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Great Offshore: Shoring up

Jan 12, 2007

Introduction to results
Great Offshore Ltd (GOL) has announced mixed results for the quarter ended December 2006. While topline has grown by 17% QoQ, net profits have declined by 3% QoQ on account of higher dry-docking expenses and tax outgo. For the nine-month period ended December 2006, sales and net profit stood at Rs 3,876 m and Rs 1,114 m respectively (corresponding figures for 9mFY06 are not available).

Performance Snapshot
(Rs m) 2QFY07 3QFY07 Change 9mFY07
Net Sales 1,271 1,483 16.7% 3876
Expenditure 646 761 17.7% 1950
Operating Profit (EBDITA) 624 722 15.6% 1925
EBITDA margin (%) 49.1% 48.7%   49.7%
Other income 9 6 -33.0% 52
Interest 73 95 31.2% 226
Depreciation 147 193 31.9% 476
Profit before tax 414 439 6.1% 1,274
Tax 26 64 143.5% 160
Net profit 388 375 -3.2% 1,114
Net profit margin (%) 30.5% 25.3%   28.8%
Effective tax rate (on PBT) 6.3% 14.5%   12.5%
No. of Shares (m) 38.1 38.1   38.1
Diluted earnings per share (Rs)*       39.0
Price to earnings ratio (x)*       19.8
*9mFY07 annualised        

What is the company's business?
Great Offshore, the erstwhile offshore division of Great Eastern Shipping is India's largest integrated offshore service provider. The company operates in two broad segments 'Port & Terminal Services' and 'Oil & Gas Offshore'. While the former involves providing berthing, unberthing, towing of vessels and other harbour services to ports, the latter involves exploratory drilling, offshore support and construction services to oil & gas companies. The company has a fleet of 39 vessels, which includes 24 Offshore Support Vessels (OSV), 11 Harbour Tugs, 1 Construction Barge and 2 Drilling Vessels. As the case with other offshore players, ONGC accounts for a large part (almost 50%) of revenues for GOL.

Fleet Profile*
Vessel Type Nos Average Age
AHT 3 22.0
AHTSV 10 16.0
Construction barge 1 28.0
Drilling vessels 2 32.6
DSV 1 17.0
FFSV 2 0.0
Harbour tugs 11 9.5
MRV 1 19.0
PSV 7 1.9
Total offshore vessels 38 12.3
* as of November 2006

What has driven the performance in 3QFY07?
Fleet expansion drives topline: GOL reported a 17% QoQ growth in topline for 3QFY07, primarily aided by higher operating days of vessels acquired in the previous quarters. The company has so far acquired 7 vessels in this fiscal, including 3 vessels (2 AHTS and 1 MRV) in 3QFY07. The vessels acquired during the quarter are expected to be deployed in the coming quarters after they undergo refurbishments. In the wake of strong demand for offshore support services, GOL plans to add 3 AHTSV (anchor handling and tug supply vessel) and one jack-up rig by FY09 for a total investment of US$ 225 m.

Higher dry-docking expenses impact margins: Operating margins declined by 50 basis points (QoQ) to 48.7% in 3QFY07. This was mainly on account of higher dry-docking expenses (repairs and maintenance), which as a percentage of sales increased from 6.7% in 2QFY07 to 11.9% in 3QFY07. The impact of the same was however mitigated by lower staff cost and direct operation expenses (refer table below). Although the staff cost has been lower this quarter, the management expects the same to increase going forward. Overall, we do not expect any significant decline in margins for the company, considering the strength in day rates due to demand-supply imbalance (demand being higher than supply). Operating margins for the nine month period ended December 2006 stood at 49.7%.

Cost details
(% of sales) 2QFY07 3QFY07
Staff cost 23.1% 20.6%
Repairs & maintenance 6.7% 11.9%
Direct operation expenses 11.0% 8.4%
Other expenses 10.1% 10.3%

Depreciation and tax outgo pare profitability: Fleet augmentation resulted in increased depreciation for the company as the same increased by 32% QoQ in 3QFY07. The profitability was further aggravated by higher tax outgo and lower other income. Tax expenses for the quarter surged by 144% QoQ, as the effective tax rate increased from 6.3% in 2QFY07 to 14.5% in 3QFY07.

What to expect?
At a current market price of 774, the stock trades at 19.8 times its annualized 9mFY07 earnings. The NAV of GOL at the end of December 2006 stood at Rs 550. Though medium to long term prospects of the company appear bright, the company might see a slight decline in its profitability in the coming quarter as 'Kedaranath' (one of the two rigs) is expected to be dry-docked for a period of 4 months at an estimated cost of US$ 8-10 m. Considering the significant amount of expenses involved and the loss on revenues, we expect profitability to be under significant pressure in the short-term. This will be however be transient in nature as fleet augmentation coupled with an increased utilization of its newly acquired vessels is expected to result in increased profitability for the company over a period of time. Also, re-pricing of its 'Kedarnath' rig at US$ 80,000/day (a 100% increase over the current rates) is likely to be a big positive.

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