Offshore gains

Firm crude oil prices helped Aban Offshore improve the performance of its offshore business and report good numbers for the quarter ended September. The company reported 17.8 per cent growth in revenue at Rs 828 crore and 23 per cent growth in operating profit, led by higher margins. Revenue growth was due to an increase in the number of rigs employed while margins rose on lower other expenditure, which fell 23 per cent.

The company reported a mere five per cent growth in net profit to Rs 75.2 crore. The subdued performance at the net level was due to: First, an unexpected loss (Rs 30.2 crore) from a joint venture; second, a provision of Rs 13.9 crore for decline in the value of investment; and third, a higher tax rate of 38.8 per cent.

A better second half
Analysts expect the second half to be better. After a lull last year, the offshore market has revived, backed by higher crude oil prices. Higher jack-up rig rates, limited supply and revival of capex in the oil and gas sector could turn the tide in favour of Aban Offshore over the next 12 months. Its contracts during the quarter with Cairn Energy and Petrobas Brazil for deployment of rigs indicate revival of the offshore rig business.
 

IMPROVING PROSPECTS
In Rs crore	FY10	FY11E	FY12E
Revenue	3,358	3,531	3,584
Interest	1,017	945	882
PAT	312	531	475
EPS (Rs)	71.7	122.1	109.2
PE (X)	11.9	7.0	7.8
Net margin (%)	9.3	15.0	13.3
EBIDTA (%)	62.5	62.1	56.9
E: Analyst estimate

The company has deployed 18 out of 19 assets, which signifies revenue visibility. In addition to improvement in business prospects, its debt, which has been a major worry, is expected to come down. Its consolidated debt could come down to Rs 10,000 crore by 2011-12 (debt to equity ratio of 3.5 times) as against Rs 14,000 crore (or 6.5 times) in 2009-10 as a result of the expected cash flow of Rs 2,000 crore and fund-raising by the company.

Reasonably valued
Analysts expect marginal growth in revenue but say profits could see strong growth over the next two years on higher margins, better utilisations and lower interest costs.

The stock is trading at seven times 2010-11 and 7.8 times 2011-12 estimated earnings, which seem reasonable from a long-term investment perspective.

Analysts value the stock in the range of Rs 950-960 per share, which is 17-18 per cent higher compared to its current price of Rs 813.