>ABAN OFFSHORE (EMKAY)

Aban’s Q3FY10 net profit of Rs894 mn is below expectations on account of higher deprecation and tax rate and lower profit from its 50% JV Venture Drilling. Revenues at Rs8.41 bn (our expectation- Rs8.93) registered growth of 19.7% sequentially as 4 new rigs (DD2, DD5, DD7 and Aban Abraham) commenced operation. However since the 3 Jack rigs started working in November 2009 and Aban Abraham worked only for half of the quarter (on account of some technical issues) we see that the quarter does not reflect the full revenue potential from new contract operations. EBIDTA at Rs5.2 bn, (our expectation Rs5.2 bn), grew 14.6% qoq. Depreciation for the quarter at Rs1.35 bn was higher by 36% qoq as depreciation on Aban Abraham (which commenced operation this quarter) was charged for the entire quarter. Higher number of rigs operating in Middle East (where the withholding tax is comparatively higher), increased Aban’s tax rate to 55.5% as compared to 50.6% in Q3FY09.

On account of higher than expected tax rate we are downgrading our FY2010 earnings estimates for Aban by 7.2% to Rs90.5 /share and FY2011 earnings by 8.2% to Rs190/share. Post declaration of results Aban’s stock fell more than 10%. We would like to highlight that consensus net profit expectation was close to Rs1.7 bn. Though the quarterly numbers were sharply below consensus expectations we believe that, the street is neglecting positives from the results. Considering that the revenue potential from new contract operations was not captured fully during the quarter, EBIDTA margins at ~60% are very impressive and management has highlighted that the same are pretty much sustainable (except for adverse movement in currency). With Aban pearl commencing operations in Q4FY2010 we expect Aban’s revenues and earnings to get significant momentum going forward. The stock is trading at attractive valuations of 12.5X FY2010 earnings and 6X FY2011 earnings. We upgrade our rating from HOLD to ACCUMULATE with revised price target of Rs1325.

Revenue growth of 19.7% qoq despite partial contribution from new contracts
Revenues for the quarter stood at Rs8.41 bn (our expectation- Rs8.93) and registering flattish yoy growth, however was up 19.7% sequentially as 4 new rigs (DD2, DD5, DD7 and Aban Abraham) commenced operation. However since the 3 Jack rigs started working from close to November 2009 and Aban Abraham worked only for half of the quarter (on account of some technical issues) we see that the quarter does not reflect the full revenue potential from new contract operations.

EBIDTA up 14.6% qoq – margins at 61.7%
Even after flattish revenue growth, EBIDTA for the quarter stood at Rs5.2 bn, (our expectation Rs5.2 bn), registering a growth of 10.1% (14.6% qoq). We would like to highlight that margins were positively impacted on account of termination of rigs O&M contract with Premium Drilling (PD). As a result, EBIDTA margins for the quarter have surprised us positively at 61.7% (our expectations 58.4%) registering a yoy expansion of 538 bps. Considering that the revenue potential from new contract operations was not captured fully during the quarter and with Aban Pearl commencing operation in Q4FY2010, EBIDTA margins at ~60% are very impressive and management has highlighted that the same are pretty much sustainable.

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