DOLPHIN OFFSHORE: Swim With The Tide

Dolphin Offshore has scaled up its business, with new vessels set to join its fleet in FY09.The stock offers growth opportunities for long-term investors

DOLPHIN OFFSHORE (DOL) provides marine engineering services to the offshore oil & gas industry. It had a tough FY08 due to unpaid dues by its key customer, weak dollar and adverse weather. But it has scaled up its business, with new vessels set to join its fleet. This offers good growth opportunities in future. Long-term investors can consider the stock.

BUSINESS:
DOL executes offshore engineering turnkey contracts for petroleum companies, involving installation, inspection, maintenance, repairs etc. From being a provider of diving services, it has become an independent EPC contractor. It owns 14 vessels and has ordered two workboats and one construction barge, to be delivered in H2 FY09. It has seen a rise in average ticket size of contracts. It has a long list of successful contracts, mainly with ONGC. It has also tied up with foreign companies for technical support. It plans to diversify into ship building and repair, and obtained the Gujarat government’s nod for a shipyard at Jafrabad. Total investment outlay for its ship venture is Rs 400 crore.

GROWTH DRIVERS:
Due to a boom in offshore exploration, demand for DOL’s services is strong. ONGC is investing $3 billion to overhaul its ageing infrastructure. Considering DOL’s proven track record, eligibility to bid and arrival of new marine assets, it’s likely to emerge as a major beneficiary. It will also be able to bid for contracts in the Middle East. The rupee’s recent depreciation is favourable for DOL. It expects to recover Rs 38 crore outstanding from L&T on account of an ONGC contract.

FINANCIALS:
The company has posted a CAGR of 78% over the past five years, while its revenues grew 49%. DOL’s RoC has declined, as the $15 million it raised via FCCBs is tied up in the new vessels it ordered. Despite a boom in offshore exploration, DOL suffered in FY08. Outstanding dues from a couple of ONGC’s contracts increased its debt burden, while adverse weather cut the offshore working season to 5.5 months, against the normal 7-8 months, leading to delays. Profit growth mainly came from extraordinary profits from sale of two vessels.

VALUATIONS:
We expect DOL to put up a better performance this year. It is likely to post a turnover of Rs 320 crore in FY09, with operating profit margins of over 18%. Net profit is set to grow over 62% to Rs 25.5 crore. The CMP of Rs 169 discounts the projected FY09 earnings 7.9 times, considering fully diluted equity of Rs 11.96 crore. This is less than half its five-year average P/E of 16.2 and lower than P/E of Garware Offshore (8.6) and Great Offshore (11).

RISKS:
DOL has a debt-equity ratio of around 2. Timely delivery of new vessels, success in recovering dues from L&T and securing new contracts will affect DOL’s profit growth.