Oil Country Tubular: Piping Growth

Growing E&P activity is likely to boost demand for Oil Country Tubulars’ products

OIL Country Tubular, which features second in ETIG’s list of 100 Fastest Growing Small Companies, has seen healthy growth, an improving balance sheet and a maiden dividend, hinting at bright growth prospects ahead. For investors with a risk appetite, this company could be a long-term play on India’s growing E&P sector.

BUSINESS: Hyderabad-based Oil Country Tubular (OCTL) is a producer of pipes and tubes required in the oil drilling and exploration industry. OCTL’s single plant has an installed capacity of 10,000 tonne per annum (TPA) of drill pipes, 50,000 TPA of casing pipes and 15,000 TPA of production tubing. It also provides services such as tool hardening, internal plastic coating for pipes and inspection, maintenance and reconditioning of drill pipes besides manufacturing accessories and spare parts.
The company has received necessary approvals from the American Petroleum Institute (API), making its products universally acceptable. In the last three years, on average, the company earned over half its revenues from exports.

GROWTH DRIVERS: The company plans to treble its casing manufacturing capacity to 150,000 tonne per annum by March 2010. It also has plans to double capacity of drill pipes to 20,000 tonne.
With oil prices recovering and hovering around $80 per barrel, global exploration and production (E&P) efforts, which had turned sluggish in the first half of 2009, are expected to revive. This will ensure steady flow of orders for the company, which is aggressively targeting various export destinations such as West Asia, South East Asia and Europe.

FINANCIALS: In the trailing five years, the company’s net profits have grown at a cumulative annual rate (CAGR) of 145% to Rs 65 crore in FY09. Net sales grew at 33% in the same period. In the year ended March 2009 the company’s operating margins weakened by 230 basis points to 24.2% of net sales compared to the previous year.
This was mainly on account of higher sales of casing pipes, where the margins came under pressure and a simultaneous fall the sales of higher margin drill pipes.
The company has repaid all its outstanding term loans during the year to emerge a debtfree company. In fact a major chunk of its FY09 profit growth came from significant cut in its interest burden. OCTL also paid its maiden dividend of Rs 1.5 per share for FY09.

VALUATION: At the current market price of Rs 101.2 the company is valued at 6 times its profits for the trailing 12 months. Other pipe manufacturers such as Maharashtra Seamless, Jindal Saw and PSL are trading in the P/E range of 8 to 10.

RISK FACTORS: Being a small company OCTL carries the risk of low level of transparency and operational disclosures and a lack of management interaction. The company’s future performance will depend on flow of orders and product mix.