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Great Offshore: Rigs dampen performance - Views on News from Equitymaster
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Great Offshore: Rigs dampen performance
Jul 20, 2007

Performance summary
  • Topline declines by 3% QoQ due to loss in operating days for two rigs.
  • EBITDA margins contract by 1.5% on account of higher other expenses (as percentage of sales).
  • Increase in other income on account of unrealised exchange gain (as per the revised Accounting Standard 11) led to 88% QoQ growth in net profit. Adjusting for the same, bottomline grew by 19% QoQ.
  • Awarded a five-year contract from ONGC for its new rig ‘Samed Shikhar’ (under construction) at a day rate of US$ 1,40,000. The contract is expected to commence on or before May 2009.

Financial snapshot - Standalone numbers
Particulars (Rs m) 4QFY07 1QFY08 Change
Income from operations 1,493 1,450 -2.9%
Expenditure 812 810 -0.2%
Operating Profit (EBIDTA) 681 640 -6.0%
EBITDA margin (%) 45.6% 44.1% -1.5%
Other income 27 290 994.3%
Interest 133 136 2.0%
Depreciation 220 236 7.3%
Profit before tax 354 557 57.6%
Tax 54 (4) -107.9%
Net profit 299 562 87.7%
Net profit margin (%) 20.0% 38.7%  
No. of Shares (m)   38.1  
Diluted earnings per share* (Rs)   42.6  
Price to earnings ratio* (x)   19.4  
*Trailing twelve months

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.

What has driven performance in 1QFY08?
Loss in operating days impacts topline: GOL reported a 3% QoQ decline in revenues for the quarter. The lackluster performance at the topline level was mainly due to loss of operating days in the rigs business. While ‘Kedarnath’ did not operate for 24 days in the quarter as it was towed back to the Indian seas from Iran offshore, ‘Badrinath’ was not available for the entire quarter on account of dry-docking. Also, Kedarnath* was deployed at a higher day rate of US$ 55,000 in Iran compared to US$ 44,000 in India. This led to a loss of revenues for the company.

*Although, the rig was contracted with ONGC (for Indian waters) for a period of three years (October 2005 to September 2008), it was taken by OVL (ONGC Videsh Ltd.) to Iran between July 2006 and March 2007. The rig has been now towed back to India, where she will complete its remaining contract with ONGC.

Higher other expenses dent operating margins: GOL’s operating margins for the quarter contracted by 150 basis points to 44.1%. Since rigs earn higher margins as compared to other offshore assets, the decrease in revenue contribution from rigs to the overall topline had a negative impact on GOL’s operating margins. Rigs accounted for just 9% of the company’s revenues during the quarter compared to 22% in FY07, when the operating margins were 48.5%.

Cost break-up
Particulars (Rs m) 4QFY07 1QFY08
Staff cost 22.1% 21.6%
Repairs and maintenance 12.5% 10.1%
Direct operating expenses 8.1% 7.4%
Other expenses 11.7% 16.8%

As can be seen in the table above, other expenditure (as a percentage of sales) increased by a significant 5.2% on a QoQ basis. The impact of the same was however negated to a large extent by the decline in other overheads.

Higher other income, lower taxes aid bottomline: Though operating margins for the quarter witnessed a contraction of 1.5%, the negative impact of the same on the bottomline was arrested due to increase in other income and lower tax expenses. In accordance with the revised Accounting Standard 11, other income for the quarter includes exchange gain of Rs 207 m (unrealised gain Rs 204 m) due to foreign exchange rate fluctuations on outstanding balances of foreign currency loans and payments (effected during the quarter), taken for acquiring vessels from abroad.

Adjusting for the same, bottomline grew by 19% QoQ. The growth in bottomline was also aided due to a decline in tax expenses. As compared to a tax outgo of Rs 54 m in 4QFY07, there was a tax inflow of Rs 4 m in 1QFY08. Decrease in tax outgo to a certain extent can also be attributed to the lackluster performance of the rigs business. Unlike offshore support vessels (OSVs), rigs, harbour tugs and construction barge are not covered under tonnage tax. Hence, significant decrease in revenue contribution from any of the segments is likely to decrease the tax liability of the company.

What to expect?
At the current price of Rs 826, the stock is trading at a multiple of 14.0 and 10.5 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’ (around Rs US$ 12 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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