Part 3

For this part let us assume that the date today is 05^th July,2019. The results of Aegis are out. So we plant to review the same.

Both Growth in EBITDA and ROCE point that the performance has been decent. The LPG business seems to be picking up pace. However, lets get deeper into both the businesses as last year we had some disconfirming evidences from Liquid Business.

The trend of rising LPG contribution is still intact. Now in fact LPG business is more important rather than the Liquid business. However, falling ROCE’s of the liquid business still require deeper investigation. Let’s look at the Liquid Business first as all are assumptions in the initial valuation in 2014 were based on the same.

Disconfirming Evidence: This is the third year of disconfirming evidence from the liquid business. Currently, the utilisation rates of the liquid business has fallen to 30% levels. Though the management has expanded capacity in the liquid business from 500,000 KL (in 2015) to 700,000 KL (in 2019) and plans to take it upto 1000,000 KL, the overall incremental capex deployed in Liquid business over past 5 years is 382 crores while in gas business is 531 crores. In addition, the gas business contributes around 75-80% to EBITDA. In future capex plans, management is spending around 350 crores towards gas business and 100 crores towards liquid one.

Analysis: Seeing the business from the overall perspective,  we think as of now the liquid business is not of a concern as of now, further the actions of the management confirm the same. We think the management is well aware of the problem, based on the past record they may solve or are already doing it by consciously allocating more toward the gas business. 

However, our assumptions of liquid business made in 2014 during valuation, have been proved wrong. Hence, we need to evaluate the gas  (Terminalling) business in order to take the decision of holding the business or to sell.

Gas Business

If we see in the figures mentioned in the screener, the ROCE of the business from the past five years is very high. Currently, in the gas terminalling business the company is in expansion phase as can be seen from the volume numbers and sales growth.  The company is already expanding capacity to around 9.2 million MT.

Valuation

Any valuation tells about the valuer rather than the company.

Assumptions

1. Over the past 5 years, sales have increased by 4 times, however we have assumed it to rise by 3 times to 7.5 Million MT. This seems plausible considering 9.2 Million MT of capacity to be live by 2021. 

2. We have taken average EBITDA as 1000 Rs per ton while the depreciation as 10% of EBITDA.

3. Future PE multiple is around 14 which results in the valuation of the company to be around 9000-10000 crores.

Current price is around 6500 crores which results in around 7% return over next 5 years. 

It seems to be a good business at a fair price.

Risk

1. Significant rise in oil and gas prices

2. Competitive advantage derailing

Share Price

The price has fallen by 19% while the earnings have increased by 15%, thereby resulting in contraction of PE from 39 to 30.

The key variables to be tracked are: (Gas business)

1) Volume (Growth) + EBITDA per ton

2) Marginal ROCE 

3) Capacity Growth

Though the evidence of ROCE over the past 10 years in gas business shows strong competitive intensity, It seems the company seems to have Geographic moat advantage. As of now we have not been able to make it out so strongly. 

Hence, we will keep our position at similar levels instead of increasing them. However, we may increase the same in future. You may have a different opinion and we would love to know the same.

If someone wants to research what happened ahead is free to do the same.