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Great Offshore: Muted performance

Oct 19, 2007

Performance summary
  • Topline grows by 20% YoY in 2QFY08 due to increase in number of vessels under operation.

  • EBITDA margins contract by 1.7% on account of higher repairs and maintenance expense (as percentage of sales).

  • Increase in other income on account of foreign exchange gains of Rs 104 m (unrealised gains of Rs 83 m). Adjusting for the latter, bottomline grew by a modest 6% YoY.

  • During the quarter, the company has raised Rs 1.5 bn through issuance of 10% optionally convertible redeemable preference shares. It has also issued FCCBs of US$ 42 m (Rs 1.7 bn) at a conversion price of Rs 875.

  • The net asset value (NAV) at the end of 2QFY08 stood at Rs 700 per share.

Financial snapshot - Standalone numbers
Particulars (Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Income from operations 1,271 1,523 19.9% 2,393 2,973 24.3%
Expenditure 646 801 23.9% 1,189 1,611 35.5%
Operating Profit (EBIDTA) 624 722 15.7% 1,203 1,362 13.2%
EBITDA margin (%) 49.1% 47.4% -1.7% 50.3% 45.8% -4.5%
Other income 9 173 1804.4% 46 463 918.2%
Interest 73 145 99.6% 131 281 114.7%
Depreciation 147 231 57.8% 283 468 65.2%
Profit before tax 414 519 25.4% 835 1,077 28.9%
Tax 26 23 -11.8% 96 19 -80.4%
Net profit (reported) 388 496 27.9% 739 1,058 43.1%
Net profit (adjusted)* 388 413 6.4% 739 770 4.2%
Adjusted net profit margin (%) 30.5% 27.1%   30.9% 25.9%  
No. of Shares (m)         38.1  
Diluted earnings per share^ (Rs)         40.4  
Price to earnings ratio^ (x)         19.3  
*adjusted for gain unrealised gains on foreign currency loans
^1HFY08 annualised

What is the company's business?
Great Offshore Ltd. (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?
Fleet augmentation drives topline: GOL reported a 20% YoY growth in revenues for 2QFY08. The improved performance was mainly due to increase in the number of vessels under operation. As compared to a total fleet size of 36 vessels last year, GOL operated 40 vessels in 2QFY08. The revenue growth would have been higher, as the rig 'Kedarnath' operated at lower day rates (US$ 55,000 in Iran offshore compared to US$ 44,000 in India in 2QFY08). While OSVs accounted for 73% of the revenues during the quarter, the contribution of rigs stood at 12%.

Higher repairs and maintenance cost dent margins: GOL's operating margins for the quarter contracted by 170 basis points to 47.4%. The decline in margins was mainly due to an increase in repairs and maintenance cost as 4 vessels went under dry-docking in 2QFY08 as compared to just 1 vessel in the previous year. As can be seen in the table below, repairs and maintenance cost (as a percentage of sales) increased by a significant 4.7% on a YoY basis. The impact of the same was however negated to a large extent by the decline in direct operating expenses.

Cost break-up
Particulars (Rs m) 2QFY07 2QFY08 1HFY07 1HFY08
Staff cost (floating and shore) 23.1% 24.5% 21.6% 23.1%
Repairs and maintenance 6.7% 11.4% 7.5% 10.8%
Direct operating expenses 11.0% 4.5% 10.4% 5.9%
Other expenditure 10.1% 12.2% 10.2% 14.5%

Higher other income rescues bottomline: Though interest and depreciation expense registered a significant increase during 2QFY08, 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 unrealised exchange gain of Rs 83 m. Adjusting for the same, bottomline grew by a mere 6% YoY. The growth in bottomline was also aided due to lower tax expenses.

What to expect?
At the current price of Rs 779, the stock is trading at a multiple of 16 and 11.7 times our estimated FY08 EPS and cash EPS respectively. Going forward, we believe that GOL's revenues will be primarily driven by the 'Badrinath' rig and the newly acquired assets. 'Badrinath' which recently went under refurbishment has been 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, 90% of which will be revenue and only 10% would be capitalised) are likely to put pressure on the company's performance in the near-term.

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