Buy Aegis Logistics Ltd For Target Rs.246 - HDFC Securities
Aegis Logistics Ltd (ALL) is a niche player in liquid and gas logistics business in India providing services such as sourcing of products, storage, and distribution for oil, gas, and chemicals. Company has storage tanks to handle liquid cargo across with 729,310KL annual capacity. It offers third-party liquid logistics services for handling and storage, provides operations and maintenance (O&M) services, and has a well-diversified customer base which includes OMCs and chemical industries. ALL is well placed to cater to the huge potential of imports through its various terminals facilitated through pipelines or railway gantry.
The work for its capacity expansion across its various locations is going on and ALL has a strong advantage of project execution at lower costs in a short duration due to its experience. Capacity addition led by expansion programs will drive volume as well as profitability growth in medium to long term. Apart from this, Japanese trading company Itochu has a 40% stake in Haldia LPG terminal, which highlights investor confidence in the LPG potential of the region.
PSUs like HPCL and BPCL basically stopped many tenders and many spot imports of LPG in the month of May and June due to the overbooking of cargos and there was a sharp drop in International LPG prices in April. This was the situation of a big drop in its sourcing of gas for the public sector as well as a big drop in prices. Currently, LPG prices have recovered after a sharp crash in Apr 2020. We expect sourcing of Gas business could come to normal level and its Gas Terminal division could continue to generate strong revenues going forward.
Valuations & Recommendation:
ALL continues to look for opportunities to lease or acquire land at major and minor ports in India in line with the Company’s vision of building a series of terminals around the coastline in India. It has significantly low working capital needs compared to its scale of operations. ALL has healthy return ratios with RoCE at 18-25%. Its control on the complete supply chain helps it to reduce costs and provide reliable services at very competitive rates. ALL has recognized a noncash expenses regarding Employee Stock Purchase Plan totalling around Rs 335 crore, of which Rs 240 crore was recognised in FY20. Expense regarding the Employee Stock Purchase Plan of ~Rs 80 crore in FY21E and ~Rs15 in FY22E, as a non-cash item could impact its profitability. However, we have adjusted this noncash expense for finding out the fair value of stock. We are positive about the long term prospects of the Company. We think the Base case fair value of the stock is Rs 218 (18.0x FY22EPS) and the bull case fair value of the stock is Rs 246 (20.0x FY22EPS) over the next 2 quarters. Investors can buy the stock in the Rs 189- 193 band (15.75xFY22E EPS) and add further on dips to Rs.174-178 band (14.5xFY22E EPS). At a CMP of Rs 204, stock trades at 16.8x FY22E EPS.
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