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Strategies & Market Trends : India Coffee House -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (3754)	2/18/1999 1:26:00 PM
From: Mohan Marette	Respond to of 12475

Prime Pick- Hitech Drilling Services (HDSIL) Today's closing prices 02/18/99 HITECH DRILL (Last traded on: 18/02/99, % change over previous close:-1.35%) Exg. Code Open (Rs) High (Rs) Low (Rs) Close (Rs) Vol. (nos) Value (Rs) B 190 76.0 76.0 72.8 73.1 35,400.0 2,616,985.0 N 802 76.4 76.4 73.8 73.8 75,200.0 5,627,805.0 Prime pick:Drilling to a profitable plan Rajiv Goel LOOKING for a profitable Tata company at a PE valuation of just 4? Hitech Drilling Services (I) Ltd (HDSIL), a Tata group company with a promoter stake of 55 per cent, just announced a record growth in its financials for the 9-months ending December ‘98. After a sharp spurt, the scrip has declined marginally on concerns of the same level of earnings being maintained in future. We feel that the same level of earnings would be maintained atleast till the second half of the next fiscal. This implies that there is no fear till September ‘99 where the earnings would be maintained at the same level or would present a marginal growth. The company is looking forward to acquire rigs, available at relatively lower costs due to a decline in crude prices and as a result, decline in hire charges of rigs. HDSIL believes that this might be the best time to buy rigs when the valuations are low. Besides, ONGC will soon be floating tenders for hiring of four rigs. Thus there is a good potential for improvement in earnings. Operations FINANCIAL results for the quarter ending December ‘98 related to operations of the offshore jackup drilling rig Hitdrill-1 on charter hire to ONGC, floating production unit Tahara on charter hire to Hardy Exploration and Production Ltd and Rig Marine-201 on charter hire to Cairn Energy (I) Pty Ltd. The contract for Marine-201 expired on November 11, ‘98 resulting in just 41 days working being included in the quarter ending December ‘98. Marine-201 contributes Rs 5 crore to the bottomline for a full year's working. This implies that a profit of about Rs 50 lakh is included in the bottomline for the quarter ending December ‘98. However, Tahara with its floating production system which had been lying idle for six years, was hired by a consortium for drilling operations in ‘97. The contract, though initially for a period of three years, is extendable by the customer upto a total period of seven years. Expenses have been incurred on the maintenance and overhauling of the system. These have been charged against revenue though they could have been capitalised. In future, expenses in the nature of maintenance would not be incurred, resulting in an estimated savings of Rs 40 lakh per annum. Thus, a decline in earnings on account of no revenues from Marine-201 will be offset by an improvement in operating margins as a result of lower maintenance expenditure. Hitdrill-1 is operating for ONGC. Drilling operations under the new contract commenced for a two-year period in October ‘97. The contract is extendable to the third year at mutually agreeable rates. On account of a decline in daytime rates, the contract would certainly be renegotiated at lower rates. With dollar denominated payments and most expenses being rupee denominated, operations remain profitable. The rupee is likely to depreciate further, thus ensuring higher growth in bottomline. A 17 per cent depreciation of the rupee in dollar terms has ensured a higher bottomline. With new rigs taking at least two to three years to build, the supply side is taken care of. With declining day rates, the activity for new rigs will slow its pace. There has been no increase in oil exploratory activity as of today. ONGC would be floating tenders for exploratory sites which are already operational. On account of competitive position, HDSIL stands a good chance of negotiating the contract. ONGC's demand for charter hire of jackup rigs has not been fully met. There is an additional demand for jackup rigs in India from private sector oil companies. Besides, likelihood of new opportunities in near future has already led to company negotiating for purchase of new rigs. Expanding its operations when rigs are available at lower rates would certainly boost the earning prospects of the company. HSDIL is also understood to have examined the prospects of acquiring Peerless Shipping & Oilfield Services but the matter could not concluded. The financial lease for Hitdrill1 is expiring in FY 2000 when the rig would be transferred back to HDSIL at the depreciated value which is negligible. The lease rentals would drop from Rs 4 crore per annum at present to about rs 10 lakh per annum. This will result in a corresponding growth in the bottomline. Outlook TATAS have a 55 per cent stake in Hitech Drilling. Institutions and FIIs hold 7 per cent of the Rs 20.32 crore equity while the balance is held by the public. There are talks, though unconfirmed, of Tatas making an exit from the business. McKinsey had suggested the Tata group should move out of non-core areas and advised sale of few companies including Hitech Drilling. Tatas had later denied that McKinsey had suggested the sale of any group companies and also that it had any plans to exit from Hitech Drilling. Rumours of the group making an exit still continue. One contender is Sedco Forex, a division of Slumburger, USA. This company had earlier held 25 per cent stake in Hitech Drilling and was a technical collaborator to the company. Following the expiry of the collaboration agreement in ‘92, Slumburger has chosen to exit from the company. Halli Burton, Norway too is learnt to be keen on acquiring a stake in the company. There could be an improvement in the profitability margins as the level of expenditure on stores and spares, besides maintenance is likely to come down. Cash flow from operations is quite high at over Rs 20 crore in ‘97-98. Earnings for the full year as well as the second half of the next year would be higher. Day rates would increase or remain stable while the rupee-dollar rate would work to its advantage. In fiscal ‘98-99, the company is expected to gross an operating income of Rs 160 crore and a net profit of Rs 38.50 crore. This would yield an EPS of Rs 19 per share. At a price of Rs 75, the scrip is discounted under 4 times. Hitech's assets, which are expected to last over the next 10 years, have a combined replacement value of over $ 200 mn, yielding an average value of Rs 400 per share. The scrip seems a good buy for the value investor with a medium term perspective. (Courtesy:Investors Guide,ETonline)