Limited downside for Aban Offshore

Aban Offshore plans to seek shareholders' approval to raise funds to the tune of Rs 4,300 crore this month, in what is perceived to be a positive move, but not positive enough to perk up the stock. Analysts feel the move is necessary for capex and the retiring part of Aban's high debt (Rs 13,048 crore at the end of FY11). But, it would also mean a substantial equity dilution, given the company's current market value of Rs 1,691 crore.

On the operational side, Aban is seeing new long-term contracts for its unutilised vessels. However, the current day rates for the fleet are much lower than the peak rates seen in 2006-07.

On the whole, analysts feel the stock has corrected substantially (60 per cent since October 2010), factoring in lower day rates and high debt. Thus, the downside, if any, is limited. Given the gradual improvement in finances, most analysts have recommended 'buy'.
 

IMPROVING PROFITABILITY
In Rs  crore	FY11	FY12E
Revenues	3,347	3,444
Y-o-Y change (%)	-0.3	2.1
Ebitda	2,109	2,089
Ebitda margin (%)	63.0	60.7
Net profit	145	494
Y-o-Y change (%)	-53.4	240.5
EPS (Rs )	25.9	114.9
P/E (x)	15.0	3.4
E: Estimates                                       Source: Analyst reports

LOWERING DEBT
Aban Offshore, which is reeling under debt, is seeking a fund-raising approval from the shareholders at the annual general meeting on September 28. Its board of directors had approved the issue of up to Rs 2,500 crore of equity-related securities to qualified institutional buyers. They had also approved raising additional long-term resources (not exceeding $400 million) through the issue of FCCBs, GDRs, ADRs, etc.

These moves should help Aban lower its debt-equity ratio from 5.7 times. In FY11, it was able to retire only Rs 1,117 crore of debt. With the fleet utilisation expected to improve in FY12, analysts at Anand Rathi had estimated Aban would be able to retire Rs 1,034 crore debt out of its operating cash, leading to the debt-equity ratio falling to 4.5 times in FY12 and to 3.6 times in FY13. The latest move should, thus, help lower its debt. The fund raising move is also essential, as observed by the ICICI Securities' report. It states that out of the total debt, Aban is obliged to retire Rs 3,300 crore in FY12.

Higher debt is impacting profitability. Interest costs of Rs 216 crore in the June quarter, though down by Rs 10.5 crore year-on-year, were almost 30 per cent of the revenues (Rs 731 crore). The fund-raising move, it is hoped, will help improve profits.

IMPROVING UTILISATION, BUT LOWER RATES
On the operational side, its fleet utilisation is seeing improvement. Although Aban-III, -IV and -V, in the June quarter, were non-operational and the lower utilisation led to lower revenues compared to the estimates, the situation now is improving. Its vessel Aban Abraham has commenced a five-year contract with Petrobas in Brazil in June. Aban-IV has already commenced its contract with ONGC and Aban-III will be going contracted from October with ONGC. Aban now has 16 vessels under contract and only two under marketing (i.e. contracts not signed), according to the ICICI Securities' report.

On the flip side, the day rates are substantially lower as Aban-III and -IV have been contracted by ONGC at Rs 64,000 a day compared to their earlier deployment, which was at Rs 1,57,000 a day.

OUTLOOK
Analysts feel that with better fleet utilisation and in absence of an exceptional write-off (Rs 389 crore) seen in FY11 on account of the loss of Aban Pearl (a rig), FY12 profitability and earnings are likely to see an upside. In this backdrop of improving finances and corrections in the stock price, most analysts, according to the Bloomberg data, recommend 'buy' and maintain consensus on the one-year target price of Rs 591.29.