Aegis Logistics: Banking on strong margins

Performance summary

• Revenues decline by nearly 43% YoY during 2QFY10, led by 50% YoY decline in gas terminal revenues.
• Costs decline at a faster rate resulting into a 22% YoY growth in operating profits.
• At the net level growth in profits stands at nearly 39% YoY. Apart from the good show at the operating level, lower interest costs and higher other income aid this growth.

Financial performance snapshot

(Rs m)	2QFY09	2QFY10	Change	1HFY09	1HFY10	Change
Net sales	1,309	751	-42.6%	2,460	1,438	-41.6%
Expenditure	1,157	566	-51.1%	2,149	1,101	-48.8%
Operating profit (EBITDA)	152	186	22.3%	311	337	8.3%
EBITDA margin	11.6%	24.7%		12.6%	23.4%
Other income	8	12	53.2%	13	37	183.3%
Interest	28	21	-25.7%	55	44	-19.9%
Depreciation	34	36	4.7%	69	71	3.5%
Profit before tax/(loss)	98	141	44.5%	201	259	29.1%
Tax	19	31	59.3%	40	58	46.2%
Share of loss in associate companies	0	2	1800.0%	2	1	-50.0%
Profit after tax/(loss)	78	109	38.6%	158	200	26.0%
Net margin	6.0%	14.4%		6.4%	13.9%
No of shares (m)				19.9	19.8
Diluted EPS (Rs)*					10.1
P/E (times)					14.0

*trailing twelve month earnings

What has driven performance in 2QFY10?

• Aegis Logistics reported a 43% YoY decline in revenues in 2QFY10. The fall in net sales was led by the 50% YoY decline in revenues of the gas terminal division. On the other hand, the liquid terminal division reported marginal growth of nearly 3% YoY but accounted for a quarter of the company's total sales. Thus, it was the poor performance of the gas terminal division caused by lower gas prices that razed topline growth.

• The company has not divulged volumes numbers for the quarter. Last year volumes were severely impacted on account of softening of crude prices and the credit crisis that impacted trade in general. While there are signs of revival in trade, crude prices are more or less stable on a year on year basis. Thus, the price scenario has not changed in the company's favour. Gas terminal division accounts for over 70% of the total sales. It should be noted that in this segment, the company generates revenues both from throughput as well as trading. Throughput business is a low margin business. Considering the 13.1% expansion in EBITDA margins we decipher that the company must not have handled large volumes in the throughput business.

• As regards operational costs, the 51% YoY decline came in on account of the 60% YoY fall in cost of consumption of raw materials. The same must have been the result of lower LPG prices. The other costs, however, scaled higher during the quarter on a year on year basis. Thus, sharp fall in raw material costs was what helped the company report a 22% YoY growth in operating profits.

• The company clocked an impressive 38.6% YoY growth in net profits during 2QFY10. Besides the good performance at the operating level, higher other income and lower interest costs aided this growth.

What to expect?

At the current price of Rs 141, the stock is trading at price to earnings multiple of 14 times its trailing twelve month earnings. Volatile gas prices in the international markets and an unstable global economic environment have impacted volumes in the past few quarters. The company is present in a niche segment of oil and gas logistics and is a leading player in the third party logistics segment in India. There is enough scope for growth in this space considering the energy needs of the country. With the volatility in fuel prices and currency fluctuations showing signs of moderating and given the opportunities, the company is likely to sustain improved profitability going forward. However, considering that the company failed to display the intended performance over our investment horizon of 2-3 years we discontinue our coverage on the stock.