Ventura Securities - Jindal SAW

Ventura Securities report on Jindal Saw:

Key Investment Highlights

Strong Demand Scenario

Economic growth in emerging markets is driving oil and gas demand thereby creating readymade markets for its products. The period between 2005 – 2010 (E) is expected to exhibit a CAGR of 1.9% and 3.1% for oil and gas respectively. The natural fallout would be demand for pipelines which is estimated to be at USD 56 billion over the next five years.

Diversified business model: Balanced approach

JSL has a diversified product range having presence in value as well as volume driven product lines. While SAW pipe is more of a volume driven product having good margins, DI pipes & Seamless pipes are segments with higher realizations & better margins.

Increasing focus on Seamless & DI pipes: Margin accretive

JSL is ramping up its Seamless pipes capacity from 100,000 MTPA to 250,000 MTPA which is expected to be completed by July’08. Further it is also adding two additional lines in the DI pipes segment which would increase the production of DI pipes from 120,000 MTPA to 180,000 MTPA. These additions would in turn add to the margins & profitability.

Strong Order Book provides earnings visibility

JSL’s Order Book provides earnings visibility. Currently the company has an order book worth Rs 56 billion, which is executable over a period of 12 months. The overseas orders contribute around 85% to the order book.

Business Model

The business operations of JSL are structured into four Strategic Business Units (SBUs) which include Saw pipes, Seamless Tubes & Pipes, DI Pipes & the US operations. While the first three SBUs manufacture & market LSAW, HSAW, Seamless & DI pipes respectively, the last SBU acts as a dedicated marketing arm catering to the US market. Thus the company has a diversified product range which mitigates the business risks in the form of being diversified across various user segments (energy transportation sector, E&P activities & industrial applications and water & sewage transportation). JSL has presence in value as well as volume driven product lines. While SAW pipe is more of a volume driven product having decent margins, DI pipes & Seamless pipes are high profitable segments having better realization & margins.

Product Mix: To focus more on higher margin products

Although majority of the revenues would continue to generate from the SAW pipe segment in the coming years, JSL’s focus on higher margin products viz. DI pipes & Seamless pipes would result in expansion of margins & de-risking its business. JSL is planning to ramp up the production in DI pipes by adding additional two lines which will enhance the production from current 120,000 tons to 180,000 tons. Further the seamless pipe capacity which is around 100,000 tons will be increased to 250,000 tons. The incremental capacity is likely to be completed by July’08. Though we expect majority of the revenues to be contributed by SAW pipe segment & US operations in the near future, we expect the revenues from Seamless & DI pipes to increase gradually in the coming years.

Strong Order Book Provides Earnings Visibility

At present, JSL has a healthy order book worth Rs 56 billion. Of the total orders booked, Rs 28.60 billion cater to the Indian operations wherein the exports constitute nearly 80% of the order book whereas the domestic orders contribute the balance. The balance order book worth Rs 27.40 billion caters to the US operations, which is targeted entirely for the US market. The orders are expected to be executed within the next 9 to 12 months.

Impressive Financial Performance

The company’s net sales for Q2FY07 jumped by 33% to Rs 12.69 billion from Rs 9.53 billion in Q2FY06. Its PAT for the quarter went up by 49% to Rs 70 crore from Rs 47 crore. For H1FY07, net sales grew to Rs 24.62 billion, up 39%. The company showed an impressive growth of 50% in PAT, to Rs 1.30 billion from Rs 500 million in H1FY06. The EPS jumped significantly, to Rs 27.0 for H1FY07 from Rs 18.1 in H1FY06. For H1FY07, the company reported an operating profit of Rs 2.83 billion, up 42%. Margins were up 30 bps from 11.2% in H1FY06 to 11.5% in H1FY07, on the back of volume growth & better realization.

Valuation & Recommendation

The burgeoning oil and gas demand should benefit pipe industry as more and more new pipe lines projects are being announced. JSL today is accredited by almost all oil and gas majors and thus is automatically qualified to bid for most of the projects. These approvals, along with its diversified business model, shall enable the Company to reap the robust demand prevalent over the next 5 years. At the CMP of Rs 606, the stock is trading at 10.4x the FY08e earnings of Rs 58 & and 8.0x its FY09e its FY09e earnings of Rs 75.5. With the company expected to increase its margins in the coming years coupled with the strong order book & the robust demand likely to prevail over the next five years, we recommend the investors to BUY the stock at the CMP with a price target of Rs 850, an upside of 40% from the current levels for 15 to 18 months horizon.

Ventura Securities - Great Offshore

Ventura Securities report on Great Offshore:

Rising oil consumption leading to increased E & P activities augurs well for the offshore oil field services providers

On the back of increased oil prices and India’s policy to achieve National Energy Security, domestic E&P activities are expected to increase at a rapid pace. The rise in E&P is in turn expected to generate huge business for companies offering offshore oilfield services to oil & gas majors. GOL being a major player in the field is expected to reap benefits from the same.

Buoyant demand for OSVs, Rigs and Tugs to firm up day rates

The rise in E & P activities coupled with high demand and long gestation period of new builds has created a shortage of OSVs and led to an increase in their prices. Currently 11 PSVs and 28 AHTSVs are available in India as against the demand for 18 PSVs and 46 AHTSVs.

Timely Fleet expansion to capture the current E & P boom

To capture the boom in the E & P industry, GOL, in November 2006 embarked upon a USD 225 million (approx. Rs.10 billion) expansion plan for acquiring offshore support vessels over the next three years. Post expansion, the fleet size has increased from 33 in FY06 to 40 in FY07 and will touch 42 by April ‘09.

Rising oil consumption leading to increase in E & P activities augurs well for the offshore oil field services providers

Together with the country’s impressive growth, India has also become a significant consumer of energy resources. According to EIA estimates, India was the fifth largest consumer of oil in the world during 2006 with a usage of an estimated 2.63 million bbl/d (barrels per day) as against a production of merely 846,000 bbl/d. The combination of rising oil consumption and only a moderate rise in production levels has left India increasingly dependent on imports to meet consumption needs. To achieve National Energy Security, the government has introduced policies aimed at increasing domestic oil production and oil exploration activities. As part of this effort, the Ministry of Petroleum and Natural Gas crafted the New Exploration License Policy (NELP), which for the first time permits foreign companies to hold 100 percent equity ownership in oil and natural gas projects. Various private players were also awarded exploratory blocks in the six rounds of NELP bidding. NELP VI received an overwhelming response with 165 bids for 55 oil blocks in 2006. Global energy giants like British Petroleum, British Gas, Italy’s ENI, Petronas and French Multinational Total were among the bidders for the NELP VI (which covered 3.52 lakh sq. km.). Most discoveries of reserves in the past two years have been offshore, including the recent ones at KG, Cambay and Mahanadi basins.

With aggressive implementation of NELP programme, the domestic E&P activities are expected to increase at a rapid pace. This increased E&P activity in new oil & gas fields is expected to generate huge business for companies offering offshore oilfield services to oil & gas majors. GOL being a major player in the field is expected to reap benefits from the same. The number of offshore rigs operating in India has gone up to 42 rigs from the FY06 figure of 35. This is despite the fact that worldwide rig availability is difficult. Average rig utilization in India has been 95%.


Timely Fleet expansion to capture the current E & P boom

To capture the boom in the E & P industry, GOL, in November 2006 embarked upon a USD 225 million (approx. Rs.10 billion) expansion plan for acquiring offshore support vessels over the next three years. Post expansion, the fleet size has increased from 33 in FY06 to 40 in FY07 and will touch 42 by April ‘09. GOL has recently ordered one multi role support vessel to be commissioned in Q1FY10, and one jack-up rig to be received by Q3FY09. The total committed capital expenditure towards these purchases will be financed through a mix of debt and equity, in the ratio of 25% internal accruals and 75% debt. GOL is also open to buy second-hand vessels if the opportunity exists.

Valuation

The impressive fleet expansion and growing efficiency coupled with rising day rates and firm industry outlook will result in increased profitability for GOL. However, we expect the company to be on a higher growth trajectory once the Jack Up Rig and OSV will be added to the fleet in FY2009. We expect the company’s revenues & profits to grow at a CAGR of 12.7% and 22.1% respectively, over the next 2 years. At the CMP of Rs. 790, the stock is currently trading at 16.1x the FY08e earnings & 11.5x its FY08e EV/EBIDTA. Considering the robust demand for offshore services, we recommend the investors to ACCUMULATE / BUY on dips with a price target of Rs 950 over a period of 15 months.