Oceanic gains

POUND WISE

Aban Offshore could see at least a four-fold jump in its revenues in the current fiscal as the full benefits of its recent acquisition Sinvest will kick in.

As India's leading private offshore drilling services provider, Aban Offshore, acquired a 33 per cent stake in the Norwegian drilling company Sinvest in June last year, and gradually increased its stake to 100 per cent, the stock market jacked up its share price by a whopping 140 per cent.

And despite the stock doubling over the past six months and currently hovering around its 52-week high, analysts remain bullish. There are good reasons.

Firstly, the addition of Sinvest's assets and re-pricing of Aban's own assets at higher rates due this fiscal will result in a substantial jump in revenues and profits.

Secondly, the company is currently riding on good business condition thanks to high crude oil prices and rising charter/day rates (per day rental for the rig).

Thirdly, taking into account a three-year time frame, the stock is trading at a substantial discount to its global peers.

Doubling fleet
The Sinvest deal costing $1.25 billion (approximately Rs 5312 crore) may not seem like an easy one to swallow for a company with annual sales of about Rs 500 crore and earnings of less than Rs 100 crore. But the money seems well spent looking at the way it changes the complexion of Aban.

Thanks to Sinvest, Aban's fleet size of 10 would stand doubled by FY2009, making it the tenth largest drilling company in the world going by the current pecking order.

At present, Sinvest has eight rigs of which three are operational, two will be added in the current fiscal, and four more in FY2009. Another two rigs are currently on long-term lease. Moreover, Sinvest's strong cash flow will help Aban reduce its debt, which it raised for the acquisition.

According to Ajit Motwani, analyst, Emkay Shares and Stock Brokers, Sinvest is expected to generate about $800 mn of cash flow by FY2010, which is enough to substantially reduce its billion dollar debt.

Aban has funded the acquisition by leveraging heavily "� its debt:equity ratio, which stood at 2.6:1 in March 2006, stands at 6:1 post-acquisition.

Quadrupling revenues
According to analysts' estimates, Aban's revenues and profits are expected to leapfrog at least four to five times in the current fiscal driven by additional rigs from Sinvest and higher day rates for its existing assets.

In FY09, the company's revenues are expected to jump 47 per cent year-on-year while net profits are expected to more than double.

"Aban has timed the acquisition brilliantly," says Sandeep Nanda, head of research, Sharekhan. While some of Sinvest assets will get added this fiscal, come of Aban Offshore's own assets are also due to be re-priced, boosting its cash flows.

The company operates its rigs on long-term contracts of about three years. And out of the eight rigs that are operational, six are expected to be re-priced this year and one is already re-priced, according to the company.

Given that charter rates have been rising, the company can expect higher rates for its assets. On an average, day rates have tripled in the past three years and are expected to remain firm with a positive bias for quite some time.

"The average day rate for Aban's fleet is expected to triple to $1,80,000 by 2009," he adds.

Besides, higher crude oil prices will also aid business growth for Aban. Says one analyst, "Exploration and production (E&P) activities planned over the next two years are assuming crude oil prices of $57 a barrel. If crude oil prices continue to remain firm at levels upwards of $60, then E&P capex is bound to go up, resulting in greater demand for Aban's products." 
 

GALLOPING NUMBERS
Rs crore	Q4FY07	% chg	FY07	% chg	FY08E*	Chg (x)	FY09E*	% chg
Net sales	118.7	-1.3	497.5	1.5	3000	6	4400	46.7
Operating profit	46	-31	241.4	-12	2300	9.5	3300	43.5
Net profit	29.5	34	91.5	9.2	535.9	5.9	1279.8	138.8
* Estimates of various broking firms

A long call
While the long term prospects look bright for Aban, the past quarter results were weak as expected. Net sales declined 1.3 per cent to Rs 118.67 crore. Operating profit tanked 31 per cent due to increased salary and insurance cost.

Net profit however jumped 34 per cent to Rs 29.54 crore, thanks to an eleven fold jump in other income which included foreign exchange gains and interest income from subsidiary.

For FY07, its net sales increased 1.5 per cent while operating profit declined 12 per cent. Net profit rose 9 per cent to Rs 91.54 crore despite a marginal rise in interest and depreciation costs, thanks to a four-fold jump in other income because of exchange gains and dividend income.

At Rs 2594, the stock trades at about 18 times estimated earnings for the current year. This may seem a bit expensive but the stock looks quite cheap going by its price-earnings ratio of 7.9 times estimated earnings for FY09.

Moreover Aban's valuation is at a discount to its global peers which are quoting at about 9 times beyond FY08.

Says Sharekhan's Nanda, "Investors should look at the stock with a two year time frame."