In a flattish market, the Shiv-Vani Oil & Gas Exploration Services’ stock has risen seven per cent since the start of the month over plans to raise about Rs 500 crore via a Qualified Institutional Placement (QIP). While the company raised $130 million in the September and December quarters of the current financial year to fund its capex plans of $100 million, the latest funding, believe analysts, is likely to be used to reduce debt estimated at Rs 2,045 crore for 2011-12. This should help the company reduce its exposure to volatility in interest rates and aid in improvement of its net profit margins. However, the latest round of equity funding will involve significant dilution. If the current market price of Rs 314 is assumed as the issue price, the dilution in promoter’s stake is expected to be 25 per cent, bringing down the promoters’ stake to 40.27 per cent. Despite the likely reduction in debt, analysts expect the 2011-12 EPS to fall 12 per cent to Rs 50.73. However, despite this, in the long run, lower debt will reduce its exposure to volatility in interest rates, thereby, aiding net profit margins.
Higher interest costs have been a drag on Shiv-Vani’s financials in the recent past. Notably, the company’s profitability was hit in the last two-three quarters due to interest rate fluctuations. Analysts expect that a per cent rise in interest costs may impact the company’s earnings per share by three-four per cent. For the nine months ended December, its interest and finance costs surged a whopping 50 per cent to Rs 201 crore, contributing to a dip of 10 per cent in the profit before tax (after interest). After the QIP, the interest burden is expected to reduce significantly and thereby push up profits.
| SLOWING GROWTH | |||
| In Rs crore | FY10 | FY11E | FY12E |
| Sales | 1,285 | 1,448 | 1,579 |
| % chg y-o-y | 33 | 13 | 9 |
| Ebitda (%) | 43 | 45.4 | 44.3 |
| Chg in bps | 379 | 273 | -105 |
| Net profit | 216 | 227 | 268 |
| % chg y-o-y | 17.8 | 5.2 | 18.0 |
| P/E (x) | 6.7 | 6.5 | 5.6 |
| E: Estimates Source: Bloomberg | |||
On the operational front, slowing order flow is a concern for Shiv-Vani. Following uncertainties about the top management rejigs in its key clients ONGC and Oil India, Shiv-Vani’s 2010-11 new order wins slowed down significantly. Its order book stood at Rs 2,700 crore as on December and is to be executed over the next 2-2.5 years. The company’s order pipeline (new order bids) stands at Rs 2,500 crore and the management is confident of winning at least 40 per cent (Rs 1,000 crore) of these orders. While the management expects tender activity to pick up in the next two-three months, any further delays in order flows remain a key risk.
Due to delays in orders as well as higher interest costs, analysts had pruned their earnings growth estimates by 18-20 per cent for 2010-11 and by 25-28 per cent for 2011-12. The Ebitda margins though are expected to be stable at around 45 per cent over FY11-13. Key triggers for the stock include pick-up in new order wins.
Looking at various segments it is present in, Deep-drilling services(54 per cent of order book) is likely to be the revenue driver for the company going forward. The company’s coal-bed methane exploration services (16 per cent of order book) is pegged to grow by 12-15 per cent going forward. Shiv-Vani is focussing on expanding market share in the seismic studies segment (which provides steady revenue stream) from the current 40 per cent. The company is looking to bid for more projects in the West Asia (26 per cent of order book), aiding its revenue growth.