Deep Industries Ltd: For rock solid gains
(BSE Code: 532760) (CMP: Rs.146.35) (FV: Rs.10) By Vihari
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.