Deep In­dus­tries Ltd: For rock solid gains

(BSE Code: 532760) (CMP: Rs.146.35) (FV: Rs.10) By Vi­hari

Money Times - - Expert Eye -

Deep In­dus­tries Ltd (DIL) was in­cor­po­rated in 1991 to pro­vide air and nat­u­ral gas com­pres­sor ser­vices on char­ter hire ba­sis, wherein it com­mands a healthy mar­ket po­si­tion and is also the first com­pany in In­dia to of­fer such ser­vices. In 2006, it di­ver­si­fied into work-over (w/o) and drilling rig ser­vices on a char­tered hire ba­sis. Cur­rently, it holds a strong fleet of on­shore w/o and drilling rigs rang­ing from 150 HP to 1,500 HP. It also for­ayed into ex­plo­ration and pro­duc­tion ac­tiv­i­ties with var­i­ous on­shore oil and nat­u­ral gas blocks and coal bed meth­ane blocks awarded un­der dif­fer­ent rounds of NELP (New Ex­plo­ration Li­cens­ing Pol­icy) and CBM bid­ding. Af­ter a suc­cess­ful run in the ex­plo­ration and pro­duc­tion busi­ness, DIL was awarded one on­shore coal bed meth­ane block in In­done­sia. DIL has thus grown into a one-stop so­lu­tions provider for ev­ery need in the oil and gas in­dus­try by pro­vid­ing var­i­ous equip­ments and ser­vices un­der rental and char­tered-hire ba­sis. It serves blue-chip clients like ONGC, Re­liance In­dus­tries, Cairn In­dia, Hin­dus­tan Oil Ex­plo­ration Com­pany, Es­sar Adani group, Petronet LNG, etc.

DIL has 9 w/o rigs rang­ing from 30T ca­pac­ity to 100T along with 2 drilling rigs of 1,000 HP each. It is one of the first few In­dian com­pa­nies qual­i­fied to pro­vide gas de­hy­dra­tion on a char­tered hire ba­sis. Out of the 7 blocks, 4 blocks are in the de­vel­op­ment phase while the rest are in the ex­plo­ration phase. It op­er­ates a to­tal acreage of over 5,539 sq.km. DIL is the largest player in the do­mes­tic 'out­sourced' gas com­pres­sion mar­ket with a mar­ket share of ~90%. It has tieups with re­puted com­pres­sor pack­agers in USA for the sup­ply of gas com­pres­sion pack­ages. Its long-term as­so­ci­a­tion with USA based ven­dors pro­vides a com­pet­i­tive edge. It has 61 nat­u­ral gas compressors rang­ing from 180 HP to 1,680

HP with com­pres­sion ca­pa­bil­ity of about 5 MMSCMD of nat­u­ral gas. Com­pres­sion con­tracts on a turnkey ba­sis in­clude sup­ply of equip­ment, in­stal­la­tion, com­mis­sion­ing, op­er­a­tions and main­te­nance. In­dia’s nat­u­ral gas com­pres­sion ser­vices mar­ket, which was val­ued at $88.51 mil­lion in 2005, is pro­jected to reach $139.29 mil­lion by 2021. There is a vac­uum in on­shore rigs busi­ness with few ex­pe­ri­enced play­ers ex­it­ing the mar­ket while DIL has been ag­gres­sively ex­pand­ing its rigs busi­ness.

The gov­ern­ment has made it manda­tory to have the gas de­hy­drated be­fore in­sert­ing it into the gas pipe­lines. DIL is one of the first com­pa­nies to en­ter the gas de­hy­dra­tion ser­vices busi­ness. The North Karan­pura CBM block awarded to DIL’s sub­sidiary is in the de­vel­op­ment phase and is likely to start pro­duc­ing gas in the next two years. Dur­ing Q2FY19, DIL re­ported 28% lower PAT of Rs.13.04 crore on 26% lower sales of Rs.54.83 crore and an EPS of Rs.4.1. Dur­ing H1FY19, it re­ported 20% lower PAT of Rs.31 crore on 12% lower sales of Rs.128.64 crore and an EPS of Rs.9.7. Dur­ing H1FY19, Deep In­ter­na­tional DMCC, a 100% over­seas sub­sidiary of DIL, booked rev­enue of Rs.30.9 crore (pro­vi­sional) with PAT of Rs.8.1 crore (pro­vi­sional). How­ever, these fig­ures have not been con­sid­ered in the Q2 and H1 re­sults men­tioned above as those are on stand­alone ba­sis.

With an eq­uity cap­i­tal of Rs.32 crore and re­serves of Rs.425 crore, DIL’s share book value works out to Rs.143. Its net DER stands at 0.4:1. The value of its gross block is Rs.706 crore. The pro­mot­ers hold 63.5% of the eq­uity cap­i­tal, for­eign en­ti­ties hold 5.6%, DIs hold 0.2% and PCBs hold 6.9%, which leaves 23.8% stake with the in­vest­ing pub­lic. The Board of Di­rec­tors has ap­proved the draft Scheme of Ar­range­ment with re­spect to the de­merger of the oil and gas ser­vices busi­ness from DIL. Post the de­merger, DIL will con­tinue to main­tain its ex­plo­ration and pro­duc­tion busi­ness while the ser­vices busi­ness will be de­merged into a sep­a­rate listed en­tity. The Scheme of De­merger awaits NCLT’s (Na­tional Com­pany Law Tri­bunal) ap­proval. The pro­posed de­merger will re­sult in value un­lock­ing of its ser­vices busi­ness.

In­dia rep­re­sents ~61.3% of the land/ on­shore rigs op­er­at­ing in the Asia-Pa­cific re­gion. The num­ber of drilled de­vel­op­ment wells is es­ti­mated to grow at 3.85% CAGR dur­ing 2016-21 due to higher ex­plo­ration and pro­duc­tion ac­tiv­i­ties, which in turn will drive the mar­ket for on­shore rigs. Al­lo­ca­tion of ad­di­tional on­shore blocks un­der NELP rounds and the re­cently con­cluded DSF bid­ding will lead to higher drilling ac­tiv­ity and new con­trac­tual op­por­tu­ni­ties. DIL is ex­pected to achieve sus­tained rev­enue growth in the coming years on the back of grow­ing prospects in ex­ploratory/ de­vel­op­men­tal drilling in small and mar­ginal fields, out­sourced gas com­pres­sion in mar­ginal fields and gas de-hy­dra­tion ac­tiv­i­ties.

Based on its cur­rent go­ing, DIL is ex­pected to notch an EPS of Rs.25 in FY19 and Rs.30 in FY20. At the CMP of Rs.146.35, the stock trades at a for­ward P/E of 5.9x on FY19E and 4.9x on FY20E earn­ings. A rea­son­able P/E of 8x will take its share price to Rs.200 in the medium term and Rs.240 there­after. The stock’s 52-week high/low is Rs.244.10/79.10.

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