(BSE: 522175 | NSE: SHIV-VANI | ISIN: INE756B01017)
Company Background Shiv-Vani Oil & Gas Exploration Services Ltd provides seismic data acquisition and exploration services to upstream oil and gas sector. The company was incorporated in 1989 and started operations with shot-hole drilling services for ONGC. Since then the company has evolved to emerge as a large player in the hydrocarbon upstream sector. It services include shot hole drilling, seismic surveying, directional drilling, well development, down-hole operations, engineering and logistics. The company specializes in every area of onshore and offshore operations as well as in natural gas compression and allied services. Shiv-Vani is the only integrated coal bed methane (CBM) services provider in India and has successfully pioneered horizontal and directional drilling in the India to enhance CBM procurement. It owns the largest fleet of on-shore rigs in India and has successfully diversified into other crucial activity areas such as seismic surveying, gas compression services and offshore drilling & logistics.
Investment Rationale Robust outlook for the user industry Shiv-Vani provides services to large upstream companies like ONGC, OIL, RIL, and Cairns India for on-shore exploration services. The company provides the entire value added services from seismic data acquisition through drilling. The growth of the company is a function of increase in the number of onshore block on offer for exploration and production. Under the New Exploration Licensing Policy – VI (NELP), the central government has invited bids for 55 exploration blocks comprising 25 onshore, 6 shallow water blocks and 24 deepwater blocks (beyond 400 metres). NELP VII is to be announced and a similar number of blocks that were offered in NELP VI are likely to be on offer. Only 18% of the total sedimentary basinals area has been explored so far. Huge potential is yet to be explored. Shiv-Vani has a 50% market share and is set to be one of the primary beneficiaries of the increase in the number onshore blocks on offer. Order book at 11.5x CY06 revenues improves visibility
Shiv-Vani is sitting on an order book position of Rs 3,200 crore. Of this, Rs 1,000 crore pertains to a company in Oman and is spread over 15 years. The remaining Rs 2,200 crore, to be executed over the next 2 to 2.5 years is around 8x CY06 consolidated revenue of Rs 276.78 crore. Orders on hand give visibility to the company’s top and bottom line growth. We expect top line to grow at a CAGR of over 64% over CY06-08E and bottom line to grow at a CAGR of over 100% during this period.Capex to improvise capability The company started the calendar year (it follows a Jan-Dec accounting year) with a rig count of 21 and currently operates a fleet of 25 on-shore rigs at a capacity utilization of 85%-90%. It expects to end the year with 28 rigs. The current number of rigs is sufficient for executing the orders in hand. The company plans to make a similar capex in the next calendar as well to look after the future order flows. The company always has a in-process bidding for Rs 3,000-5,000 crore. On the capex front, the company spent Rs 600 crore in CY07 and plans a similar capex in CY08, which is to be financed through a mix of debt and internal accruals. The company financed its CY07 capex through a mix of FCCB issue, debt and internal accruals. The US$ 55 million FCCB issue is to be converted into equity at a price of Rs 271.83, at a fixed exchange rate of Rs 45.292 per dollar.
Risk & Concerns Shiv-Vani’s business depends significantly on government policies regarding oil and gas exploration. Moreover, higher margins and large business opportunity may induce new entrants to enter the segment despite the high entry barriers of capital-intensive nature of the industry. The entry of new players may dilute the revenue growth as well as the high operating margins of 37%-39%.
Financials The company reported a year-on-year top line growth of 20% to Rs 171.26 crore in the first half of CY07, while bottom line grew over 41% to Rs 29.24 crore. A robust order book of around 8x CY06 revenue of Rs 276 increases visibility on the numbers for ensuing years. In addition, an aggressive addition to the fixed asset and increasing billing rate scenario suggests that the earning of the company is set see good growth. We expect the top line to grow at a CAGR of over 64% over CY06-08E to Rs 751 crore and bottom line at a CAGR of over 100% to Rs 112.50 crore.
Valuation Currently, the stock trades at 11.37x its diluted CY08E EPS of Rs 29.56. Looking at the aggressive addition to the fixed asset, increasing order size and increasing billing rates, we believe the earnings will see good growth. The high order book position gives higher visibility, increased comfort level and favourable risk reward ratio. The company is also looking for an opportunity to venture into the lucrative offshore business. Offshore billing rates are about 10x the onshore rates (offshore billing rate US$200,000 per day, while onshore rate is US$15,000–40,000). Its foray into the offshore business could lead to a re-rating on the counter. We rate the stock an outperformer with price target of Rs 403 over a 6-month time frame.
Technical Outlook The stock has been trading above the 200-day simple moving average, which is at Rs 327. It has been trading in a consolidation phase for the very long time on the daily charts between Rs 308 and Rs 321. This week, volume surged to almost three times than its average volume last week. Rising volumes with a positive bullish candle after a doji candle at the botttom indicate positive strength in the coming week. The stock has good support at Rs 305, which will provide opportunities for accumulation. The RSI momentum has began to show strength, which is another positive sign. On the higher side, if the stocks moves above Rs 377, it could further move to Rs 410 and Rs 425 levels very soon.
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