Aban Loyd: Exploring strategically

Buying 33.76% in Norway-based Sinvest will help Aban Loyd gain from sector upturn

The well-documented upturn in the upstream industry has led to a sharp rise in day rates for hire of rigs, as exploration and drilling activities have increased.

Current day hire rates are pegged at $200,000 compared with $120,000 a day in March 2004. To leverage this opportunity, Aban Loyd Chiles Offshore's Singapore subsidiary has decided to acquire a strategic stake of 33.76 per cent in Norway-based Sinvest for $445 million (approximately Rs 2040 crore).

In an analyst conference, Aban Loyd's senior management pointed out that the Norwegian company has two rigs, which are in operation, and seven more are expected to go onstream, in stages over the next two-three years. The Norweigian company's rigs are capable of deployment in deep sea drilling operations across the globe.

In case of Aban Loyd, its fleet capacity in March 2006 included six offshore jack-up rigs, one floating production system and two drillships.

It does appear that the Aban Loyd management would be keen to leverage the synergies created between the Indian and the Norwegian operations.

Besides the $100 million FCCB issue that Aban Loyd raised earlier, the senior management highlighted that the company would also utilise credit facilities to finance the acquisition.

The buoyant operating conditions for Aban Loyd have helped the stock to withstand the selloff recently witnessed on the street.

It has gained nearly 16.3 per cent over the past four months vis-a-vis a fall of 0.8 per cent in the Sensex.

Aban Loyd's operating profit expanded 87.3 per cent y-o-y to Rs 281.34 crore in FY06, compared with a growth of 70.1 per cent in its income from operations to Rs 490.16 crore.

A faster growth in operating profit was aided by a tight check on costs. For instance, repairs to machinery declined 18.3 per cent y-o-y to Rs 20.07 crore in FY06.

As a result, its operating profit margin rose by 532 basis points y-o-y to 57.4 per cent for the year. The stock trades at about 26.5 times estimated FY07 earnings (excluding the latest Norwegian acquisition), given the strong operating environment for the company.

GHCL: Yet another acquisition

GHCL seems to be following a rather aggressive strategy in acquiring companies abroad. In the December 2005 quarter, it bought soda ash manufacturer Bega Upsom in Romania and home furnishings player Dan River, based in the US.

The company today announced the acquisition of the home furnishings business of Rosebys for $40 million. With revenues of $250 million and 325 retail stores in the UK, the price of the acquisition appears reasonable.

Last December, GHCL acquired 90 per cent stake in Dan River for $17.5 million. The $250-million Dan River had become sick as the fact that 75-80 per cent of its manufacturing was based in the US made the business unviable.

Through this acquisition, GHCL found a ready market for its textile furnishings plant, with a capacity of 36 million metres.

The Rosebys buyout will further enhance its presence in the global furnishing market. GHCL plans to source home furnishings of $100 million from its own unit, which began production in March 2006.

Chairman Sanjay Dalmia plans to source the remaining requirements from other manufacturers, mainly in Pakistan and China.

While Dan River is a reseller to larger chains such as JC Penney, Linen & Things and Wal-Mart, the Rosebys acquisition will provide GHCL presence in retail stores too. According to Dalmia, the margins in retailing are higher than that in manufacturing.

Going forward, to widen its presence, GHCL may go in for more acquisitions at the retail store level in home furnishings. It also plans to benefit from manufacturing and sourcing synergies to increase both revenues and profits as Dan River and Rosebys are integrated with the company.

In soda ash, its Romanian operations have increased production by 30 per cent to 650 tonne a day and reduced cost by $4 a tonne, post-acquisition. GHCL is also enhancing its soda ash capacity in India from the current 8.5 lakh tonne a year to 18 lakh tonne a year, to be appreciable in 2008.

The GHCL stock has fallen 8.3 per cent since the beginning of 2006 against the Sensex gain of 6.4 per cent, as its shareholders are yet to see the benefits of the acquisitions. The stock trades at about 10.8 times trailing 12-month EPS.