Part 2

This part is further divided into two phases:

1. 2015-2016

2. 2017-2018

2015-2016

Let us assume that the date today is 05^th August, 2016.  We plan to reevaluate our investment in Aegis.

Though the Sales of the company has fallen over the past two years, the Return on Capital Employed has increased from 16% to 20% and up levels. Besides that the EBITDA of the company has grown from around 100 crore levels to 185 crores. Lets focus on the EBITDA first.

The company has expanded in stable Liquid Chemical Division. The revenues for the division  have increased from 131 crores to 171 crores with increase in EBITDA margins from 45% to 60%. If this kind of EBITDA margins are to stay, they are above are expectations, however we ought to wait for few more years to be sure.

Even the company has surprised on the expansion speed in this division the company plans to reach the capacity of 1million KL by 2017-2018. In fact, the fast execution of the company was visible in 2015 when a project was implemented earlier than the timeline.

If we look at the gas business.

If we look at the gas  division, the contribution of EBITDA from 2014 has increased from 20% to 28% despite rising EBITDA levels.  Though the revenues are falling due to fall in gas prices but volume of terminalling, sourcing and retailing and distribution business seem to be increasing. The volume of both businesses has increased.

Over the past two years the EBIT of gas terminalling business has risen from 20 crore to 80 crore, slowly contributing more to the pie. Falling oil and gas prices could have played a major role in this. It would be interesting to see whether the same trend of the company sustains when oil and gas prices rise.

Growth

Currently, the company has around 100 gas stations and plans to take it to 125. Recently the company entered into Joint Venture with Essar to set up petrol and diesel infrastructure in its plants. Slowly the company is increasing EBITDA per station by improving the value proposition.

In liquid terminalling business, as already mentioned expansion plans are on to reach 1 million KL capacity. Currently, the company is setting up 100,000 KL plant in Kandla port.

In gas terminalling business, the company is setting up a 25000MT plant (250 crore) at a port in West Bengal and plans to reach 800,000 of capacity within next 2 years.

In 2015, The company entered into a joint venture with a Japanese company to sell 40% stake in its sourcing business for complete valuation of 101 crore. This further  indicates the capital allocation skills of the management as this business could have been a drag on others. 

Disconfirming Evidence

The past track record (before 2014),  of the gas terminalling business is not that good. However, with changes in government policies this may change. The company is further investing in the business, this needs to be tracked.

Share Price

The earnings of the company has increased by 74% while the Market cap has increased by 257% thereby resulting in expansion of PE from 14 to 35. The fall in 10 year bond yield from 8.5% to 6.5% has played a role in the same.

We will do nothing at this stage. However, you may have a different viewpoint and we would love to know why you think so?

2017-2018

Let us assume that the date today is 15^th August, 2018.  We plan to review our investment in Aegis LPG.

Over the past two years, the ROCE of the company has been on a decline, while the earnings have grown from 153 crores to 253 crores (91%).  

While the margins of the company have started to fluctuate due to rise in Oil Prices, main reason for fall in ROCE is the massive investment which the company has overtaken in both Liquid terminalling and gas terminalling business over the past two years.  Recently, the company has opened a new gas terminal in West Bengal which has resulted in capacity expansion in the LPG segment from 1.7 million MT to 5 million MT. 

The profitability numbers clearly signal that Gas business (Mainly terminalling) has become more than 70% of the profitability profile of the company. Hence we need to evaluate the Gas business in order to better think about the future of the company.

Growth

The company has already expanded capacity in the gas business from 750000MT (Throughput capacity) in 2016 to 5000000 MT capacity in 2018. Currently, around 17.44 million MT of volumes is being done by the company. This is as the main expanded plant has come to capacity this year only. 

In Gas Station business the company has expanded from 100 stations to 108 stations, while in the distribution business company has scaled from 54 to 109 distributors. It seems clearly the company is not focused on this segment. 

The company has expanded capacity in the lucrative liquid business from 500000 (KL) to around 700,000 (KL). There seems to be some problem in this business due to the stagnant sales numbers from past two years.

Disconfirming Evidence

The Revenue of liquid terminalling segment is stable around 170 crores signifying either capacity utilisation issues or pricing pressures. The repeated nature (2017 and 2018) of the stagnant sales is not good.   This could be due to deterioration in the business as it has never happened in the past or temporary. Currently, The margins of the business are intact from the past two years (45% levels- EBITDA).  This needs to be tracked in future, as our expectation was based on the same.

Gas Business

The past record (2002-2014) of gas terminalling business is not good, however it  seems not relevant as the gas industry is going through rapid changes. Further, the high growth rates of the gas business signify the same. As of now we have no opinion regarding the same (Neither good nor bad)

Share Price

Over the past two years, the price has increased by 90% while the earnings of the company have increased by 75%, thereby keeping the PE at almost similar levels of 35-40. The 10 year bond yield are at similar levels.

At this point we will do nothing as we are not sure regarding the business quality of Gas business. In fact we may sell in case of further disconfirming evidence. Though you may have a different viewpoint and we would love to know why you think so.

Purpose

While taking such decisions in theory are easy, they are tough in reality. Thats why cases like these help us. The purpose of these case studies is to practice such cases and help all of us develop patterns to take similar decisions in future and avoid mistakes of both omission/comission. Its like practice before the main match. We may have made some mistakes or you may not agree with us. However, we would love to know why you think so or what you may have done differently? So that we may all learn together.  

You  may visit screener.in  and in.tradingview.com for prices. These resources are really helpful.

Before Going further it would be better if you Analyse the case or do the valuation or allocation according to your own Method. That way it may help you to do better with the case further and sharpen your mind for future.

Pick Parts of the case study and use it as it may be helpful to you.

May we all learn and progress together. 

What Happened?

We will cover the next phase, from 2018 in part 3. (Please click on 3 on the bottom of the page)