Dolphin Offshore

Addition of new assets, graduation to main turnkey contractor and healthy E&P outlook in India make Dolphin Offshore an attractive investment

Although the scrip has more than tripled since we last covered it in July 2008, the growth trajectory of Dolphin Offshore still remains strong making its valuation fair. With new assets joining its fleet, the company is expanding its capabilities that can generate healthy returns over the next two-three years.

BUSINESS:

Dolphin Offshore (DOL) is a marine engineering company supporting the offshore petroleum industry. The company currently owns 14 vessels and has two major vessels on order to be delivered later in 2010. The company, which started as a diving support company 30 years back, has now scaled up to undertaking turnkey contracts for fabrication, offshore engineering, inspection, maintenance, modification, repair works for the offshore E&P petroleum companies. Historically, ONGC has remained the principal client for the company. The company’s plans to set up a shipbuilding and ship repair unit in Gujarat have taken a backstage due to environmental concerns. Hence, the company is trying to tie up with a fabrication yard for its captive consumption.

GROWTH DRIVERS:

Although the global E&P industry has slowed down considerably in the past couple of years following the economic crisis, it continues to thrive in India. ONGC, particularly, is busy revamping its Mumbai High assets and has budgeted Rs 15,000 crore for the purpose. It will also spend Rs 7,000 crore for developing small and marginal fields in the western offshore. In the first quarter of 2010 itself, ONGC is expected to tender out contracts worth around Rs 3,300 crore. DOL has just taken the delivery of one workboat in December 2009 and is set to get its construction barge by March 2010 and another workboat by September 2010. DOL has established itself as an efficient EPC contractor by executing several ONGC turnkey contracts. This enables it to aspire for bigger and more complex jobs in the future with better margins. The outstanding order book, which is currently at Rs 257 crore, is expected to increase.

FINANCIALS:

For the 12-month period ended December 2009, the company posted an identical 52% growth in operating revenues as well as net profit with operating margins stable at 19%. Over the past five years, its net sales have increased at a CAGR of 31.7%, while the net profit grew at 56.4%. It is currently carrying a debt of around Rs 100 crore, three-fourth of which represents working capital. Payment delays by debtors are one of the greatest problems faced by the company as its average debtor velocity stood at six months during FY2009.

VALUATIONS:

At the current market price, the scrip is trading 9 times its consolidated net profit for the past 12 months. Other companies in the industry, such as Garware Offshore (11.1), Great Offshore (7.8), Aban Offshore (15.5), are trading at similar levels. DOL is expected to end FY11 with a net profit of Rs 78 crore. The current price discounts the estimated FY11 earnings 7.4 times.

CONCERNS:

Global economic recovery that can refuel the E&P binge of the global majors remains a key concern for the company’s growth. Due to the contractual nature of work, which again is dependent on monsoon and weather conditions, the company’s earnings could witness great swings from quarter to quarter.