Aban Offshore: Utilisation improves, but debt still a concern

The recent Rs 1,050-crore ONGC order has brought some cheer, but valuations will improve only after some debt is retired

The recent Rs 1,050-crore award from ONGC comes as a relief for Aban Offshore, which has suffered a lack of demand, lower rates (rentals) and high debt in its books. Its stock is up around 2-3 per cent, after it announced that its drillship Aban Ice would be deployed at ONGC for three years. While rig rates remain low and are expected to remain subdued, but if Aban Offshore, which has 18 offshore assets in its portfolio, can keep higher utilization, it could help address a part of its high debt problem. "The uncertainty over asset utilisation, declining charter rates and interest cost has reduced post renewal of the existing contracts," said Mayur Matani, who tracks the company at ICICI Securities in a note. 

Aban Offshore has a debt of Rs 11,865 crore, which is almost four times its equity and six times its operating profit. This is the reason that almost 60 per cent of its operating profit is used in servicing the interest cost and thus, this has huge impact on profitability and valuations. Its stock is trading at 7.8 times FY13 earnings, which obviously can be attributed to higher debt and lower return on equity of 6.1 per cent. On the basis of earnings, the valuations may look attractive, but given the huge debt it is prudent to value the company along with debt. For instance, including the debt its enterprise value works out to Rs 13,192 crore which is almost 7 times its operating profit and 3.6 times sales in FY13. This is not attractive and the company needs to bring down its debt significantly.

"Profitability is not reflecting in debt reduction and debt to equity remains high at 4 times (not including preference shares). Other risks are an ageing fleet and risk of payment issues in Iran. Only debt reduction will make us turn positive on the stock," said Niraj Mansingka analyst at Edelweiss Securities.



Thankfully the company is trying to bring down interest cost. It recently converted standalone Rupee loans of about Rs 2200 crore into foreign currency debt. The foreign loan is at LIBOR plus 6%, which effectively cost at around 6.3-6.5% compared to earlier rate of 14%.

This is believed could help the company to save about Rs 154 crore annually, which is almost 80% of its FY13 net profit of Rs 191.3 crore. No wonder this will have positive impact on FY14 numbers as analysts believe that interest cost will come down by almost 220 crore and that is the main cause of 72% expected increase in net profit in FY14 at about Rs 329.6 crore.

That apart, it has recently said to exchanges that it plans to raise funds to the tune of Rs 4,500 crore through various instruments including QIP of upto Rs 2,500 crore.

This could possible help the company. However the impact on profitability and valuations will depend on the timing of such initiatives and possible dilution. At current price if company wants to raise entire QIP it will lead to 65% dilution.