I read the article and didn’t find anything new. This thread has more material than probably what the author knows(obviously he has not put his money and hence the details are not required for him).
Deep Industries is a capital intensive business( a well known fact). For every new order they need to go for a capex. Now some important points to ponder.
- Their EBIDTA margin is 55-58%. They recover the cost of equipment is 3 years while the equipment life is 15-20 years. When the renewal of the contract comes they can bid much lower(as the equipment cost is already recovered) and for competition it becomes tough to win.
- Management says that they will grow 30% even without a new order in FY18.
- Their CBM block will start generating revenue from FY19. This project is fully funded now with $20M QIP with Tridevi Capital.
This all ensures good growth for next 2 years without any capex needs.
If a new order comes then only they have to worry about capex but it also starts giving them additional revenue.
Disc: Invested since lower levels and bullish in the prospects. My views are biased and hence please do your own due diligence.
Thanks for sharing this vikas. I completely concur with your views that this is a good investment due to sectoral tailwinds, despite this not being a great business.
Result are average this time aided by lower tax out go (20%), other income (7 cr). Operating margins have taken a beating. Average result to be honest. I was expecting 80 cr topline with margins of 55% as guided by the management. Would be important to understand why margins have suffered so much.
To me these are good results. Margins are down this quarter but for the full year margins are similar to last year.
We need to watch the trend for few quarters. If this continues then this is a worry.
In fact Pat margins are up for the quarter and for full year.
This is a high growth story in near to mid term available at very reasonable valuations.
Government policy changes: The details have been given in the investor presentation. The NELP auctions and freedom in CBM pricing will help improve the demand of rigs. The Make in India push is a sectoral tailwind, and not specific to Deep. We will need to check the current market share of foreign players in this space.
EBITDA margin suffered in this quarter due to a one off hit (Rs 2.5cr) due to delay in deployment of equipment, which the management attributed to demonetisation. The remaining charges includes some year end charges (~Rs 4.5cr). Other income includes a Rs 6cr hedging gain.
FY17 Revenue breakdown by segment: Gas compression (38%), Rigs (24%), Gas Dehydration (38%).
Current Order book - Rs 780cr. Segment wise breakdown: Compression (24%), Rigs (25%), Dehydration (51%). This includes a repeat order of Rs 42cr won in the rigs and compression segments.
Repeated their guidance of revenue reaching Rs 340cr even if no new orders are won. Order book visibility of 2.25 years.
Commentary on competition: Maintained market share in the compression division(90%) and rigs division(15%), but dehydration business has seen market share go down from ~100% to ~60% (3.5mmscmd/6mmscmd) The management maintained the guidance of having 55%+ EBITDA margins for the rest of the order book, and said that there was no pricing pressure seen in the bids for new contracts.
Dehydration Business: 2-3 ONGC assets to come up for bidding in this quarter, with the overall market set to expand to 15-16 MMSCMD from 5-6 MMSCMD currently.
Rigs: In the overall market, supply exceeds demand by 20-30%. On the demand front, 10-15 rigs will be available for bidding soon, including 6-7 2000HP rigs and 4-5 1000HP rigs required by ONGC.
QIP money utilisation: Rs 20cr used to capitalise the Cairn order won last quarter, some of it has been used to repay the promoter’s quasi equity in the firm, while the rest has been parked in investments.
In the future, the company is looking to expand its gamut of oil and gas services to include hydrofacturing, cementing, etc. to become an integrated OFS player. It will tie ups with necessary players for venturing into this.
Hedging policy: No formalised policy as of now. The net receivables are almost equal to the dollar exposed debt, resulting in a natural hedge.
Utilisation levels of assets: Dehydration (100%), Compression (90-92%), Rigs (85-87%).
The company will not be participating in the NELP auctions since it plans to monetise the existing blocks on its books. It will only gain from the additional demand for its services due to these new blocks.
The company has not faced any penalties in the dehydration business till date, which might be a testament to its technical prowess.
Personally, I am wary of the company expanding into the oversupplied rigs division inspite of the growth prospects. This is a cyclical business with a relatively low barrier to entry. With the outsourced dehydration market set to triple in the next few years, this is going to be a very exciting segment for the company, possibly making it a strong mid-stream company with a visible annuity model.
Thanks for the concall summary. Few questions if you can help answer -
Was there any discussion regarding tax outgo for the qtr? It has fallen substantially…
Also, one-off year end charges (4.5 r)…what are these specifically? Will they repeat every year?
Do they have some kind of insurance for any untoward accidents happening at the sites? Or for instance, the delays in delivering some equipment cost them 2.5 cr. Won’t it be sane to have some sort of insurance for such events?
Regarding dehydration business, competition is kicking in and there will me pressure on the margins going forward. They might deny this, but we have to read between the lines. What is eye catching is - “we will be able to maintain Ebidta margins of 55% on the current order book”. Meaning, going forward, margins might decrease.
I think there market share in dehydration business going down from 100% to 60% means they have lost some contracts they had bid for. Any information on who else is competing against Deep and have won those orders? Won’t this mean they will have to bid aggressively going forward? Or i am getting this wrong, and they have not bid for the contracts which resulted in their market share reducing.
Dehydration business is the key here going forward as is evident from the ONGC commentary as well. And such high margin business is going to result in competition kicking in at some point in time. May be happening already…
Deep has got High Client concentration. Most of its dehydration and compression business comes from ONGC. Also, most of its order book of 750Cr consists of contracts with ONGC. If the worst fear of blacklisting by ONGC comes true, it would mean doomsday for Deep. Deep is working with a government company. This can go either way. Either it would be able to come out of this unscathed. Or if some bigger player is behind the accusations, the above mentioned risk might come into play.
I would request senior investors who have tracked this industry since a long time give their inputs regarding what such show cause notices mean and if its really something we should be worried about.
I exited my position completely. ONGC is their largest client and if they are found on the wrong side then there will be severe impact both on the existing as well as future orders.
I am ready to jump in and buy at 20% higher prices once the issue settles down in favour of Deep.
