>GREAT OFFSHORE (ICICI DIRECT)

Strong operating performance…

Great Offshore (GOL)’s standalone results were above our expectations. GOL reported a YoY rise of 45.1% in revenues in Q4FY09, while on a QoQ basis revenues declined by a meagre 2.2%. This rise was mainly due to revenue addition from heavy lift vessel and project income of Rs 86 crore during the quarter. The EBITDA margin rose from 39.7% in Q4FY08 to 48.8% in Q4FY09. This was on the back of a reduction in the other expenses to sales ratio from 26.3% in Q4FY08 to 16.6% in Q4FY09. The overall net profit rose 29.6% YoY to Rs 71.35 crore in Q4FY09, owing to a decline in the depreciation cost by 6% to Rs 24.69 crore.

For FY09 (on a consolidated basis), the company reported a 39.5% rise in sales to Rs 1139.25 crore as against Rs 816.18 crore in FY08. The EBITDA margin for the entire year rose by 181 bps to 47.5% from 45.7% in FY08.

Valuations
AT the CMP of Rs 296, GOL is trading at 4.6x FY10E earnings of Rs 63.27 and at 3.8x FY11E earnings of Rs 77.39 We expect GOL’s operating performance to remain strong, but are cautious on the other events related to the stock like low promoter stake and pledging of shares with corporates as collateral. We have valued GOL on multiple valuation parameters using global benchmarks, with a target price of Rs 307, which provides an upside of 4%.

Expansion in operating margin
GOL’s EBITDA margin saw a sharp rise from 39.7% in Q4FY08 to 48.8% in Q4FY09. The rise in the margin was on account of the other expenses to sales ratio declining from 26.3% in Q4FY08 to 16.6% in Q4FY09.

Delay in acquisition of vessels
GOL had placed an order for a jack up rig and multi support vessel (MSV) with Bharati Shipyard, which was expected to join the fleet in Q1FY10 and Q2FY10, respectively. However, there has been a delay in the delivery of these vessels, due to amendments in design. To factor in the delay of these two vessels we are downgrading our revenues estimates for FY10E by 5.9% to Rs 1300.65 crore and EPS by 18.6% to Rs 63.27.

Pledging of shares to Bharati Shipyard a major concern
GOL’s promoters have pledged 14% from 15.5% promoter’s shareholding to Bharati Shipyard in order to raise money required to clear off their dues with creditors. This is a major concern for GOL as the collateral given is far lower than the loaned amount.

Award of new contracts
Great Offshore Services Ltd secured a contract for three years commencing by the end of April 2009 with ONGC for three of its vessels (one PSV and two AHTSV) for an aggregate contract value of around US$65 million.

The company also commenced a firm charter contract with Gujarat Sate Petroleum Corporation Ltd (GSPL) for its AHTSV- “Malaviya Nine”. The contract is worth US$32 million and is initially for two years with an embedded option.

Detailed valuations
GOL is trading at 4.68x FY10E earnings of Rs 63.27. About 35% of GOL’s fleet is more than 20 years old, which results in higher repairs & maintenance expenses. Though the company has more than 70% of its fleet on long-term charters providing sustained revenue visibility, concerns remain over low promoter’s stake and pledging of majority of promoter stake to BSL. We have
valued the stock on multiple valuation parameters with a target price of Rs 307. At the target price of Rs 307, GOL would trade at a multiple of 1x its FY10E price to book value, FY10E market cap to revenues multiple of 0.9x, EV/EBITDA of 4.3x FY10E earnings and P/E of 4.8x FY10E earnings.

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