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Shiv-Vani Oil & Gas 1QFY2010 performance highlights and result update

Contributed by Angel Broking

By Angel Broking

Shiv-Vani Oil and Gas (SOGES) reported good set of numbers for 1QFY2011 on the back of deployment of additional two rigs during the quarter. One rig remains to be deployed with ONGC, which is likely to happen in the current quarter. For  1QFY2011, the company registered top-line growth of 43.8% yoy, while bottom-line grew 53.4%. We remain positive on the company’s future growth prospects on account of strong order book and substantial investment commitments under NELP. We maintain a Buy on the stock.

Robust growth continues: SOGES registered strong top-line growth of 43.8% for 1QFY2011 driven by newer asset deployment. This growth was despite the 6.5% yoy appreciation in the rupee during the quarter. OPM expanded by 302bp yoy. Excluding the impact of forex fluctuations, OPM increased by 381bp yoy, driven by deployment of high-end rigs, benefits of operating leverage and increased contribution of the integrated projects in the revenue mix of the company. Bottomline registered an increase of 53.4% yoy to Rs65cr (Rs42cr).

Outlook and Valuation: SOGES is a visible play on the huge upcoming investments in the Indian E&P segment. Strong order book of Rs3,200cr (2.0x FY2011E Sales) and potential order accretion, imparts visibility over the next few years. We expect SOGES to record a CAGR of 24.4% and 14.5% in top-line and bottom-line respectively, over FY2009-12E. At Rs461, the stock is trading at 8.5x FY2012E EPS. We have marginally tweaked our numbers coupled with revising our EPS estimates downwards to account for newer FCCB issue. However, we increase our Target P/E multiple for the company owing to improving earnings visibility, diversification moves by the company and higher liquidity premium. We maintain a Buy on the stock with a revised Target Price of Rs539 (Rs510).

Top-line registers robust 43.8% growth: SOGES registered robust top-line growth of 43.8% yoy for 1QFY2011 to Rs399cr (Rs277cr) driven by newer asset deployment, largely on account of deployment of additional two rigs during the quarter and all 10 seismic crews being operational during the quarter. In 1QFY2011, 34 out of 40 rigs were operational, with five working on spot basis and one large rig is expected to commence work soon. Such robust top-line growth came in despite the 6.5% yoy appreciation in the rupee during the quarter. SOGES’s 40-50% of contracts are denominated in US dollar and thus the rupee appreciation restricts its top-line growth.

EBITDA margin expands by 302bp: OPM during the quarter expanded by 302bp yoy. Excluding the impact of forex fluctuations, OPM increased by 381bp yoy,  driven by deployment of high-end rigs, benefits of operating leverage and increased contribution of the integrated projects in the company’s revenue mix. Benefits of operating leverage are visible as other expenditure fell, as a % of sales, by 53bp yoy. Staff costs, as a % of sales, also declined by 50bp yoy during the quarter. SOGES reported 54.5% yoy growth in operating profit during the quarter to Rs176cr (Rs114cr). On a qoq basis, OPM contracted by 662bp from the high of 50.6% registered in 4QFY2010. High other expenditure was primarily responsible for the same, which as a % of sales, increased by 119bp.

Depreciation, interest expenditure increase: On account of capitalisation of newer assets, depreciation and interest expenditure increased during the quarter. Depreciation surged 79% yoy to Rs39cr (Rs22cr), while interest expenditure grew 68% yoy to Rs58cr (Rs35cr).

PAT grows by healthy 53.4%: Bottom-line during the quarter registered an increase of 53.4% yoy to Rs65cr (Rs42cr). Bottom-line recorded robust growth despite the significant increase in depreciation and interest expenditure during the quarter. However, effective tax rate during the quarter fell by 994bp yoy to 18% (27.9%). As a result, PAT margins expanded by 100bp yoy to 16.2% (15.2%) during the quarter.

Investment Arguments

Huge investment commitments under NELP and strong order book position impart strong revenue visibility: India has a total sedimentary basin of 3.14 million square kilometer (sq km) spread across onshore (1.39 million sqkm) and offshore blocks (1.75 million sq km), of which only 22% is extensively explored. Thus, India is still under explored and we expect the pace of exploration to pick up going ahead. SOGES with a diversified asset base stands to benefit from the same. SOGES has a order book position of Rs3,200cr (2.0x FY2011 sales). Thus, visibility in terms of revenues and profitability remains high.

SOGES to benefit from increased capex by ONGC, OIL: SOGES has built up a strong relationship with ONGC and OIL over the years and given the fact that almost 54% of the total New Exploration Licensing Policy (NELP) blocks are held by them, SOGES is likely to benefit on account of the same. Concerned over the stagnant production, ONGC and OIL are likely to spend more than Rs85,000cr in the Eleventh Plan (2007-2012), a growth of 60% over the actual outlay in the Tenth Plan. We believe SOGES is likely to benefit from the increased spending by these companies.

Outlook and Valuation

SOGES has reported good set of numbers for 1QFY2011 on account of deployment of additional rigs during the trailing one year. Out of the total 40 rigs, the company till 1QFY2011 has deployed 39rigs. The balance one rig is likely to be deployed during 2QFY2011. Thus, full impact of the all the rig deployment will be visible during 2HFY2011E. SOGES currently has an order book of Rs3,200cr  (2.0x FY2011 sales), which imparts visibility over the next couple of years. The company has also bid for orders worth Rs3,000cr. Factoring a success ratio of  25% for the same, it could result in increase in order book by Rs750cr, up 23.4% over the current order book. Based on our interaction with the company, winners of orders to the tune of Rs1,500cr would likely be announced over the next quarter. Thus, any order wins by SOGES could be a positive catalyst for the stock.

We believe that there exists huge potential for further order accretion going ahead. It may be noted that OIL India, the second largest oil exploration and production (E&P) company in India, has also lined up capex of more than 2,500cr for the exploration and appraisal activity for the next couple of years. We believe that SOGES would be a key beneficiary of the same. Thus, strong order book lends strong visibility to the company’s revenues and profitability. Potential can also be gauged from huge planned E&P outlay under the Eleventh Five-Year Plan at US $31.7bn as against US $12.5bn in the Tenth Plan. Substantial investment commitments under NELP and strong Order Book position are expected to impart strong revenue visibility to the company going ahead. Thus, SOGES is a visible play on the significant upcoming investments in the Indian E&P segment. We expect SOGES to record CAGR of 24.4% and 14.5% in top-line and bottom-line respectively, over FY2009-12E.

We have marginally tweaked our estimates for SOGES in light of the quarterly results. However, we have revised downwards our EPS estimates on account FCCB issue worth US $80mn. The same would result in equity dilution of 15.8% if the FCCBs are converted at Rs516/share up to August 2015.

SOGES plans to acquire a company overseas to improve the technological knowhow to work in newer areas such as offshore drilling. We believe the move opens up the new growth avenues for the company. We increase Target P/E multiple from 8x earlier to 10x for SOGES. The increase in multiple has been on account of improving earnings visibility, diversification efforts by the company and higher liquidity premium. At Rs461, the stock is trading at 8.5x FY2012E EPS. We maintain a Buy on the stock, with a Target Price of Rs539 (Rs510 earlier), translating into upside of around 17% from current levels.