Shiv Vani Oil seems to be an attractive choice for long-term investors considering strong visibility of earnings
INDIA’S largest service provider for onshore petroleum exploration, Shiv Vani Oil, continues to carry a fat order book, which gives great visibility to its future growth. Its flat performance in FY10 followed by a tepid June quarter has kept its stock market performance under check. However, the company is well poised to benefit from its huge capital expansion during the past couple of years. Long-term investors can bet on this stock.
BUSINESS: Shiv Vani Oil (SVOL) is India’s largest integrated service provider for onshore petroleum exploration and production. It offers services including collection and analysis of seismic data, well logging, cementing, mud engineering, directional drilling and well testing till actual extraction of petroleum and well maintenance. At present, the company has 10 seismic equipment sets, 350 shot-hole rigs and 40 drilling rigs. The company has also emerged as the leading integrated service provider for coalbed methane (CBM) development in India owning eight sets of modern directional drilling equipment. The company 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 revenues come from national oil companies, which provide great visibility on its future earnings.
GROWTH DRIVERS:
The company currently carries an order book of 3,000 crore, which is nearly two-and-a-half times its consolidated revenue for FY10. Further, a number of more contracts has come up for bidding, which will be awarded post monsoon. The company, being a dominant player, is certain of grabbing a lion’s portion.
With all its equipment deployed on various contracts, SVOL has already started preparing for acquiring additional assets that will be required in carrying out additional contracts. It recently raised $80 million through the issue of FCCBs, which can be utilised in buying more drilling rigs. The company has historically followed the practice of buying new assets only when they have firm orders in hand.
As the company’s seismic equipment remains idle in India during monsoon, it is proposing to transfer them to Middle East for four months from next year. This will enable the company to earn additional revenues.
FINANCIALS:
The company has incurred heavy capex in line with inflow of orders, which has more than tripled its gross block in the past two years. Bond conversion and preferential allotments have resulted in 20% equity dilution since 2008. The recent FCCB issue is likely to dilute equity by another 15% when converted.
During the past five years, the company has expanded its net profit at a cumulative annualised growth rate (CAGR) of 76%, while the net sales grew at 58%. The company has consistently increased its operating profit margin from 32.4% in FY04 to 44.9% in FY10. However, the spurt in interest and depreciation burden in FY10 has resulted in a fall in the net profit margin. The company’s June 2010 quarter numbers were dull, as some of its ongoing contracts faced delays on asset relocation.
VALUATIONS:
At its current market price of 443, the scrip is valued at 9.1 times its profits for the trailing 12 months. Considering its growing asset base and the contracts in hand, SVOL is likely to end FY11 with net profit of around 282 crore. As the company continues to generate positive cashflows and retires debts, its net profit margins are likely to improve. The current market value is just 8.4 times its expected profit for FY11 on fullydiluted equity. This makes SVOL an attractive bet for investors.
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