Buy Shiv-Vani Oil & Gas - Elara Capital

• Shiv-Vani Oil & Gas
• Rating : Buy
• Target Price : INR600
• Upside : 37%
• CMP : INR439 (as on 30 August 2010)

FY11 execution on track, new orders in store

We recently met up with Shiv-Vani Oil and Gas top management and came back confident on the company's prospects of meeting its FY11 guidance and outlook for new orders, flowing in the next six months.

On track to meet FY11 guidance

With the Q1FY11 results delivering a top-line of INR4.0bn and PAT of INR0.64bn, the management has confirmed that the company is reasonably confident of meeting its FY11 top-line guidance of ~INR15.5-16.0bn and PAT guidance of ~INR2.5bn. We, however, would like to point out that Q2 usually is a weaker quarter. Despite a slight potential dip in Q2, we estimate that the annual guidance should be achievable with some new rigs being operational from the current quarter.

Recent fund raising purely for asset additions

Shiv-Vani also confirmed that the recent USD80mn FCCB issue is purely for new asset additions, denying Street rumors about the proceeds being utilized to retire some of the debt. The company has a bid book of ~USD650mn and new long term orders of USD200-225mn would warrant 4-5 new rigs for order completion. We think that Shiv-Vani strongly expects bagging such long term orders and have thus raised the funds recently. Also, though the company has not received any big-ticket order since the ~USD400mn ONGC order in 2008, Shiv-Vani has been bagging smaller orders, sufficiently replenishing its order book (~USD650mn). Moreover, the upside to estimates may also come from Shiv-Vani deploying its seismic assets in the Middle East, a venture which seems to be in advanced stages.

Additionally, Shiv-Vani is also open the idea of an onshore acquisition. However as seen in the past, we believe that the company is very circumspect about the valuation it would pay. It would seek acquisition benefits such as geographical expansion and new customers in addition to the valuation being preferably lower than the cost of setting up the same assets on its own.

Maintain Buy for impending re-rating; limited downside

We maintain our Buy rating and the target price of INR600/share (12x P/E) for Shiv-Vani. The stock currently trades at 9x. We believe Shiv-Vani may start re-rating in the next couple of quarters as the market starts to appreciate the execution and earnings visibility. We also see very little downside for the stock as our analysis of the worst-case FY11 earnings shows only a 9% downside from the current levels. Shiv-Vani remains our top pick in the Indian oil services sector driven by its high earnings visibility, low risk-profile and attractive valuations.

Source : Equity Bulls

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