By Ankit Bhembre

India Ratings and Research (Ind-Ra) has affirmed Aegis Logistics Limited’s (ALL) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Strong Credit Metrics: The affirmation reflects ALL’s ability to maintain a strong credit profile in line with Ind-Ra’s expectations for FY16. ALL’s net leverage (Ind-Ra-adjusted net debt/EBITDAR) improved to 0.9x in FY16 from 1.1x in FY15 on account of strong growth in operating EBITDAR and lower debt. In FY16, it had an EBITDAR return on capital employed of 26.4% (22.4%). The agency expects ALL’s net debt/EBITDAR to remain below 1x over the medium term, driven by moderate operating profitability growth and lower debt.

Moderation in Liquid Division’s EBITDA: In FY16, ALL reported moderate growth in the liquid division’s EBITDA (normalised to exclude corporate overheads and hedging cost) to INR1,705 million (FY15: 1,573 million). The division registered a healthy EBITDA margin of 60% in FY16 (FY15: 63.5%).

In 1HFY17, ALL handled lower volumes on account of low chemical and cessation of alcohol traffic at the Pipavav terminal. As a result, the division’s EBITDA declined to INR425 million in 1HFY17 from INR557 million in 1HFY16, with EBITDA margin falling to 56.9% from 61.6%. ALL is in the process of diversifying its product portfolio and increasing evacuation options by extending the railway gantry at the terminal, the full benefit of which is likely to be realised in FY18.  The agency expects the division’s EBITDA to register low-to-moderate growth for FY17 on account of moderate profitability at ALL’s other terminals, although EBITDA margin is likely to remain under pressure.


Growth in Gas Division’s EBITDA: ALL reported significant growth in the gas division’s EBITDA (normalised to exclude corporate overheads and hedging cost) to INR1,226 million for FY16 from INR847 million recorded for FY15, with EBITDA margin improving to 6% from 2.2%. The improvement in operating profitability is due to the capacity expansion at ALL’s Pipavav and Mumbai terminals and higher terminaling and distribution volumes on the back of a reduction in supply costs, robust LPG demand and the rationalisation of LPG subsidies by the central government.

The gas division registered robust growth in EBITDA for 1HFY17 at INR700 million (1HFY17: INR534 million), along with an EBITDA margin of 5.2% (4.6%). The agency notes that ALL has a strong sourcing order book of 1 million metric ton of LPG, backed by international tenders of public sector units (PSUs) and private clients and healthy gas terminaling orders from PSU clients for FY17. The agency expects ALL’s gas distribution business to register healthy volumes, driven by improved sourcing, lower spreads to competing fuels and increased LPG demand. The gas division’s EBITDA accounted for 62.2% of the consolidated EBITDA (normalised to exclude corporate overheads and hedging cost) in 1HFY17 (FY16: 54.5%). Ind-Ra expects the gas division to remain the key growth and EBITDA margin driver in the near to medium term.


Increased Port Presence: In FY16, ALL added a second chemical berth for its liquid and gas business in Mumbai and added a 2,700 metric ton to existing gas capacity at the Pipavav terminal. ALL is in the process of increasing liquid terminal capacities on the west coast via the setup of a new 100,000 kilolitre terminal in Kandla, addition of 25,000 kilolitre to its existing capacity in Haldia and the establishment of a new 25,000 kilolitre terminal in Mangalore. ALL is expected to incur INR483 million in FY17 and INR250 million in FY18 (funded by internal accruals) on liquid capacities.

Moreover, ALL is installing new gas capacity on the east coast via the addition of 25,000 metric ton in Haldia. This expansion involves an internal accrual-funded INR1 billion investment over FY17-FY18. The new capacities are likely to come online in FY18 and likely to boost gas throughput and liquid storage capacity, thereby enhancing ALL’s position as a key gas and liquid logistics player in India.


Strong Liquidity and Cash Flow Stability: In FY16, ALL maintained positive cash flow from operations at INR1,256 million (FY15: INR1,101 million; FY14 INR811 million) and a lean cash cycle of 4 days (FY15: 2 days; FY14: 3 days). Ind-Ra expects cash flow from operations (estimated at over INR1.5 billion annually) to be adequate to meet debt repayments over FY17-FY19. Furthermore, for the gas sourcing subdivision (12% share of normalised gas division EBITDA in FY16), ALL enters into back-to-back contracts with customers and suppliers; these contracts have common price, quantity, forex rate and credit period terms. In addition, the company makes a fixed dollar spread per metric ton, ensuring stable cash flow. In the LPG distribution subdivision (16% share of normalised gas division EBITDA in FY16), LPG imports are fully hedged by way of forward contracts.

Proven Track Record; Strong Customer Relationships: ALL has over 40 and 20 years of experience in liquid logistics and the gas business, respectively. Moreover, it has long-standing ties with large clients such as Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited (‘IND AAA’/Stable) and Reliance Industries Ltd (‘IND AAA’/Stable). In 2HFY16, the company added Indian Oil Corporation Limited (‘IND AAA’/Stable).

Risks:
Risks associated with the terminalling business (both gas and liquid) are competition (from national oil companies setting up own captive terminals and others), future availability of land for expansion at prime locations, reduced demand from end-user industries and regulatory risks. Furthermore, the gas sourcing and distribution businesses are susceptible to risks such as availability of alternative fuels at lower costs and any adverse change in government policies and regulations.


RATING SENSITIVITIES

Negative: A deterioration in credit metrics, along with a sustained Ind-Ra-adjusted net leverage of above 1.5x, could result in a negative rating action.


COMPANY PROFILE

Incorporated in 1956 and listed in 1978, ALL operates a network of bulk liquid and LPG terminals, filling plants, pipelines and gas stations.

ALL’s ratings:
- Long-Term Issuer Rating: affirmed at ‘IND AA’; Outlook Stable
- INR 176.7 million (reduced from INR359.4 million) term loans: affirmed at ‘IND AA’; Outlook Stable
- INR98.2 million fund-based working capital facilities: affirmed at ‘IND AA’; Outlook Stable
- INR250 million non-convertible debentures: affirmed at ‘IND AA’; Outlook Stable

- INR4,719.8 million non-fund-based facilities (increased from INR4,119.8 million): affirmed at ‘IND AA’; Outlook Stable and ‘INDA1+’



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.


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Applicable Criteria

Analyst Names

  • Primary Analyst

    Ankit Bhembre

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40356197

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121