The company is not quite getting its logistics right
A company of many parts
This is an indecipherable 56 year old company of many parts. The chairman of the board, Kapoor Chandaria, the vice chairman and managing director Raj Chandaria, and, the managing director and CEO Anish Chandaria, who today form the principal promoters, are NRIs or some such. There are two other Chandarias who are members of the board. Thus five of the nine directors boast the same surname. One wonders how they divide their managerial functions given their identical sounding titles. The 'foreign promoters' as they call themselves control 62.4% of the outstanding voting capital of Rs 334 m. But the three principal shareholders who include two offshore companies and who each hold more than 5% of the capital-- collectively hold 68.8% of the capital. Presumably, these three companies hold the shares on behalf of the promoter shareholders.
Aegis Logistics is principally in the business of logistics management. The definition of logistics management is that it is a part of the supply chain management that controls the storage and flow of goods and services from the point of origin to the point of consumption and vice versa in tune with the requirements of the customer. Logistics management is a member of the services sector. Some companies do pure management of the services on behalf of the customer. Yet others create the infrastructure of their own to supply the service as a first step. Aegis is one such.
The many ends of the business
The company has divided its revenues into two business divisions or is it three business divisions? There is the liquids division, the gas division, and what appears to be the marine products division. The company is engaged in both the midstream and downstream end of the oil and gas industry. The midstream segment consists of storage and transportation of crude oil and gas, while the downstream segment is engaged in the refining and production of petroleum products, and in the processing, storage, marketing and transportation of oil industry products. The liquid division--the LPG division--from my understanding of the company's operations consists of three terminals for storing and piping purposes - Haldia Dock Complex, Kochi terminal complex, and Pipavav Port complex. The first named is a green field unit which is still under erection with a total capacity of 60,190 kilo litres (KL). The last named is setting up a new terminal with a capacity of 1.20 lakhKL of bulk liquid, and 2,700 MT of gas. Liquefied petroleum gas (LPG) comes in two formats-liquefied gas or as vaporised gas. Consequently it resorts to the classification of the liquid division and the gas division. The company supplies gas in cylinders of its own. The third division is the marine products division. It supplies marine fuels including to Kochi Port. This is my understanding of the muddled contents of the directors' report to the shareholders.
The incongruence is in the fact that the standalone company is a pygmy relative to that of the consolidated entity in terms of revenues but beats the consolidated entity when it comes to post-tax profits! The parent has seven siblings of whom six are of the wholly owned variety and two of whom are based out of Singapore. As per the directors' report the standalone parent reported revenues from operations of Rs 3.83 bn in 2012-13, while the consolidated group, showed revenues of Rs 39.82 bn-i.e. a ratio of 1:10.5 between the standalone and the consolidated entity. The standalone entity as per the directors' report showed a post tax profit of Rs 400 m while the consolidated entity reported a post-tax profit of Rs 352 m! But there appear to be different figures on revenues and profits in different schedules. Going by another independent schedule the combined revenues of the seven siblings alone amounted to Rs 57.9 bn - with a combined post-tax profit of Rs9 m. The vastly differing figures in different schedules of both revenues and profits of the consolidated entity could be due to group inter-se transactions on revenue account-with the consolidated accounts featuring only the 'value addition'. But the inter-se revenue transactions if any do not show up in the 'schedule of group transactions' for the year.
In effect going by one set of figures it means that the consolidated operations of the siblings reported a net pre-tax loss. This does NOT make for any sense but that is the reality of the matter. Consider also the following data stream. It has a wholly owned sibling going by the name of Hindustan Aegis LPG Ltd which on a paid up capital of Rs 400 m ponied up revenues of Rs 28.3 bn, but registered a pre-tax loss of Rs 360 m. This sibling presumably is in the same business as the parent. That is to say on an almost similar paid up capital base the sibling reported revenues over seven times in excess of the parent, but reported a loss for its efforts. This would amount to a very strange way of running a business. There are other anomalies too which we shall examine as we go along.
How the revenues accrue
Simply put the company earned its roti through revenue receipts from sales of traded goods, service revenues, and other operating revenues. The revenues at Rs 3.83 bn were higher by 35% over that of the preceding year. The revenues are divided 71.5%/28.2%/0.2%. The sale of LPG accounts for the bulk of the revenues at Rs 2.73 bn, followed by service revenues of its liquid terminal division at Rs 754 m and service income from its gas terminal division at Rs330 m. There are some other minor revenue accretals too. The service revenues apparently refer to the commission that it earns on the supply of both liquid LPG and gas LPG or some such. How these revenues pan out is not immediately known. There is also other income of Rs 180 m against Rs 164 m previously -derived primarily from interest on bank deposits and dividends etc. The other income incidentally accounts for a hefty 33% of the pre-tax profit against 31% previously.In other words the 'margins' from the main operations are found wanting. The company has no consumption cost of materials as there is no manufacturing involved. There is the movement of the stock in trade which takes the place of consumption costs. The cost of stock in trade consumed amounted to 64% of the revenue from operations against 55.5% previously. But the company was able to manage the bottom-line at the level of the preceding year as the growth in employee costs and other expenses were tempered. Surprisingly, the deprecation charge was maintained at the level of the preceding year inspite of a hike in fixed assets. The company boasted a tangible gross block of Rs 2.77 bn at year end against Rs 2.43 bn at the beginning-with a capital work in progress of Rs 571 m. It may also be noted that the gross block could only muster up the revenues that it did -implying perhaps the capital intensive nature of its operations. The company also made do with borrowings of Rs 1.4 bn at year end against Rs 875 m previously. The outflow of cash on capex together with the purchase of long term investments drilled a large hole in its pockets.
Exemplary working capital
The year-end working capital figures look quite exemplary. It is able to collect its trade dues with no difficulty and the trade payables at year end are almost on par with the trade receivables. The current assets at year end barring the cash balance of Rs 682 m is in the company's favour Vis- a -Vis the current liabilities at year end. Where the company is 'short-changing' itself is in the investment and loans and advances department. At year end the company had non-current investments with a book value of Rs 1.17 bn against Rs 1.07 bn previously and current investments valued at Rs 52 m. In the former grouping, the investments in siblings include equity capital valued at Rs 179 m and preference capital valued at Rs 890 m, with some monies blocked in what can only be categorised ashalthu falthu investments. It has also made advances of Rs 662 m to group companies against Rs 431 m previously.
The company has booked dividend income on current investments of Rs 17.4 m and on non current investments of Rs 57.4 m. The dividend income on the former appears mostly from the concept of dividend stripping - buy securities cum dividend and sell securities ex dividend. It bought and sold securities of the value of Rs 1.7 bn. It has also booked interest on investments of Rs 9.3 m and interest on loans and advances (including bank deposits) of Rs 73 m. Since the two receipts are not bifurcatedone cannot get a fix on the interest received on loans and advances. But the dividend return on its investments is yet to get off the starter's gun. For example, the seven siblings have not declared any dividends during the year. So one is not very clear from where the dividend receipt of Rs 57.4 m from noncurrent investments emanated from.
The financials of the siblings is baffling to say the least. And why the parent makes do with so many of them and that too in allied lines of businesses are also not known. But, anyways, the parent has also stood guarantees for loans of Rs 6.12 bn availed of by them. The paid up capitals of almost all the siblings is rather unique to say the least. Of the seven siblings, six are categorised as wholly owned siblings, and one-- Sealord Containers -- is classified as only a sibling. But the latter too on the basis of the shareholding pattern appears to be a wholly owned sibling. The vast bulk of the capital of Rs 513 m is made up of preference shares amounting to Rs 500 m. This sum is held by the parent in toto, as is the equity capital of Rs 9.7 m. The entire capital of Hindustan Aegis LPG Ltd apparently consists of preference shares of Rs 400 m. The parent holds preference shares worth Rs 390 m. There is a shortfall of Rs 10 m here. Another sibling Aegis Group International based out of Singapore has a paid up capital of a mere Re 1 m. Yet another sibling has a paid up capital of Rs 0.01 m. What is the purpose of incorporating such entities please?
If the paid up capitals look humorous take a look at the financials. Its Singapore based offspring Aegis Group International Pte. Ltd, with a paid up capital of Re 1 m rang up revenues of Rs 27.6 bn and posted a pre-tax profit of Rs 245 m. On the face of it -- and in the absence of a lack of additional financial information this is simply a fantastic feat of financial engineering, and its working should be made the subject of a case study in management institutes. What in heaven's name does this company do for a living anyways? And more to the point why is it that the parent cannot re-create such azure blue results? I have already expanded on the eyebrow raising performance statistics of Hindustan Aegis LPG Ltd. Yet another Singapore based offspring, Aegis International Marine Services, indulges in some fancy footwork of its own. It has a paid up capital of Rs 2.6 m. It rustled up revenues of Rs 566 m and rang up a pre-tax profit of Rs 4.9 m.
It is time that the government enacted a law to make companies more accountable for the need to create such outfits in the first place and then put some discipline into their functioning. The present situation is such that it presents a 'free for all' from the management's perspective. They have to be made accountable to the main body of the shareholders of the parent company.
From the looks of it this is not a company which will excite any interest from an investor.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.