Shiv Vani Oil & Gas: Oiling The Wheels

Growing order book and healthy financials make Shiv Vani Oil an attractive long-term investment

SHIV VANI Oil & Gas Exploration Services (SVOL) grossly underperformed the markets last year despite its excellent performance in FY09. This offers a great opportunity for long-term investors to accumulate the scrip, as the company enjoys strong cashflows and a bulging order book.

BUSINESS: Shiv Vani Oil (SVOL) is India’s largest integrated service provider for onshore petroleum exploration and production. Its services start from collection and analysis of seismic data till actual extraction of petroleum and include services such as well logging, cementing, mud engineering, directional drilling, well testing, etc. It presently has 10 seismic equipment sets, 350 shot-hole rigs and 40 drilling rigs - the largest in India.
The company has also emerged as the leading integrated provider of services for coal-bed methane (CBM) development in India, owning eight sets of modern directional drilling equipments. It is executing a long-term contract in Oman for PDO and Shell, which has no expiry clause. The contract generates annual revenues of $18 million. More than 98% of the company’s domestic revenue comes from national oil companies, which provides great visibility on its future earnings.

GROWTH DRIVERS: SVOL is currently carrying an unexecuted order book of nearly Rs 4,000 crore, which is 4.5 times its FY09 revenue. While nearly Rs 750 crore of these orders relate to the contract in Oman to be executed over the next 10 years, the rest will be executed over the next three years. The company won a three-year Rs 1,610-crore contract from ONGC last year, which, after a year of delay, has started getting implemented recently.
Additionally, the recently launched eighth round of NELP bids and fourth round of CBM bids will ensure that the company continues to receive a steady flow of orders in the years to come.
SVOL last year added 16 new drilling rigs to its fleet, for which FY10 will be the first full year of operation. The impact of these additional assets will reflect in the company’s earnings going forward. Since almost all of the company’s assets are now deployed for the next three years, it can consider buying new equipment based on new order flow.
For this purpose SVOL has passed a resolution enabling it to raise up to Rs 600 crore while increasing the authorised equity capital to Rs 75 crore from present Rs 63.5 crore and raising the ceiling on investment by FIIs to 49% of paid-up equity capital from 24%.

FINANCIALS: After three consecutive years of negative operating cashflows, SVOL reported substantially strong cashflows in FY09 despite the economic turmoil. In the last five years, the company’s profits have grown at a compounded annual rate of 94.7%, as against a CAGR of 59.2% for net sales. As a result, the net profit margin has been continuously improving and reached 22.1% in FY09.
The company’s expansion spree last year has left it with a debt-equity ratio of above two and bulging interest and depreciation costs. However, the burden on profits has come down to just 35.2% of the company’s operating profits in FY09, down from 62.7% in 2004.

VALUATION: At the current maket price, the scrip is trading at a P/E multiple of 8.9 on a consolidated basis. Considering the current unexecuted order book position and the capacity creation of last year, the company’s profits next year are likely to touch Rs 203 crore with revenues of Rs 1,090 crore. As a result, the FY10 forward P/E works out to 7.4, which is attractive for long-term investors.