Great Offshore: Back in Safe Waters

Great Offshore is settling down under the new management. Considering the better growth prospects of the company, it seems an attractive buy for long term


GREAT Offshore (GOL) has come a full circle from getting demerged from GE Shipping in 2006 to getting acquired by Bharati Shipyard recently. The company’s aggressive inorganic growth plans backfired in the past, but the organic growth continues at a healthy pace. With the valuations dipping to a low, investors can enter for long-term gains.

BUSINESS
Great Offshore came into existence through a demerger of GE Shipping’s offshore division in October 2006 with 37 vessels. Today the number of vessels increased to 65 — the largest in Indian offshore support industry. The company’s aggressive growth plans coupled with low promoter group holding heavily backfired when the stock market crashed in 2008. The promoters have pledged their holding to Bharti Shipyard and as such lost their control over the company to the latter. In 2007 when the markets were booming and the offshore industry was doing particularly well, GOL drafted aggressive growth plans in line with most other offshore players. It raised Rs 350 crore in October 2007 — Rs 150 crore by issuing convertible preference shares and Rs 200 crore through FCCBs — and went on to announce an acquisition in January 2008. Unfortunately, the equity markets took a plunge subsequently and the dynamics of the offshore industry also took a hit.
GOL’s attempts to keep the deal alive by curtailing the scope of its acquisition in June 2008, proved in vain. The company launched a share buyback scheme utilising Rs 55.2 crore in September 2008 and acquired two Andhra-based companies for Rs 160 crore. However during these activities, the promoters’ stake continued to fall. At the time of its birth, GOL’s promoters held 27.7% stake in the company, which dipped to 15.7% within just two years — by the end of 2008. Weak market sales and stepping down of promoters were the two main reasons behind this fall.

GROWTH DRIVERS
The company is now settling down under the new management. GOL has added five vessels in FY10, including one floating dry dock. The company further has one jack-up rig and one multi-support vessel to be delivered by the end of 2011. All these assets will help bring in incremental revenues in the coming quarters. At the same time, the company secured a 50% jump in daily charter rates for its rig to ONGC at $69,000 recently.
The global offshore E&P industry is coming back to normalcy with better prospects of economic growth. This will bring about a revival in the investment flow in the global E&P. The offshore E&P continues to grow unabated with a series of successful NELP rounds in India in the past decade. Under the new management, GOL got the approval for raising up to Rs 1,750 crore by issuing equity or bonds to augment its resources to provide for offering broad-spectrum services to customers.

FINANCIALS
The company’s net sales have grown at a cumulative annual growth rate (CAGR) of 40.7% and net profit at 41.5% in the past three years. During FY09, the company paid off entire Rs 150 crore preference capital raised in FY08, while an additional Rs 1,000 crore of loans were taken. This worsened the company’s debt-equity ratio to 2.76 at the end of FY09 from 1.1 in FY08. In the past, the company enjoyed nearly 50% as operating profit margin and 25% net profit margin, which has dropped to 43.9% and 18%, respectively, in the 12-month period ended December 2009.

VALUATIONS
The recent crash in the market has brought down the company’s valuation to 8.1 times its 12-month profits and 2.2 times its book value. All its peers are trading at slightly higher valuations. Considering GOL’s fleet size, the discount appears unjustified. We expect the company to post per share earnings of Rs 48.3 and 65.8 for FY10 and FY11, respectively, which are 8.8 and 6.5 times, respectively of the current market price. The stock seems to be a value buy at the current levels.