Q2FY08 Results Review
We had initiated coverage on Dolphin Offshore Enterprises Ltd (DOEL) in June 2007 (at a price of Rs. 240). Subsequently the stock made a high of Rs. 338 on the 16th of November 2007. We present a quarterly update on the stock after the second quarter (Q2FY08) results following a discussion with the management.
DOEL is involved in the business of Topside and Underwater / Diving services, inspection maintenance and repair, the execution of turnkey projects related to Offshore structures including process and unmanned platforms, rigs / floaters SBMs, pipeline, etc.
Strengthening of the Rupee vis-à-vis the dollar, the seasonal nature of the business, dry docking costs and higher interest outgo has impacted the topline, EBITDA and PAT margins
DOEL operates in the offshore infrastructure development, modification and revamping space. This business is seasonal in nature and witnesses a slow down during the monsoon period. As a result DOEL could not carry out any major offshore construction work during the quarter and has primarily booked revenues in the onshore fabrication segment.
The rupee has appreciated about 10% vis-à-vis the dollar in H1FY08 and since most of DOEL’s contracts are dollar denominated, this had led to a significant drop in topline revenue. Forex losses for the quarter and half year are at Rs. 1.03 cr and Rs. 4.42 cr respectively as opposed to forex gains of Rs. 4.14 cr in H1FY07.
During the quarter, DOEL has carried out the dry-docking of two of its vessels, Ganga Dolphin and Brahamaputra Dolphin. For the half year H1FY08, DOEL has spent about Rs. 1.2 cr on dry-docking of its various vessels. While Ganga Dolphin is already operational, Brahamaputra Dolphin is only expected to be operational towards the end of November.
Personnel costs have also increased y-o-y, which has dampened margins.
As a result of the above-mentioned reasons, the topline of DOEL, in Q2FY08, is down 9.5% y-o-y on a consolidated basis. Further, the operating margins have fallen 980 basis points y-o-y from 27.3% to 17.5%.
There are change orders still to be executed for standby claims on account of ONGC not giving access to site on the ONGC BBBLRP and L&T SHRC contract, which will be recognized as income when these claims are accepted and finalized by ONGC. The effect of this is that while expenses have been recognized, revenue for the same will be recognized at a later date and thus this has led to postponement in booking of revenues and a tight working capital situation. As a result, DOEL’ interest costs have jumped 90% y-o-y, from Rs. 1.5 cr in Q2FY07 to Rs. 2.9 cr in Q2FY08. The claim of Rs. 18 – 20 cr is likely to be accepted by Q4FY08.
Seasonal nature of the business, lower topline due to appreciating of the Rs versus the USD, increased operating and financial costs has resulted in DOEL reporting a loss of Rs. 0.2 cr in this quarter as opposed to a profit of Rs. 3.7 cr in the corresponding quarter last year.
Key Developments:
There has been a delay in the delivery of the 2 workboats cum supply vessels ($6.65mn each), which were ordered with Alcock Ashdown (Gujarat). They were due to be delivered in September 2007 and now this has been delayed to March 2008. This was due to a delay in the shipment of the propulsion systems to the shipbuilder. However, DOEL is entitled liquidated damages (2% per month) due to delay in delivery of the workboats.
There is also a slight change in the schedule of delivery of the $18mn barge. While it was scheduled for delivery in December 2008, a dummy barge without the propulsion system will now be delivered in September 2008 and the propulsion system for the barge is to be delivered the following monsoon (June 2009). This could have an impact on the OPM of DOE for FY09 as vessel charter related costs could go up for that year.
The outstanding order book as of November 2007 is about Rs. 160 cr, which is to be executed by April 2008. During the quarter, DOEL received another order from Punj Lloyd for the provision of under water / diving services including DP DSV for the ONGC Heera Redevelopment project. The value of this contract is approximately US $ 8.5 million with an option to provide additional diving services, which could enhance the contract value by another US $ 3.5 million. The scheduled completion date of entire scope of work covered under this contract is around May 2008. 20% (USD 3 mn) of the USD 15 mn FCCBs have been converted on the 24 July, 07 by Clearwater Capital Ltd at a premium of Rs. 215. This has resulted in DOEL allotting 6,04,933 equity shares and thus the equity capital has increased from Rs 896 lacs in Q2FY07 to Rs. 957 lacs in Q2FY08. The fully diluted equity would be Rs. 1162.70 lacs.
As mentioned in our previous result update, DOEL could sell two of its vessels i.e. the anchor handling tug M.V.Krishna Dolphin and M.V.Godavari Dolphin for about $8.5 mn before the end of FY08. This could result in an extraordinary income of about Rs. 14 - Rs. 16 cr.
DOEL is venturing into the ship fabrication / shipbuilding segment. DOEL has earmarked Rs. 400 cr for this project and is eyeing two existing shipyards on the West Coast for acquisition. Further, DOEL has received the LoI from the Gujarat Maritime Board who has already allotted land at Jaffrabad in Gujarat to DOEL and the project is expected to take off in about two years time. The monies received through the sale of the above-mentioned two vessels could be deployed for this purpose. DOEL plans to cater to ONGC’s needs of Platform Supply Vessels (PSVs). Each of these vessels is expected to cost about $20 mn and ONGC is soon to float a tender for 30 such vessels. DOEL plans to build 4-5 such vessels for ONGC, which would be chartered to ONGC for 5 years.
Recommendation:
We are leaving our estimates of the full year sales target for FY08 (E) of Rs. 231.50 cr and PAT of Rs. 16.5 cr unchanged, despite them looking a bit touch to achieve. However, DOEL is confident of completing most of its current order book of Rs. 160 cr during the current work season. However, having regard for the apparent shortfall in DOEL’s performance in H1FY08, we advice short-term investors to book profit at the current levels of Rs. 315. Long term investors can use the current rally in the stock to exit and re-enter is the Rs. 231 – Rs. 248 band.
Consolidated Financials:
| P & L Account | 2 Qtr | 2 Qtr | Chg % | 1 Qtr | Chg % | FY06 | FY07 | Chg % | FY08 (E) | Chg % |
| (Rs. in cr) | 200709 | 200609 | y-o-y | 200706 | q-o-q | 200603 | 200703 | y-o-y | 200803 | y-o-y |
| Net Sales | 27.8 | 30.7 | -9.5% | 51.7 | -46.3% | 182.5 | 217.7 | 19.3% | 231.5 | 6.3% |
| Other Income | 0.0 | 0.0 | -2.4 | 0.0% | 2.2 | 1.9 | -15.5% | 0.5 | -73.1% | |
| Total Income | 27.8 | 30.7 | -9.5% | 49.3 | -43.7% | 184.7 | 219.6 | 18.9% | 232.0 | 5.7% |
| Total Exp | 22.9 | 22.3 | 2.7% | 41.7 | -45.1% | 161.9 | 180.8 | 11.7% | 191.6 | 6.0% |
| PBIDT | 4.9 | 8.4 | -41.9% | 7.6 | -35.9% | 22.8 | 38.8 | 69.7% | 40.4 | 4.2% |
| Interest | 2.9 | 1.5 | 90.0% | 2.3 | 22.8% | 4.8 | 6.6 | 37.3% | 9.2 | 38.8% |
| PBDT | 2.0 | 6.9 | -70.7% | 5.3 | -61.8% | 18.0 | 2.1 | 78.5% | 31.2 | -2.9% |
| Depreciation | 1.6 | 1.7 | -8.8% | 1.5 | 4.0% | 4.1 | 6.0 | 46.0% | 6.2 | 3.3% |
| PBT | 0.5 | 5.2 | -91.3% | 3.8 | -88.0% | 13.9 | 26.1 | 88.1% | 25.0 | -4.4% |
| Total Tax | 0.7 | 1.5 | -55.2% | 1.5 | -56.1% | 5.0 | 8.7 | 71.9% | 8.5 | -2.1% |
| Reported PAT | -0.2 | 3.7 | -105.4% | 2.3 | -108.8% | 8.9 | 17.5 | 97.3% | 16.5 | -5.5% |
| Latest Equity (Rs cr) | 9.6 | 5.6 | 70.7% | 9.0 | 6.7% | 5.6 | 9.0 | 60.0% | 11.6 | 29.7% |
| EPS (Unit Curr) | 0.0 | 4.1 | -100.0% | 1.9 | -100.0% | 15.8 | 18.5 | 17.3% | 14.2 | -23.3% |
| OPM% | 17.5% | 27.3% | 14.7% | 12.5% | 17.8% | 17.5% | ||||
| NPM% | -0.7% | 12.1% | 4.4% | 4.8% | 8.0% | 7.1% |
-----With due apologies and full credits to HDFC Securities
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