote LPG, combined with increased adoption by consumers, to sustain its double-digit growth in the coming years. Expansion Plans Gas Terminal Division Aegis has completed implementation of two fully refrigerated tanks of static storage capacity of 25,000 MT with a throughput capacity of 2.5m MT and an LPG bottling plant at Haldia at a total project cost of Rs 250 crs and Rs 25 crs respectively last quarter (earlier expected to be completed in H1FY18) and will benefit from Paradip-Durgapurr pipeline connectivity being constructed by IOCL. The company has signed 20 years of MOU with a large PSU as the anchor customer at the current market throughput rates for use of this terminal. It had envisaged a debottlenecking plan of Mumbai LPG terminals with static capacity of 20,000 MT and throughput capacity of 1.1m MT (incremental 0.4m MT) at a cost of Rs 15 crs financed through internal accruals to be completed by first half of current fiscal. The project, involving pipeline connectivity between Mumbai and Uran with additional infrastructure including intake pumps and internal pipeline, was completed in Q3FY18, while Uran Chakan LPG connectivity is still under construction by HPCL and is expected to be completed in the next few months. Brownfield capacity expansion at Pipavav involving a capex of Rs 75 crs (static capacity and throughput capacity pegged at MT and ~0.8m MT respectively) has also been wrapped up last quarter (original expected time of completion was H1FY18). Total LPG capacity post expansion will reach static capacity of 63,300 MT and throughput capacity of 5m MT. 3 3

4 Liquid Terminal Division The company has plans to establish a greenfield liquid terminal costing Rs 75 crs ($11.5m) at Kandla port envisaging 100,000 KL slated to be completed in the current quarter. Another greenfield liquid terminal expansion of 25,000 KL at Mangalore port at a cost of Rs 18 crs ($2.8m) is also expected to be completed in the current financial year. Phase I of brownfield liquid terminal expansion at Haldia port of 25,000 KL involving a capex of Rs 15 crs ($5.4m) had been completed in Q1FY18 as per schedule. Phase II expansion of 35,000 KL costing Rs 35 crs was commenced in Q1FY18 and is expected to be completed by Q1FY19. Post expansion, total capacity at Haldia will reach 120,0000 KL. Total liquid capacity post expansion will reach ~689,000 KL. Financials & Valuations After two consecutive years of de-growth in topline in FY16 and FY15, Aegis managed to post a growth of 77.7% last fiscal, owing to sharp volume increase in gas terminal division. Successful implementation of LPG Subsidy Pahal (DBTL) scheme in rural areas led to increase in demand, improving sourcing volumes and gas throughput volumes. Record volumes handled at Mumbai and Pipavav terminals in the gas division increased the segment s revenue by 34..0% in 9MFY18. Higher LPG volume in Haldia terminal due to strong off-take of its customers like HPCL and BPCL should continue to add to company s earnings. Despite liquid division not performing well in FY17- its revenue declined by 9.8% y-o-y due to underperformance of Pipavav liquid terminal and fall in revenue from O& &M activities commencement of new capacity at Haldia in Q1FY18 has helped in boosting the division s performance which has witnessed a growth of 8.5% in its revenue in 9MFY18. Aegis expects bigger revenue from the liquid division in the current quarter, mainly driven by completion of capacity expansion at Kandla port of 100,000 KL. Aegis is planning to set up two LPG terminals along the west coast of the country- commercial negotiations has been completed on one of the two projects whichh will be the largest LPG terminal Aegis has ever constructed and it is in the stage of legal formalities. Negotiations for the other terminal are still on with oil and marketing companies. With its unique infrastructure liquid terminals at key ports in Mumbai, Kochi, Haldia and Pipavav and a network of 108 auto gas stations in 7 states and 107 commercial distributors in 8 states in LPG segment, Aegis has an integrated supply chain. 4 4

5 Short-term borrowings skyrocketed in H1FY18 to Rs crs ($58.1m) compared to Rs crs ($27.4m) in FY17 due to expansion at Haldia terminal. However, it is expected to come down by the end of current fiscal due to equity infusion received in January It intends to incur a capex of ~Rs 750 crs ($115.3m) over the next few years, mainly financed through internal accruals, thus borrowings should not increase much going forward. Going forward, we expect distribution and logistics volume to grow by 25.0% and 58.9% respectively in FY19, leading to an overall volume growth of 58.2% in the gas terminal division. New capacities coming on stream in the liquid terminal division should increase its volume by 24.1% next fiscal. Overall revenue should grow by 30.3% and 41.7% in FY18 and FY19 respectively with the gas terminal growing at 31.2% in FY18 and 42.3% in FY19 and liquid terminal growing at 8.2% and 24.1% in FY18 and FY19 respectively. Better capacity utilization and cost control should increase its profit by 71.4% this fiscal and 15.7% in the next. The stock currently trades at 40.6x FY18e EPS of Rs 6.17 and 35.1x FY19e EPS of Rs Gamut of expansion strategies undertaken by Aegis and steadily rising LPG usage in India is expected to buoy its business in the coming years. Infrastructure status granted by the government to logistics sector will ease availability of funds to build modern infrastructure for managing complex supply chains. Its existing and new customer relationships should drive volumes at current and new capacities. JV with ITOCHU will help it become a leading LPG sourcing player in India. In view of robust 9MFY18, we have revised our FY18 earnings estimate by 40.5% (EPS of Rs 6.17 vs Rs 4.39 earlier). However, increase in adoption of electric vehicles might slowdown demand for natural gas. Capacity utilization of Pipavav liquid terminal would revive only if negotiation with Gujarat Pipavav Port Ltd. materializes. Any delay in capacity expansion plans cannot be overlooked either. We therefore maintain an accumulate rating on the stock with revised target of Rs 286 (previous target Rs 224) based on 40x FY19e EPS of Rs 7.14 over a period of 6-9 months. For more information, refer to our July report. 5 5

6 Cross Sectional Analysis Company Equity CMP MCAP* Sales* Profit* Aegis Log Gati Ltd Transport Corp Allcargo Log Container Corp *figures in crores; calculations on ttm basis; standalone or conso OPM (%) NPM (%) Int Cov olidated data as available on Dec 31, ROE (%) Mcap/ Sales P/BV P/E Despite growth of 5.6% in topline last quarter, Gati failed to improve its margins which declined by 62 bps (y-o-y) led by 13.1% rise in raw material costs OPM constrained to 5.4% vs 6.0% in Q3FY17. Gati is fully prepared for the E-Way bill rollpart of its regular business. out and as the trial phase of the E-Way bill continues at this point, it has already made E-Way bill Its core express distribution business is witnessing good volume growth. The company expects its efforts to increase market share and enhanced customer service will boost its business going forward. Being one of India s leading integrated supply chain and logistics solutions provider, TCI has recorded an impressive revenue growth of 24.3% (y-o-y) in Q3FY18 with freight division and supply chain solutions division (combined revenue share of 87.2%) up by 15.6% and 26.0% respectively. Its focus on retail, auto, pharma, etc through its service segments like large scale warehousing, multimodal rail and coastal solutions amongst others and operational efficiency has helped it achieve 65.1% (y-o-y) growth in post tax profits last quarter. With a planned capex of Rs 130 crs for current fiscal, it aims to cash on fresh impetus given to the logistics sector in India. Allcargo posted a modest revenue growth of 6.9% (y-o-y) in 9MFY18, chiefly affected by underperformance of projects and engineering solutions (revenue de-growth of 29.9%) owing to uncertainties in the wind sector, distorting revenue from equipment leasing. However, multimodal transport operations continued to grow (volume growth of 7.4% y-o-y in Q3FY18) despite challenging global conditions and declining freight rates. To improve performance of container freight station operations (segment EBIT down by 13.9% y-o-y in 9MFY18 because of increase in lease rental expenses), it is no longer going to manage Central Warehousing Corporation s CFS in Mundra. To expand its business in contract logistics, one of the fastest growing sub-sectors of logistics in India, it has acquired majority stake in Avvashya CCI, a pre-dominant player in this segment for key clients in chemicals, auto, engineering, pharma, food, e-commerce and retail sectors. Container Corp s exim business has grown by 26.2% (y-o-y) in Q3FY18 owing to healthy volume improvement and 8-10% growth in realization. Emphasis on optimal utilization of infrastructure with complete cost control helped it achieve high margins (see table). To tap on the enormous potential in logistics sector, it has recently signed a MOU with Bharat Mumbai Container Terminals (BMCT) to launch dedicated shuttle train running between BMCT and CONCOR s rail transshipment hubs (RTH) at Kathuwas and Jakhwada to consolidate containers railed between BMCT and north and west India. It has also signed a non-binding MOU with state government of Andhra Pradesh for setting up an integrated logistics and manufacturing zone (ILMZ) at Machillpatnam to develop the land and use it to provide multi-modal logistics facilities at Machillpatnam in a phased manner through PP PP and other modes. Note: Graphs on consolidated data. 6 6

7 Financials Consolidated Quarterly Results Figures in Rs crs Q3FY18 Q3FY17 % chg. 9MFY18 9MFY17 % chg. Income From Operations Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT Minority Interest PAT after MI EO Adjusted Net Profit EPS(Rs) Segment Results Figures in Rs crs Q3FY18 Q3FY17 % chg. 9MFY18 9MFY17 % chg. Segment Revenue Liquid Terminal Division Gas Terminal Division Segment Revenue Segment EBIT Liquid Terminal Division Gas Terminal Division Sub Total Finance Cost 4.86 Other Unallocable Exp. (net) 9.23 Interest Income 0.85 PBT

8 Financials Consolidated Income Statement Figures in Rs crs FY15 FY16 FY17 FY18e FY19e Income From Operations Growth (%) Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT Minority Interest PAT after MI EO Adjusted Net Profit EPS (Rs) Segment Results Figures in Rs crs FY15 FY16 FY17 FY18e FY19e Segment Revenue Liquid Terminal Division Gas Terminal Division Segment Revenue Segment EBIT Liquid Terminal Division Gas Terminal Division Sub Total Finance Cost Other Unallocable Exp. (net) Interest Income PBT

9 Consolidated Balance Sheet Sources of Funds Share Capital Reserves Total Shareholders' Funds Figures FY15 FY16 FY17 FY18e in Rs crs FY19e Minority Interest Long Term Debt Total Liabilities Application of Funds Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans and Advances Inventory Trade receivables Cash and Bank Short term loans (inc. other current assets) Total CA Current Liabilities Provisions-Short term Total Current Liabilities Net Current Assets Net Deferred Tax Liability Net long term assets ( net of liabilities) Total Assets

10 Cash Flow Statement Figures in Rs crs FY17 FY18e FY19e Net Income (a) Non cash exp. & others (b) Depreciation Loss/ (profit) on sale of investments Interest Income Dividend Income Provision and Write off Others (Increase) / Decrease in NWC Inventories Assets (net of liabilities) Operating cash flow (a+b+c) Purchase of Fixed Assets (Net) Change in investments Investment in subsidiary Interest Received Dividend Received Decrease/ (Increase) in balances not considered cash Investing cash flow (d) Net Borrowings Dividend paid including CDT Equity Financing cash flow (e) Net change (a+b+c+d+e)

11 Key Financial Ratios FY15 Growth Ratios(%) Revenue EBITDA 28.4 Net Profit 29.5 EPS 29.5 Margins (%) Operating Profit Margin 3.7 Gross profit Margin 3.4 Net Profit Margin 2.2 Return (%) ROCE 16.7 ROE 21.1 Valuations Market Cap/ Sales 0.5 EV/EBITDA 13.7 P/E 25.7 P/BV 4.9 Other Ratios Interest Coverage 6.4 Debt Equity 0.5 Net Debt-Equity Ratio 0.2 Current Ratio 1.2 Turnover Ratios Fixed Asset Turnover 9.2 Total Asset Turnover 7.6 Inventory Turnover Debtors Turnover 19.2 Creditor Turnover 19.7 WC Ratios Inventory Days 2.2 Debtor Days 19.0 Creditor Days 18.5 Cash Conversion Cycle 2.6 FY16 FY17 FY18e FY19e

12 Cumulative Financial Data FY08-10 Liquid Terminal Division 220 Gas Terminal Division 860 Income from operations** 1081 Operating profit 195 EBIT 166 PBT 138 PAT after MI 109 Dividends 34 OPM (%) 18.1 NPM (%) 10.1 ROE (%) 26.3 ROCE (%) 18.6 Interest Coverage 6.0 Debt Equity* 0.7 Fixed asset turnover 2.4 Debtors turnover 15.6 Inventory turnover 35.0 Creditors turnover 9.9 Debtor days 23.4 Inventory days 10.4 Creditor days 36.8 Cash conversion -3.0 Dividend payout ratio (%) 31.4 FY11-13 FY14-16 FY17-19e FY8-10 implies three year period ending fiscal 10;*as on terminal year; ** includes other operating income Income from operations grew 9.5x in FY11-13 period mainly driven by 11.6x increase in gas terminal division due to high growth in sales across all segments in FY12 and FY13. Yet, it failed to improve company s cumulative bottomline which dein FY12 and FY13. Fall in grew by 8.2% owing to higher hedgingg costs and loss on foreign currency fluctuation international LPG prices and illegal diversion of subsidized LPG to the gas sector reduced gas division sales by 23.2% in FY15 which declined further by a massive 45.7% in FY16, thanks to delay in registration of AGI as an international vendor, leading to a growth of only 7.4% in gas terminal division during FY14-16 period. Aegis is poised to grow in spate of recent developments undertaken to boost its capacity- we expect its topline to grow 1.5x during FY17-19 period. Reduction in debt to Rs crs ($28.4m) in FY16 vs Rs crs ($61.0m) in FY13 helped curtail finance cost, stimulating interest coveragee ratio to 7.1 during FY14-16 period from 2.4 in the preceding three years (see table) and with most of its planned capex to be funded through internal accruals, debt-equity and interest coverage should improve to 0.2 and 13.9 respectively in FY Better capacity utilization would not fail to improve margins and return ratios (see table). Higher profitability should help dividend payout ratio to stand at 23.5% for FY

13 Financial Summary- US Dollar denominated million $ FY15 Equity capital 5.3 Shareholders' funds 66.1 Total debt 34.8 Net fixed assets (incl. CWIP) 75.7 Investments 3.4 Net current assets 7.5 Total assets 91.3 FY16 FY17 FY18e FY19e Revenues EBITDA 25.3 EBDT 22.0 PBT 18.2 PAT 12.9 EPS($) 0.04 Book value ($) 0.20 Operating cash flow - Investing cash flow - Financing cash flow Income statement figures translated at average rates; balance sheet at year end rates; projections at current rates (Rs 65.05/$). All dollar denominated figures are adjusted for extraordinary items

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