Surging crude chokes HPCL as govt offers little support

LOWER government support in the form of oil bonds and lesser discounts from oil producing companies have badly hit HPCL, the third largest oil marketing company in the country, during the second quarter of the current fiscal.
The company continued to suffer from under-recoveries as prices of petroleum products in the local markets remained stable during the quarter despite substantial rise in crude oil prices globally. Discounts from the upstream petroleum companies fell 24%. Further, the spurt in other income was negated by a rise in depreciation and interest costs. As a result, net profit declined 30% compared to the year-ago level. Even though net sales increased by 2%, total revenue including oil bonds fell by a tad 0.5%. Oil bond support from the government dropped by 19%.
A large chunk of HPCL’s sales are derived from the traded goods. The company’s owned refining capacity is significantly lower compared to its market sales. The company has to make these purchases at market rates, which are dollar-denominated. The appreciation in rupee over last 12 months has helped the company in containing its losses despite rising prices of crude oil and petroleum products. The crude throughput of HPCL’s two refineries at Mumbai and Vizag put together was around 3% higher at 4.3 million tonne during the quarter ended September 2007. The gross refining margins at both the refineries improved marginally on Y-o-Y basis. However, the margins were sizably lower compared to June 2007 quarter.
The company, which currently has nearly 16.8 million tonne per annum (MTPA) of refining capacity, has plans to add another 24 MTPA capacities within next five years. This would increase the amount of surplus products for exports making the company less vulnerable to the price regulations in the domestic market. Until these capacities come on stream, HPCL’s future performance will largely depend upon the government policies.

ONGC Q2 net seen up 15% at Rs 4,800 crore

RIDING on high crude oil prices, India’s biggest government firm, is likely to post a 15.2% rise in the second quarter net profit to Rs 4,800 crore. Analysts believe that ONGC’s profits could have been much more but for the strong rupee appreciation. Its mandatory discount to refiners is likely to prove a dampener for the company, when it announces its Q2 results on Tuesday.
The rupee has appreciated by around 13% in the past 12 months averaging at Rs 40.53 during the September 2007 quarter. This is likely to cancel out a large chunk of benefits from other positive factors such as a 25% fall in the subsidy burden and a year-on-year (y-o-y) rise in production of both oil and gas.
During the September 2007 quarter, the E&P major is likely to report around 1.7% higher crude oil production at 6.5 million tonne, while the production of natural gas is estimated to be higher by 7.8% at 5.65 billion cubic metres. However, crude oil production in September dropped marginally to 2.79 million tonne when compared with 2.81 million tonne in September 2006 and planned production of 2.87 million tonne. The benchmark WTI crude oil prices during the quarter ended September 2007 averaged at around $75.5 per barrel, which was around 7% higher compared to the average during the corresponding previous quarter.
During the quarter, ONGC paid advance tax of Rs 2,401 crore, 17% more than Rs 2,052 crore paid by the company in the same period last year. This is the highest advance tax paid by any corporate in this quarter. ONGC’s subsidy burden during the September 2007 quarter is likely to come down sharply by around 25% to below Rs 3,800 crore from Rs 5,032 crore in the quarter ended September 2006. The company’s performance during the corresponding previous quarter was also burdened with a penalty of Rs 365 crore towards extension of licence period.
ONGC, which accounts for over 70% of India’s total natural gas production, has long pleaded with the petroleum ministry to revise upwards the gas prices set under the administered pricing mechanism.

Gujarat Gas: Stepping On The Gas

Gujarat Gas is likely to witness a strong growth in the coming quarters, thanks to additional supplies of natural gas. Consider investing in the scrip with a 12-month horizon

GUJARAT GAS — an Indian subsidiary of British Gas and the largest city gas distribution company in India — is likely to witness a strong growth in topline and bottomline in the coming quarters, thanks to additional supplies of natural gas.

The company’s supply contract with Panna-Mukta-Tapti (PMT) consortium became operational in September ’07. This will add nearly 50% to GGCL’s volumes once it becomes fully operational. In view of this, investors can consider investing in this company with a 12-month perspective

BUSINESS: Gujarat Gas was setup in 1988 and is majority-owned by British Gas. The company has pipelines in excess of 2,100 km and sells around 3.5 million metric standard cubic meters per day (mmscmd) of natural gas.

It has a dominant position in southern Gujarat, which is India’s largest producing and consuming state of natural gas. The company buys natural gas from a number of sources including British Gas, PMT consortium, Gujarat State Petroleum, Niko Resources and GAIL.
Over 95% of the natural gas sold by the company is procured at market-determined rates, while the remaining comes from subsidised gas under the administered pricing mechanism (APM). This means that Gujarat Gas is not exposed to any revision in APM rates as determined by the government. Though the company focuses mainly on the retail segment, it also has a few bulk customers on short-term contracts. It has set up 20 CNG stations in Surat, Bharuch and Ankleshwar in Gujarat and plans to add around 10 more over the next 12 months.

GROWTH DRIVERS: The company has contracted additional 1.65 mmscmd of natural gas from the PMT consortium from September ’07. The initial supplies under this contract have just started flowing and they will reach full capacity towards the end of December ’07.

Once fully utilised, this additional supply will add over 50% to the volumes sold by the company. Gujarat Gas has launched projects to extend its pipelines to industrial areas such as Vapi and Jhagadia. It plans to spend over Rs 300 crore over the next three years on network expansion.

The company has dollardenominated contracts for purchasing natural gas while it bills its retail customers in rupees. This has enabled it to gain from the rupee’s appreciation against the dollar over the past 12 months.

FINANCIALS: During the quarter ended September ’07, the company reported a 60% YoY growth in net profit to Rs 34.1 crore. Revenues during the period were higher by 18% to Rs 276.6 crore. Operating margins during the period expanded by 640 basis points to 20.7% of net sales. Higher margins were the result of a higher rupee along with an around 14% price increase affected by the company at the beginning of ’07. Going forward, margins are expected to decline to more sustainable levels of around 17-18%.

The volumes of gas sold during the quarter declined marginally to 259 mmscm against 264 mmscm in the corresponding period last year. This was mainly on account of expiry of a gas supply contract with one supplier and technical problems with another supplier, restricting a little over 0.5 mmscmd of supplies for the company.

During the nine-month period ended September ’07, the company’s net profit grew 63% to Rs 113.7 while net sales were up 29% to Rs 898.8 crore.

VALUATIONS: At its current market price of Rs 305, the stock is valued at 12.7 times its ’07 estimated earnings per share of Rs 24.1. Considering the company’s assured volume-led growth, in the near term the scrip appears attractive. Considering the additional revenues from new gas inflows, we estimate a forward EPS of Rs 31 for ’08. The current market price is just 9.8 times the forward EPS. RISKS: However, investors have to be wary of a few risks. The government recently set up a Petroleum and Natural Gas Regulatory Board to regulate the downstream companies in the petroleum and natural gas sector. In future, this regulatory authority can, in some way, put a ceiling on margins for city gas distribution companies, which will be detrimental to Gujarat Gas’ prospects. Also, any depreciation of the rupee against the dollar will have a negative impact on the company’s operating margins.

Deepak Fertilisers profit shoots past expectations

DEEPAK Fertilisers and Petrochemicals (DFPCL) has managed to beat expectations during the September 2007 quarter despite the challenging industry outlook. The company faced pressure on its operating margins, but it managed to survive by cutting down on the loss-making fertiliser business. The turnover from fertiliser business — both manufactured as well as traded goods put together — came down by 32% while the losses from the segment fell by 78% to just Rs 1.46 crore.
DFPCL registered a modest 3% topline growth to Rs 224 crore. The 320 bps improvement in operating margins to 186%, coupled with higher other income and a fall in extraordinary expenses, helped the company report a 39% growth in net profit to Rs 22 crore.
The chemicals business grew handsomely, thanks to Isopropyl Alcohol (IPA) and propane business, which it had entered only last year. Although a better performer, the chemicals segment too witnessed pressure with the PBIT margins falling by 710 bps to 24% of net sales. DFPCL has also forayed into specialty retailing by setting up the multispecialty mall named Ishanya. The company has already leased out 80% of the 5.5 lakh sq ft area in this mall. It has also set up eight windmills with 1.25 MW capacity each in Maharashtra. The company has further strengthened its position in chemicals industry by setting up a chemical complex, including nitric acid and ammonium nitrate plants in Paradip in Orissa. The company has been waiting a long time for improved supply of natural gas to its chemicals and fertilisers plant at Taloja from Gail’s gas pipeline connecting Dahej in Gujarat to Dabhol in Maharashtra. However, there have been some delays in establishing lastmile connectivity. The company expects to overcome these problems by the year-end. Gujarat Gas posts robust growth
GUJARAT Gas came out with strong profit growth during September 2007 quarter despite a marginal fall in volumes of natural gas sold. Its performance during the September 2006 quarter was affected due to floods in Surat and fall in transmission income.
The total volume of gas sold during the third quarter declined to 259 mmscm against 264 mmscm in the corresponding period last year. This was due to the gassupply contract with one supplier expiring during the quarter and gas availability from another source facing constraints due to technical issues.
GGL’s topline on a consolidated basis inched up 18% to Rs 276.6 crore, but the operating margins jumped by 640 bps resulting in 62% higher PBDIT.
Gas from the Tapti field expansion project started flowing in September, which is likely to be ramped up to the full contracted volume of 1.65 mmscm per day over the next quarter, would drive company’s growth going forward.

Subsidy cut lifts Gail

GAIL India’s turnover rose in the quarter ended September 2007 due to volume gains and net profit was also boosted by higher operating margin. The quarterly performance was propped up by a strong 38% cut in its subsidy burden, which stood at Rs 260 crore on a provisional basis.

GAIL registered a 22% growth in net sales at Rs 4,529 crore and a 28% growth in PAT at Rs 572.54 crore during the quarter ended September 2007. Profit growth was aided by a sharp reduction in the subsidy burden. This enabled the company to register profits in its LPG business, which had incurred losses in the corresponding quarter last year.

GAIL’s revenue from natural gas transmission grew 14.3% to Rs 568.3 crore, aided by a doubledigit growth in volumes. The natural gas trading business grew 9.8% to Rs 3,209 crore as the volume sold rose by nearly 12% during the period. For GAIL, the best-performing segment of Q2 was probably petrochemicals, which witnessed a 37% growth in turnover at Rs 640.2 crore as polymer sales jumped an equal measure to 96,000 tonnes. As the margins expanded, PBIT from this segment went up by 83.4% to Rs 319.53 crore. However, GAIL had to overcome a few hurdles before reporting this impressive result. The rupee appreciation has cost the company around Rs 131 crore during the said quarter. Its effective tax rate rose to 35.6% during the quarter, up from 23.2% in September 2006 quarter, due to the expiry of income tax holiday of its petrochemicals plant at Pata and LPG plants. The largest gas company in India has recently joined hands with Rashtriya Chemicals & Fertilisers (RCF) to jointly explore surface coal gassification project in Talcher. Similarly, the company is in the process of forming a JV for city gas distribution in Vadodara, where it will hold 25%. However, it’s still early to judge the company on the basis of these proposed diversification. The company’s performance in the near future will continue to depend on its subsidy burden.

SEAMEC: Cash-Rich & Debt-Free

Commissioning of Seamec’s new vessel will boost its future earnings.The stock has an upside potential over the next 12 months

SEAMEC (earlier known as South East Asia Marine Engineering and Construction) is a 78.2% subsidiary of French marine construction company Technip. It’s one of the cheapest stocks amongst peers and its earnings growth is attractive, considering higher charter rates and commissioning of a new vessel. It provides an upside potential for investors over the next 12 months.

BUSINESS: It owns a fleet of three multi-support vessels (MSVs), which support offshore exploration and production (E&P). MSVs are fitted with various equipment, which enable them to provide critical services including fire fighting and diving support. They are required by petroleum exploration companies such as ONGC for underwater/sub-sea engineering services, deep-sea diving, inspection of underwater-structures, rescue operations and fire fighting. With heightened petroleum E&P activity the world over, there is a global paucity of marine assets, which has triggered a two-folds rise in MSV charter rates over the past couple of years. It purchased a cable-laying vessel in June ’06 for around Rs 83 crore, which is currently being converted into an MSV at a further cost of around Rs 70 crore. Commissioning of the vessel, which has been delayed by six months, is now likely by end of October ’07. This will help it add to its topline and bottomline from the December ’07 quarter onwards.

FINANCIALS: For H1 FY07, it registered a 61% growth in revenues to Rs 102.8 crore. Despite a slight weakening of PBDIT margins, the company went on to post a 37% growth in its bottomline at Rs 43.98 crore. It is a cash-rich and debt-free company. Its September ’07 quarter results will face some pressure as one of its vessels has lost around 35 days of work on statutory dry-docking. But, as charter hire charges have improved since last year, they are likely to compensate for the same. It has scheduled dry-docking for another of its vessels in the December ’07 quarter. However, the financial performance during that quarter will remain robust due to the addition of the new vessel. The full benefit of the new vessel, coupled with higher charter rates, will be realised in ’08.

VALUATIONS: Seamec’s valuations are low visa-vis its peers, making it an ideal investment candidate. It’s currently trading at a P/E of 9.2, based on trailing twelve months’ earnings, which is less than half the P/E of its peers. While, based on the book value as on December 31, ’06, its current market-price-to-book-value ratio is 2.9, which will fall further by the end of current year. For the CY07, we expect Seamec to report a profit after tax of more than Rs 75 crore, which should jump to Rs 110 crore in ’08. Considering the forward EPS for ’08, the P/E, at current market price, is 5.9. Nevertheless, the investor should be wary of a few risks. The depreciation of the dollar may have a negative impact on its earnings as most of its billing is dollar based. Seamec does not have a diversified asset portfolio and any global stagnation in MSV charter rates in the future may have an adverse impact on the company’s growth prospects.

RIL nudges $1b Q2 net with 28% surge

NET GAINS RS 3,837 CR

RELIANCE Industries (RIL), India’s largest company by market capitalisation, has become the first private sector firm to post a net profit of close to $1 billion in a single quarter. RIL is now short of the $1 billion (Rs 3,947 crore) mark by Rs 110 crore, after it posted a net profit of Rs 3,837 crore in the July-September quarter. Beating Street expectations, the company posted a 28% increase in net profit, up from Rs 3,000 crore during the same period last year.

Net profit in the September quarter last year, has been restated after the merger of IPCL. The increased profit was on a turnover of Rs 33,402 crore compared to Rs 31,422 crore in the same period last year.

Profits have grown largely on higher margins and the merger with Indian Petrochemicals Corporation (IPCL). Refining contributed to 63% (Rs 23,575 crore) of the total revenues, while petrochemicals made up for the remaining 35% (12,916 crore).

Though the company registered a 1.2% increase in operating margins during the quarter, it translated into 14% higher operating profit at Rs 5,781 crore. Other income went up 34%, while the interest and depreciation costs came down, resulting in 24% higher PBT at Rs 4,563 crore during the quarter.

A fall in deferred tax provisions helped the bottomline gain Rs 3837 crore. The company has not accounted for forex gains of Rs 515 crore on foreign currency borrowings.

Analysts attributed the growth to “strong refining margins and higher refinery throughput.” Profit before interest and tax from this segment zoomed 56% to Rs 2,321 crore. The petrochemicals segment, however, witnessed a 4% fall in PBIT to Rs 2,025 crore from Rs 2102 crore in September 2006 quarter.

During the half year, RIL’s 33 metric tonnes per annum refinery processed 16.1 million tonnes of crude, an increase of 3% with an operating rate of 98%.
Higher volumes boost RIL’s petrochem business

RIL exported refined products worth $6.99 billion, accounting for 60% of the production volumes. RIL’s gross refining margins (GRMs) in Q2 stood at $13.6 per barrel against the Singapore benchmark of $6.4 per barrel.
This was primarily due to the superior configuration of the refinery, which allows flexibility to focus on the production of middle distillate products (gasoil and jet kerosene), where margins remained firm with strong global demand. The company processed four new crudes at its refinery in the past six months. Globally, while refinery outages led to spikes in margins, RIL has maintained its high operating rate to take advantage of these opportunities.
RIL’s petrochemical business benefited from higher volumes through integration of IPCL. The petrochemical production grew 7% in the last half year to 9.8 million tonne against 9.1 million tonne during the first half of 2006-07. In Q2, revenues from the petrochemical segment increased by just 1% to Rs 12,961 crore against Rs 12,888 crore during the Q2 of last fiscal. High feedstock prices have impacted the petrochemicals business globally, but strong domestic demand provided integrated players like RIL the flexibility to pass on the increase in polyester and polymer prices, expanding margins.

RIL has revalued its plants, equipment and buildings, resulting in additional depreciation of Rs 890 crore. The company saved Rs 957 crore ($2.4 billion) in the past six months by reducing its other expenditure, primarily due to lower incidence of sales tax on account of higher export of refinery products and exchange differences. On BSE, RIL shares closed at Rs 2,575.90, down 4.25% or Rs 114.40 in a highly volatile market. The results were announced after the closure of market hours.

Great Offshore: Waiting In The Wings

Great Offshore is poised for a strong growth in H2 FY08, as its important assets get deployed at higher rates

GREAT OFFSHORE, the Vijay Sheth-led company, was demerged from GE Shipping last year and listed on the bourses in December ’06. The company, which operates in the offshore support industry, owns the second largest fleet of vessels next only to ONGC. Great Offshore owns a fleet of 40 vessels. The company acquired three vessels during the first half of FY07. It has ordered one drilling rig and one multi-support vehicle (MSV), which will be incorporated in its fleet by FY10. The company has won a five-year contract from ONGC worth Rs 1,000 crore even before the arrival of its new drilling rig. In terms of charter rates, this translates into a whopping $145,000 per day. However, the heavy expenditure incurred over the past three quarters on dry-docking and upgradation of some of its vessels is a matter of concern. This has not only increased its expenditure, but also curtailed revenues.

But, the fact that the company is through with the dry-docking and all its main assets have become operational, should enable it to register strong topline and bottomline growth over the next few quarters.

Recent Developments:
Recently, ONGC contracted Great Offshore’s Badrinath rig at a newly negotiated rate of $80,000 per day, which is substantially higher compared to the earlier charter rate of $34,000 per day. Also, the MSV which was being upgraded has been commissioned at $58,000 per day. The Kedarnath rig has also resumed its contract with ONGC at the old rate of $46,000 per day. Over the past six months, the company has forayed into the related field of marine construction. It currently holds an unexecuted order book of Rs 55 crore. Going forward, this business can contribute substantially to its topline and bottomline growth. Great Offshore is expected to record a turnover of around Rs 375 crore during the second half of FY08 with stronger operating margins than in the first half of FY08 due to lower dry-dock expenses. It recently issued preference shares and FCCBs to ready a war chest of Rs 320 crore. The company, which enjoys the flexibility to raise further funds through leveraging, is actively looking for acquisition of assets to drive its future growth.

RISKS: A majority of its vessels are considerably old. Ageing vessels tend to command lower charter rates and typically have greater operating costs. Another factor that could impact the company is that the offshore support industry is currently at its peak of the economic cycle and, therefore, it is much more expensive to acquire new assets. It has also spent around $15 million on upgradation of its MSV and, therefore, its profitability for the September FY08 quarter (Q2) may come under pressure if this expenditure is not capitalized and instead written off.

FINANCIALS: For FY07, it registered a 50% spurt in its bottomline to Rs 145.18 crore, while the total income was up 51% at Rs 590.07 crore. During Q1 FY08, the company’s operational performance was lacklustre, but was boosted by forex gains on foreign currency loans. During Q1, it lost 25-day revenue on the Kedarnath rig, while the other rig lost a couple of months of revenues due to dry-docking. Similarly, the MSV remained out of business due to the ongoing upgradation work. This scenario has now changed dramatically.

VALUATIONS: Considering the recent changes in the scenario and the high growth potential the scrip appears attractive. Based on an EPS for the trailing 12 months calculated on fully diluted equity, the scrip is currently trading at a P/E of 20.9. At an estimated EPS of Rs 49.2 for FY08, the forward P/E works out to 16.5, which is substantially low for a highgrowth company.

Ready To Set Sail

Offshore support companies are all ready to throw their weight behind the hectic activity going on in the petroleum E & P space

NOTWITHSTANDING THE bull mania on the bourses investors seem to have overlooked offshore support services sector in ’07, leading to its relative underperformance vis-à-vis benchmark indices. Ironically, this has happened at a time when oil prices are quoting at an all-time high, which bodes well for exploration & production (E&P) activity worldwide. The E&P activity in India too has picked up with six rounds of NELPs already over and the seventh expected in the near future. With heightened petroleum exploration activity in India as well as the world over, the demand for services and assets that offshore support companies provide has grown tremendously. And the bulging capex plans of E&P majors like ONGC and RIL ensure that the demand for offshore support services will remain strong in the future as well.
However, most of the companies supporting these petroleum heavyweights in their offshore exploration activities have grossly underperformed the benchmarks in ’07. And this is despite their outperformance during ’05 and ’06. While the fundamentals of the industry have not weakened, the stock performance of companies like Dolphin Offshore, Garware Offshore and Seamec has taken a hit in ’07. Even the largest private sector fleet owner Great Offshore has underperformed since it got listed in December ’06.
One of the main reasons behind this lull is that the industry is currently passing through an investment phase and all the companies are awaiting deliveries of a number of vessels over the next 12 months. Industry leader Aban Offshore has been an exception mainly because it has doubled its asset base through acquisition of Sinvest via a leveraged buyout.
Since it spun-off last year, Great Offshore’s fleet has been undergoing a phase of heavy dry-docking and upgradation, with the company having invested over Rs 130 crore till date on the exercise. The dry-docking and upgradation work meant heavy expenditure on the one hand and loss of revenues on the other, as the vessels remained idle. However, with this phase getting over the company is likely to perform better in the coming quarters. Making The Right Moves
BOTHits rigs as well as the MSV (multi-support vessel), which was commissioned recently, will be on charter from Q3 FY08 onwards. The company has ordered for a drilling rig – for which it has already secured Rs 1,000 crore contract for fiveyear duration – and an MSV to be delivered in FY10. The company has also raised nearly Rs 320 crore over last one month and is believed to be planning some acquisition.
Seamec has also augmented its fleet of three MSVs by buying one diving support vessel. Despite substantial delay in the deployment of the new vessel, the company has performed well in the past couple of quarters. The new vessel is likely to commence operations by the October ’07, adding substantially to the company’s revenues, which is trading at a significantly lower P/E of 10.
Dolphin Offshore’s stock has also suffered due to unbilled expenditure on a couple of contracts and higher dry-docking expenditure. Over the past few quarters, it has moved up from being a sub-contractor to a main contractor and won several big-ticket contracts. Its current unexecuted order book stands at Rs 230 crore, which is more than its revenues for FY07. Two workboats and one construction barge are scheduled to join its fleet over the next 12 months. It is aiming for a sustainable 40% growth over the next three years.
Garware Offshore, which gained over 1,400% in market capitalisation after its dream run in ’05 and ’06, has posted a 27% fall during ’07. This was mainly because the company had to dilute equity to finance the acquisition of vessels. It presently owns a fleet of 3 PSVs (platform support vessels) and 4 AHTs (anchor handling tugs) and will add two AHTs and two PSVs over the next 15 months to its fleet. It has also obtained the exclusive rights from a Norwegian company to market its ships and ship designs in India. It aims at a turnover of Rs 90 crore with profits of Rs 30 crore for ’07.
Considering India’s dependence on imported crude oil, the efforts in E&P will continue unabated even in the event of a global economic slowdown. Also, the government will award around 60 oil blocks under the seventh round of NELP by end’07. These new exploration activities, along with routine maintenance and repairs, replacement of old assets and redevelopment of ageing oil fields offer excellent growth opportunities for the domestic players in the offshore support industry. Investors with investment horizon of 6 to 12 months can consider investing in these companies