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Great Offshore: The rig effect! - Views on News from Equitymaster
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Great Offshore: The rig effect!
Apr 30, 2007

Performance Summary
Great Offshore Ltd. (GOL) has announced results for the fourth quarter and year ended March 2007. For the fiscal, while topline grew by 55% YoY, the growth in bottomline was slightly lower at 54% YoY. Operating margins expanded by 440 basis points (4.4%) on the back of lower direct operating costs and other expenses. For 4QFY07, the performance on QoQ basis was lackluster (4QFY06 data unavailable due to the recent listing of the company), with topline at almost same levels but the bottomline declining by 20% QoQ, mainly due to pressure on operating margins and higher interest expenses.

Performance Table
Particulars (Rs m) 3QFY07 4QFY07 Change FY06 FY07 Change
Net Sales 1,483 1,493 0.7% 3,468 5,368 54.8%
Expenditure 761 812 6.7% 1,937 2,762 42.6%
Operating Profit (EBIDTA) 722 681 -5.7% 1,531 2,606 70.2%
EBITDA margin (%) 48.7% 45.6% - 44.1% 48.5% -
Other income 6 27 334.4% 29 78 165.6%
Interest 95 133 39.7% 164 360 118.9%
Depreciation 193 220 14.0% 422 697 65.2%
Profit before tax 439 354 -19.5% 974 1,628 67.1%
Tax 64 54 -15.0% 56 214 279.4%
Net profit 375 299 -20.2% 918 1,414 54.1%
Net profit margin (%) 25.3% 20.0% - 26.5% 26.3% -
No. of Shares (m)         38.1  
Diluted earnings per share (Rs)         37.1  
Price to earnings ratio (x)         20.2  

What is the company’s business?
GOL, 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 40 vessels, which includes 26 Offshore Support Vessels (OSV), 11 Harbour Tugs, 1 Construction Barge and 2 Drilling Vessels.

Fleet profile
Asset category Numbers Average Age
Drilling
Jack-up rig 1 32.0
Floater 1 34.0
Sub-total 2 33.0
     
Marine Construction
Construction Barge 1 29.0
     
OSVs
Highend AHTSVs 9 8.3
Lowend AHTSVs 9 23.1
PSV 7 2.9
MSV 1 20.0
Sub-total 26 12.2
     
Harbour Tugs
Tugs 11 11.4
* As of 31st March 2007

What has driven performance in FY07?
Rig segment drives topline: GOL has reported a 55% YoY increase in revenues for the fiscal. This was primarily due to increased utilisation of the ‘Kedarnath’ rig as it operated for the entire year in FY07. The rig was unavailable for almost half of the year in FY06 on account of dry-docking (repairs). Although the rig is contracted with ONGC (in Indian waters) at US$ 44,000 per day for a period of three years (Oct. 2005 to Sep. 2008), it was taken by OVL (ONGC Videsh Ltd.) to Iran, where it was deployed for a higher day rate of US$ 55,000 per day between July 2006 and March 2007. The rig has been now towed back to India, where it will complete its remaining contract with ONGC.

The growth in topline during the fiscal was also on account of fleet augmentation undertaken by the company. During the fiscal, GOL added 6 new vessels to its fleet (2 PSV, 3 High-end AHTSV, and 1 MSV). Since most of these acquired vessels were deployed only in latter part of the year, their full impact in revenue terms will be visible only in FY08.

Details of new assets acquired in FY07
Asset type Delivery date Contract start date Rate per day Contract period
PSV 25-Jul-06 25-Jul-06 US$ 14,950 5 years
PSV 14-Sep-06 - Spot Spot
Highend AHTSV 22-Sep-06 30-Sep-06 US$ 15,300 5 years
Highend AHTSV 28-Dec-06 30-Dec-06 US$ 14,400 3 years
MSV 30-Oct-06 19-May-07 US$ 58,500 5 years
Highend AHTSV 14-Dec-06 1-Mar-07 US$ 11,250 3 years
Source: Company presentation

Operating margins – The rig effect: GOL’s operating margins for the fiscal expanded by 440 basis points to 48.5%. Since rigs earn higher margins as compared to other offshore assets, the increased revenue contribution from rigs to the overall topline has had a positive impact GOL’s operating margins. Rigs accounted for 22% of the company’s revenues during FY07, as compared to 13% in FY06. As far as the cost break-up is concerned, all cost overheads (as a percentage of sales) except repairs and maintenance, recorded a decline on a YoY basis. Since acquired vessels have to be first refurbished before they are deployed, repairs and maintenance cost for the fiscal increased by 250 basis points to 10.1%

Cost break-up
Particulars (Rs m) 3QFY07 4QFY07 FY06 FY07
Staff cost 20.6% 22.1% 21.8% 21.5%
Repairs and maintenance 11.9% 12.5% 7.6% 10.1%
Direct operating expenses 8.5% 8.1% 13.2% 9.2%
Other expenses 10.3% 11.7% 13.2% 10.6%

Higher interest, depreciation and tax expenses arrest bottomline growth: Though operating margins for the fiscal witnessed an expansion of 4.4%, the benefit of the same on the bottomline was not visible due to increase in interest, depreciation and tax expenses. The increase in interest and depreciation expenses was mainly on account of the fleet expansion undertaken by the company during the fiscal. On the other hand, the increase in tax outgo was a result of better performance registered by the rig business. Unlike offshore support vessels (OSVs), rigs, harbour tugs and construction barge are not covered under tonnage tax. Hence, significant increase in revenue contribution from any of the segments is likely to increase the tax liability of the company.

What to expect?
At the current price of Rs 750, the stock is trading at a multiple of 12.8 and 9.6 times our estimated FY08 EPS and cash EPS respectively. Going forward, we believe that GOL’s revenue will be primarily driven by the ‘Badrinath’ rig and the newly acquired assets. ‘Badrinath’ is currently undergoing refurbishment after which it will be deployed at US$ 80,000 per day with ONGC, compared to US$ 35,000 earlier. Also, increased revenues from the rig business are likely to result in margin expansion going forward. However, significant dry-docking expenses involved in the overhaul of ‘Badrinath’ (to the tune of US$ 10 m) and loss in revenues on account of the non-availability of the asset is likely to put pressure on the company’s performance in the near-term. We maintain our positive view on the stock.

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