IDBI Capital - Oil Country Tubular Ltd.

Highlight :

Hyderabad based Oil Country Tubular Ltd (OCTL) is set to get benefited from increasing exploration and production activities in the oil and gas sector. The stock has gained more than 170% since second quarter FY07 and more than 20% over last week.

OCTL's wide product range covers Drill Pipe, Production Tubing, Casing, Tool Joints, Couplings, and others, used in oil exploration and production business. ONGC and OIL are the largest domestic customers for OCTL. Exports contribute around 12% of its total revenue.

Increasing demand:

Indian exploration and production industry has tremendous growth scope going forward. Out of the total 3.14m sq. km. of sedimentary basins in India only around 19% has been extensively explored so far. The increasing demand supply gap of exploration and production services has been well reflected in gyrating rig rental charges over last couple of years.

About the company:

Incorporated in 1985, Oil Country Tubular (OCTL) was promoted by United Steel Allied Industries, K Suryanarayana and their associates. The company has installed capacity for processing 50,000MT of Casing Pipes, 10,000MT of Drill Pipes and 15,000MT of Production Tubing. Very low capacity utilization is an indication that the company has the capacity to accept huge orders without major capex. OTCL has a tie-up with Baker Hughes Tubular Services, US that owns 5.6% share in OCTL. It has obtained the API monogram from the American Petroleum Institute, US for its quality products.

OCTL's Oil Field Accessories include Rotary Subs, Lift Plugs and Lift Subs, Cross Overs, Stabilizer Sleeves, Welded Blade Stabilizers & Integral Stabilizers and Cast Steel Lifting Bails.

Services include Tool Joint Hardbanding, Make and Break of Tool Joints, Internal Plastic Coating of Drill Pipe and Tubing, Reconditioning of Drill Pipe, Re-threading of Drill Pipe, Tubing and Casing, and Field Inspection of Tubulars.

Financials and valuation :

The company was contemplating for some expansion couple of months back, but we

learnt that the plan had been rejected, as the management found the financing difficult.

In Q3FY07 OCTL recorded a topline of Rs.758.5m, which is around 77% YoY growth.

The company faced tremendous margin pressure due to increasing raw-material prices.

The operating profit margin slumps by 12.4 percentage points to 7.3%. That along with the increasing interests burden pushes down the Q3FY07 PAT to negative zone. PAT comes down from Rs.24.8m in Q3FY06 to a loss of Rs.6.9m in Q3FY07. The current price is 56.8x the TTM EPS of Rs.0.64.