>ABAN OFFSHORE (EDELWEISS)

■ Revenues down 15% Y-o-Y on back of ~10 idle assets during Q2FY10
Aban Offshore’s (Aban) Q2FY10 consolidated revenues declined 14.7% Y-o-Y and11.4% Q-o-Q to INR 7,029 mn on account of ~ 10 idle assets in the quarter (as compared to 6-7 assets in Q1FY10). Most assets in the Singapore subsidiary were idle, except Deep Driller 3, Aban VIII, Deep Driller 5 for 10-15 days, Deep Driller 8, and Deep Venture. In the parent company, FPU Tahara was idle. Currently, most of the new contracts have started, taking the current idle rigs to ~three (Aban VII, Deep Driller 1, and Deep Driller 6). Hence, we expect revenues to improve in the next few quarters. The company is also marketing the three idle assets.

Weak performance, but outlook positive

■ Higher interest costs offset dip in expenses, revenues from Deep Venture
Overall, the company’s total expenses declined 31.3% Y-o-Y and 23.0% Q-o-Q to INR 2,500 mn in Q2FY10. The decline is due to absence of marketing by Premium Drilling effective from July 2009 end which helped curtail operating costs. Consequently, the company’s EBITDA margin increased to 64.4% in Q2FY10 from 55.9% in Q2FY09. However the company’s interest expenses increased to INR 2,611 mn in the quarter, on account of high debt levels (~INR 3.27 bn) and higher interest costs (~Libor + 400 basis points from Libor + 300 basis points on foreign currency loans), due to debt rescheduling. Aban has partly benefited from start of higher rate contract of Deep Venture in Q2FY10. All these factors resulted in a Q2FY10 PAT of INR 715 mn, down 73.3% Y-o-Y and 35.5% Q-o-Q, significantly ahead of our estimates due to higher Deep Venture revenues, mobilisation fee, and EBITDA margins.

■ Outlook and valuations: Fair value at INR 1,551/share; maintain ‘BUY’
Q2FY10 results were weak due to ~10 idle assets and high interest expenses. Hereon, we expect improvement in fleet utilisation, turnover and potential new contracts. Any equity capital raising is likely to help ease balance sheet leverage. We have revised our FY10 estimates down by ~22% to reflect delay in start of Aban Abraham and Aban Pearl contracts and higher Libor spread on foreign currency loans. Yet, we have increased our FY11 EPS estimate. We estimate Aban’s fair value at 6.0x FY11E EPS (40% discount to global peers) at INR 1,551/share (fair value EV/EBITDA = 7.9x; Mid-cycle EV/EBITDA = 8.0-9.0x). Upsides to our fair value are likely on new contract announcements and higher-than-expected day rates. At INR 1,381, Aban is trading at 5.3x FY11E EPS, a 48% discount to 2-year median P/E of 10.2x for global offshore drilling firms. On the other hand, Aban’s FY11E EV/EBITDA of 7.9x is trading at 7% premium to global median valuations (2-year EV/EVITDA = 7.4x). We maintain our ‘BUY’ recommendation. On relative return basis, the stock is rated ‘Sector Outperformer’

To read the full report: ABAN OFFSHORE