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ICRA revises long-term rating of Jindal Drilling & Industries Limited

Posted On: 2014-12-08 21:15:38

The long-term rating of Jindal Drilling & Industries Limited has been revised to [ICRA]A- (Stable) from [ICRA]A (Stable) for the bank facilities and short-term rating reaffirmed at [ICRA]A1.

The rating for the Rs. 20 crore long-term, fund-based limits of Jindal Drilling & Industries Limited (JDIL) has been revised to [ICRA]A- (pronounced ICRA A minus) from [ICRA]A (pronounced ICRA A); the outlook on the long-term rating is Stable. The rating for the Rs. 150 crore short-term, non-fund based limits of JDIL has been reaffirmed at [ICRA]A1 (pronounced ICRA A one).†

The revision of long-term rating factors in the expected decline in the scale of operations, profitability and returns of the company based on its modest order book position (estimated at US$ 91.55 million as of end-September 2014) with no new contracts being entered into by the company and some of the previous contracts having been completed or expected to be completed in the near term. Based on the current order position, the company would generate most of its revenues from a single rig belonging to a Singapore-based associate company until March 2017. This is expected to result in deterioration in the return indicators going forward. ICRA had previously anticipated significantly higher scale of operations and profits for the company based on the company having the exclusive right to market and operate the rigs owned by associate companies, which was expected to enhance its scale of business and cash flows over the medium term. Besides, decline in crude prices globally and expectations of subdued energy prices in the medium term on account of significant supply additions, particularly in the US, are expected to weigh on day rates going forward. While the day rates for jackups continue to be favourable vis-a-vis historical trends, the offshore drilling industry may witness an oversupply situation in the medium term as significant number of newbuilds enter the market, which may further pressure the day rates going forward. Nevertheless, the financial flexibility of the company continues to be comfortable with healthy reserves of cash and liquid investments (~Rs. 238 crore as of endSeptember 2013), as reflected by the reaffirmation of the short-term rating.

The ratings continue to derive comfort from the strong parentage of the company, being a part of the D.P. Jindal Group, its long experience and sound operating track record in the offshore drilling business and the favourable long term outlook for oilfield services in India. The standalone credit profile of the company remains comfortable with negligible debt, low working capital and capex requirements and decline in contingent liabilities, with the Singapore-based joint venture companies having repaid a large portion of the debt resulting in withdrawal of corporate guarantees from JDIL. Further, the asset light / low capital intensive business model leads to relatively lower risk for the company from the credit perspective. The ratings also factor in the expected increase in revenues from support services such as directional drilling and mud logging.

The ratings are constrained by the cyclicality inherent in the offshore drilling business which results in vulnerability of profitability to the market conditions prevalent at the time when the contracts fall due for renewal, the company's low fleet diversification, and high customer and geographical concentration risk. Some of these factors have resulted in decline in contracts for the company for its offshore drilling business in the recent past. The company has not been able to redeploy rigs owned by global rig supplier Paragon Offshore Limited (demerged from Noble Drilling Corporation Inc. and rated Ba2 by Moody's), which it had contracted previously to ONGC Ltd. and those rigs have now been contracted to ONGC through a domestic competitor. Further, competitive intensity in the domestic industry is set to increase as the protection for Indian operators against global competition by way of a price preference has been removed by the government recently. This would add to the high competition for PSU contracts from domestic players, given the long tenure of these contracts, high payment security and stability of rates. While the back-to-back nature of JDIL's contracts with its customers and rig providers largely mitigate the risk to the capital structure, the impact of lower profits would weigh on the return indicators going forward. The key rating sensitivities would be (a) any significant increase in the order book position resulting in an improvement in return prospects and (b) any significant exposure to rig investment companies of the group and / or capex plans resulting in a significant reduction in cash balances and financial flexibility.

Shares of JINDAL DRILLING & INDUSTRIES LTD. was last trading in BSE at Rs.194.9 as compared to the previous close of Rs. 196.4. The total number of shares traded during the day was 1200 in over 151 trades.

The stock hit an intraday high of Rs. 200 and intraday low of 192.25. The net turnover during the day was Rs. 234720.

^ 100 lakh = 1 crore = 10 million
† For complete rating scale and definitions, please refer to ICRA's website or other ICRA Rating Publications

Source: Equity Bulls

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