Buy: Garware Offshore (GOSL) CMP: Rs 214 Target: Rs 272

(BSE:501848| NSE: GARWOFFS| ISIN: INE446C01013)

Garware Offshore Services (GOSL) continues to expand aggressively, recently acquiring a new build platform supply vessel (PSV) for US$ 22.8mn. We expect GOSL to almost double its fleet size from the existing seven vessels (including the recent acquisition) in the next couple of years to capture the booming opportunities in the offshore service arena. The company is likely to deliver an earnings CAGR of 59% over CY06-CY08, translating to an EPS of Rs 16.6 in CY08. GOSL’s foray into new ventures like management contract services, knowledge process outsourcing (KPO) and construction projects would be key growth triggers in the long run. However, we have not yet factored the impact of new ventures in our estimates as these projects are in the initial stages. We reiterate our Buy call on the stock with an end-FY08 price target of Rs 272.

Growth plans on track Timely delivery of PSV

As scheduled, GOSL has taken delivery of a new build PSV – M.V. Kameth, (a UT 755L Norwegian vessel), for a total investment of US$ 22.8mn. This includes mobilisation costs of US$ 0.3mn. Around 71% of the total cost has been financed on debt through State Bank of India at LIBOR+3% for twelve years with a two- year moratorium period, while the rest of the funds have been raised internally. M.V. Kameth will be deployed on a five-year contract with ONGC this month at a predetermined day rate of US$ 15,500, fetching an annual operating income of ~Rs 240mn. With this acquisition, GOSL’s fleet has increased to seven vessels.

Plans to add seven vessels including two construction barges

GOSL’s order book consists of two PSVs, two AHTS 60T vessels, one AHTS 80T vessel and two construction barges. The total committed capital expenditure towards these purchases is about US$ 138mn (including mobilisation costs) till CY09. The company’s fleet expansion plans will further strengthen its ability to service the surging demand from E&P operators

Expansion to be funded through debt-equity mix GOSL to mobilise Rs 4.7bn over the next three years to expandits fleet

Garware Offshore – Company Update

We expect the company to mobilise Rs 4.7bn in all over the next three years to fund its fleet expansion programme. Itproposes to do so via debt of around Rs 3bn, an equity issue of 5mn shares and internal accruals for the balance. GOSL’s
peak debt-equity ratio is expected to increase to 2.1 in CY08 and then reduce to1.9 in CY09. Interest coverage is, however, likely to be maintained at the same level of about 2.2-2.5x. Even in terms of cash flow, debt servicing is of no concern due to high depreciation and low taxation

New ventures

GOSL is targeting new revenues streams by venturing into management service contracts, starting a design KPO and entering into construction-related projects.

Management service contracts

GOSL has signed an MoU with Norway-based Havyard Leirvik AS – one of the biggest shipbuilding yards in Europe . As per the MoU, GOSL will act as Havyard’s exclusive representative for the supply of vessels to Indian shipping companies and for the supply of Havyard designs to Indian shipyards.

Setting up a design KPO

In another joint venture (JV) with Havyard Leirvik, GOSL is planning to set up a Knowledge Process Outsourcing (KPO) outfit to function as a ‘Workshop Design Centre’ in India . This centre will operate in collaboration with Havyard to design all types of marine assets and offer customised solutions to vessel yards and buyers in both domestic as well as international markets. Initially, this JV aims to offer design services to 6-7 of Havyard’s clients every year. By transferring its design operations to India , Havyard would save nearly 60% of its total cost. We expect this KPO to be a major revenue driver for GOSL going forward.

Construction projects

GOSL plans to purchase two construction barges during CY08-CY09 at a capex of approximately US$ 45mn. Currently, a construction barge charges day rates of US$ 16,000-16,500, which is relatively higher than the company’s existing realisations. However, we have not factored the contribution of construction barges in our estimates as their exact delivery schedule is yet to be framed.

Financial outlook

PSVs to drive operating revenues at 59% CAGR over CY06-CY08 We expect GOSL’s operating revenues to increase at a 59% CAGR to Rs 1.3bn by CY08, backed by a strong charter rate environment and higher capacity due to new vessel additions. The company plans to deploy a total of five PSVs by CY09, which are likely to contribute 67% of total revenues.

EBITDA margin to expand substantially

We expect the company’s operating margin to improve by about 750 bps from 56.2% in CY06 to 63.8% in CY08 on account of the higher contribution from PSVs, which offer relatively better contract rates and margins. We expect operating profit to grow at a CAGR of 69% over CY06-CY08. Net profit CAGR of 58% till CY08 We expect net profit to grow at a CAGR of 59% over CY06-CY08 on the back of a sharp improvement in margins and a healthy growth in topline. Consequently, EPS is expected to grow from Rs 7 in CY06 to Rs 17 in CY08.


Reiterate Buy with a potential upside of 27% At the current market price, the stock is trading at P/E multiples of 21.6x and
12.9x on CY07E and CY08E respectively. We have valued GOSL using the weighted average methodology, assigning a 60% weightage to the discounted cash flow (DCF) valuation and a 40% weightage to the P/E-based comparative valuation. We remain positive on the stock and reiterate our Buy call with an end- FY08 target price of Rs 272, providing an upside of 27% from the current levels.

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.