A small beginning

IPO REVIEW

The demand for natural gas compression has been rising due to increasing energy demands, its eco-friendly nature and laws prohibiting flaring of natural gas at oil wells.

Moreover, the contribution of natural gas is only eight per cent of the total energy sources in India, as compared to 24 per cent globally. This leaves a substantial scope for growth. Already, natural gas consumption has grown by 6.3 per cent CAGR over the past 10 years.

Deep Industries, engaged in the business of natural gas compression, posted an operating revenue of Rs 7.29 crore for FY06, down 25 per cent since FY02. However the net profit has grown by over 880 per cent to Rs 1.79 crore over the same period.

Now, the company is entering the market to garner over Rs 40 crore through issue of shares priced at Rs 36. The P/E for Deep Industries stands at 13.64x, while its major competitor - Shiv Vani Oil - trades at 26.7x trailing EPS. Analysts find the valuations reasonable, given the growth potential for the sector.

The company attributes the fall in revenues to the shifting focus of the company from gas transportation to gas compression, which at present is low value, but offers high margin. The gas compression sector is currently very small but holds good potential for growth.

"New uses of gas compressors in oil wells, in supply pipelines and in power plants, apart from gas fields, is creating more demand. Over the years, the trend of outsourcing the compression activity to specialised players has been gaining ground. Moreover, new gas discoveries create further demand," says an analyst.

Currently, Deep Industries has over 50 per cent market share in the gas compression business with clients like ONGC, Gail and IOC. It has also forayed into the overseas market.

Shiv Vani, which derives about 30 per cent of its business from gas compression (rest from hiring oil rigs), controls the remainder of the market apart from a few unorganised players.

Majors in the international market like Hanover Asia and Universal Compression are too big for comparison and hardly have a presence in India. The stock could turn out to be a dark horse.

Issue opens: August 29, 2006
Issue closes: September 4, 2006