Stock Review: Jindal Drilling & Industries (JDIL)

THE shares of Jindal Drilling & Industries (JDIL) have underperformed the markets almost throughout the past one year, losing 10% while Sensex gained 15%. However, it had more to do with the company's internal instability rather than its financial performance.

   The company's board recently removed its managing director unceremoniously "having concluded that they have lost confidence in him" to be re-placed by one of the promoters.

   It has also put its earlier restructuring ideas on the backburner.

   Jindal Drilling (JDIL) is in the business of hiring jackup drilling rigs and deploying them on ONGC contracts, besides offering support services such as mud-logging and directional drilling. These two support services represent around 10% of the company's total revenue.

   For the first half of FY11, the company reported a 34% profit growth to Rs 49.9 crore, although revenues dipped 21.5% y-o-y to Rs 526.3 crore. This was mainly on account of a substantial cut in its single largest cost item of drilling operation charges. In effect, the company is now paying around 80% of revenues as charter hire charges to rig owners – down from 87% last year.

   The numbers were slightly affected due to dry-docking of one of the rigs between the contract renewal phase.

   The company currently has five jack-up drilling rigs on hire — three from Noble and one each from two joint ventures, Discovery Drilling and Vir-tue Drilling, where the company owns 49% stake. All these rigs are working with ONGC on long-term charters of three or five years and the next renewal is due only in October 2011.

   The company's share in these two JVs resulted in a net profit of Rs 91.5 crore during FY10 — more than its standalone profit of Rs 84 crore. However, the return on capital is substantially higher in the standalone business.

   Despite being in the offshore drilling services business, the company is virtually insulated from the fluctuations in the rig charter rates. This is mainly because it doesn't own any rig on its own and earns its income as a differential between what it gets from ONGC and what it pays to the rig owner. Typically, both these contracts are back-to-back, with 80% of revenues being paid to the rig owner.

   Being asset-light, the company has emerged a debt-free and cash-rich company with strong operating cashflows. Its joint venture companies, which had raised loans to buy rigs, are also repaying their loans rapidly. During FY10 alone, the outstanding loan in JVs fell by Rs 235 crore or 30%.

   While focusing on repayment of debts in the JVs, the company is also looking out to charter few more rigs for Indian market. JDIL is currently trading at 12.1 times its standalone earnings for trailing 12 months. Considering the profits on a consolidated basis, the valuation would appear even more attractive.