Buy Oil Country Tubular - Sunidhi

OCTL is a dominant supplier of drill pipes to Indian E&P companies. Approx 50% of OCTL's revenues are derived from exports largely to drilling contractors operating in the USA and the Middle East region: Major customers include MB Petroleum Services LLC, Schlumberger, JIVA International etc.

The global market for OCTGs is largely dominated by a few players, namely, Grant Prideco Inc., based in USA, Tenaris S.A., based in Luxembourg and Vallourec & Mannesmann Tubes, based in France. Within the domestic market, OCTL services the requirements of Indian E&P companies namely: ONGC and Oil India (OIL). Given the stringent quality standards in the oil industry, the qualification process is usually long drawn and demanding and serves as an important barrier to entry, thereby limiting competition.

Going forward, revenue growth is expected to be supported by the expected improvement in demand for OCTGs given the steady oil prices, OCTL's continued strong competitive positioning and the enhancement in capacities. While product-wise margins are expected to sustain, there could be a moderation in overall operating profitability given the expected growing proportion of relatively lower added casing pipes (trebling of capacity) in the overall product mix.

Going forward, OCTL's revenues (around 50%) are expected to come from exports. While it has ventured to new geographies like Brazil, Canada and Algeria, it also stands to gain from offtake commitments from US based clients to USTPL. Nevertheless, it will continue to be a key supplier to domestic clients Oil India, ONGC and Reliance Industries. In the drill pipes and premium casings segment, OCTL will continue to enjoy leadership over the medium term as the expanded capacities have come up in the basic segments.

At the CMP of Rs. 39, the share is trading at a P/E of 3.4x on FY13E and 2.7x on FY14. We recommend BUY with a target price of Rs. 50 at which the share will trade at a P/E of 4.4 on FY13E.

Key Risk: Factors like economic slowdown, trend in energy prices; global capacity expansion may impact OCTL's performance.

Source : Equity Bulls

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