ABG Shipyard: Slick move

Foray into rig making comes amid rising day hire charges

With strong demand conditions from the upstream oil and gas industry for oil rigs, it is no surprise that ABG Shipyard is planning a foray into the rig-making business.

It is understood that ABGs new oil rig facility at Dahej shipyard would come on-stream over the next 15-18 months. Senior company officials pointed out to an investment of Rs 600 crore for this expansion plan, which would be financed by debt.

The company plans to make high-end oil rigs where the day hire rates are estimated at over $150,000, thanks to heightened upstream oil activity in India and West Asia.

In addition, analysts point out that day hire rates for these oil rigs are also expected to remain strong even over the medium term.

Meanwhile, ABG Shipyard's operating profit fell 3.2 per cent y-o-y to Rs 49.65 crore in the March 2007 quarter, while its net sales grew marginally to Rs 193.06 crore. Its operating profit margin declined 85 basis points y-o-y to 25.75 per cent in the last quarter.

This pressure on margins in the last quarter was owing to higher other expenditure. Other players such as Bharati Shipyard's operating profit margin declined 1350 basis points y-o-y to 33.1 per cent in the last quarter.

Over the next few quarters, ABG's growth will be powered by its current outstanding orders that exceed Rs 4,074 crore. Also, the company's ability to manage rising metal costs would be crucial. At Rs 400, the stock trades at 17.5 times FY07 earnings.

Jindal Saw: Upstream ride

Jindal Saw reported an improved performance in the March 2007 quarter helped by strong demand for its submerged arc welded pipes from the upstream oil and gas industry.

As a result, operating profit grew 35.2 per cent y-o-y to Rs 146 crore in the last quarter, while net sales grew 33.1 per cent to Rs 1269.1 crore. Operating profit margin also improved 20 basis points y-o-y to 11.5 per cent in the previous quarter.

An improved performance by the company has not gone unnoticed by the street "" the stock has gained 33 per cent over the past three months compared with 13 per cent rise in the Sensex. Prominent contracts bagged by Jindal Saw in the last quarter include a $355 million (Rs 1500 crore) from a US-based customer.

The outlook for this sector remains robust as in user industries such as hydrocarbons, investments are expected to remain strong.

Jindal Saw's growth will be powered by its outstanding order book of $1.4 billion at the end of the March 2007 quarter. However, its ability to manage operational costs will also be crucial.

The company has said demand from the oil and gas sector and civic bodies to improve water and sanitation facilities offers good opportunities. At Rs 625, the stock trades at a reasonable 11.5 times estimated earnings for the year ended September 2007.

Adlabs: Silver lining

India's leading films processing company, Adlabs, turned in strong numbers for Q4 FY07, with revenues growing at 151 per cent y-o-y to Rs 86.1 crore and the operating profit surging 389 per cent y-o-y to Rs 40.7 crore on a standalone basis.

Consolidated revenues for the 12 months ended March 2007 were up 140 per cent y-o-y at Rs 298 crore with the profit after tax rising 158 per cent y-o-y to Rs 72.5 crore.

Adlabs is looking to become the country's leading multiplex operator with 175 screens by FY08 and 315 screens by FY09 from the current 67 and to reach this target, it has been both setting up and acquiring screens. The low occupancy at multiplexes continues to be a cause for concern.

However, if the company does manage to put up 200 screens by FY09, earns an average ticket realisation of Rs 95 and gets 25 per cent share of revenues from food and beverages, multiples revenues could grow in excess of 50 per cent annually in two years.

Adlabs revenue mix continues to change with the exhibition and film divisions contributing a larger share to revenues "" the share of film processing has dropped from 66 per cent to 25 per cent in two years.

In FY07, 69 per cent of the increase in revenues was owing to film distribution and production business. The company plans to demerge its radio business comprising licences for 45 stations, of which 13 have gone live.

The stock has outperformed the Sensex for the better part of the last one year and at the current price of Rs 549, trades at 25 times estimated FY09 earnings which is not cheap.

However, with the entertainment sector tipped to see huge growth, stocks in this space are likely to continue to attract high multiples.

With contributions from Amriteshwar Mathur and Shobhana Subramanian