Aban Offshore

It gives me pleasure to address you at a time when your Company is
 growing in scope, scale and performance.
 
 At the outset, allow me to state that there were two aspects of our
 record performance during the year under review - one was on-market and
 the other off-market. I would be honest to state that Abans off-market
 performance completely overshadowed its on-market performance even
 though the latter was by no means insignificant.
 
 During the year under review, the Company reported the following
 numbers:
 
 * 11.68 per cent growth in top line
 
 * 18.82 per cent growth in bottom line
 
 * 14.64 per cent growth in earnings per share
 
 * Rs. 7,482 crore market capitalisation
 
 These were absolutely compelling figures and would have merited
 considerable attention in any case. However, I must confess that our
 performance was overshadowed by our seminal acquisition of Sinvest in
 2006-07. Besides, this deal was to the best of my knowledge, the
 largest of its kind within our industry during the year under review.
 This was also the first largest cross-border cash acquisition by any
 Indian business group.
 
 A number of you will ask whether it was necessary to have stretched the
 Companys financials in making this acquisition. After all, the Company
 has always taken pride in its financial conservatism.
 
 Perhaps this needs to be answered at two levels.
 
 First, there is a question of whether we needed to do the deal at all.
 My answer is that in our industry space it wasnt entirely a question
 of whether we were getting the rigs at the right price; the question
 was whether we were getting any rigs at all. Any company intending to
 expand would primarily have to accomplish the challenging exercise of
 finding a seller. It took us some time to get adjusted to the price
 that was being quoted because we - and in fact, nobody within our
 business - had ever seen such rates being quoted for rigs or day rates.
 However, your Company took a calculated risk that the prevailing asking
 rates were reasonable in view of the long-term industry outlook, the
 prevailing day rates and the projected payback. From this point of
 view, the acquisition was definitely worth doing.
 
 Second, there is a question of whether we stretched our financial and
 compromised our future earnings capability in the acquisition. A number
 of shareholders will conclude that we are stretched. My answer is a
 firm no.
 
 There are several reasons for this:
 
 * In a business environment where we have funded our acquisition with
 low- cost debt, it is important to consider the interest cover in the
 business rather than the debt-equity ratio. And here we have a fair
 reality to present - our business has consistently reported an EBIDTA
 margin in excess of 55 per cent.
 
 * We succeeded in maintaining a comfortable interest cover even during
 the worst phase in the last five years.  y We secured our earnings
 through back-to-back contracts that should result in our fresh
 acquisition, generating a cash payback in less than five to six years.
 The assets that we purchased will last for at least three decades while
 their cost of acquisition will be paid off within a relatively short
 time.
 
 The Companys entry into an aggressive capital-intensive acquisition
 with this reality indicates how it follows the ethos of organisational
 de-risking.
 
 Following the acquisition, our biggest challenge for the moment is to
 establish a cultural and operational integration between the acquired
 and the acquirer across the following areas:
 
 * Having serviced several multinationals over the years, Sinvest has
 acquired a specialised understanding of contemporary standards and
 competencies. The takeover offers Aban the chance to imbibe these
 insights.
 
 *Over the last decade-and-a-half, Aban leveraged its engineering
 excellence to create a cost structure that is now one of the most
 competitive in the world; Sinvest has begun to absorb the mechanics of
 competitiveness and the result could well emerge as a potent economies
 of scale within our industry space the world over.
 
 Aban is attractively placed to cash in on the trends in the global
 industry.  The Company plans to leverage the following:
 
 * There has been a huge increase in rig demand, coupled with enhanced
 exploration activity in the Asia-Pacific and the Middle East. Aban
 enjoys a rich insight into the Asia-Pacific and its rig Aban VI has
 been deployed in the Middle East.
 
 * The increase in rig demand and relative stagnation in rig
 availability has strengthened day rates, which is expected to harden
 till 2008 and remain steady thereafter, irrespective of the global oil
 price. Abans four drilling units under construction/refurbishment will
 go on stream in the first half of 2007-08, capitalising on this
 uptrend.  Besides, the contracts for five of its older rigs/FPU will be
 re-priced and, given the existing trend, we expect that these will
 fetch stronger rates.
 
 * Among the other discernable trends, there is a growing preference for
 new- built rigs due to their superior functional capabilities and for
 floaters/drill ships due to their low gestation compared to jack-ups.
 Of Abans 20 rigs (by 2009), nine will have an age-profile of less than
 three years, strengthening the preference for them.
 
 * We foresee stronger co-operation between service providers and their
 customers (oil companies), leading to a faster deployment of the
 new-built assets. Aban expects to commit most of its rigs with
 established customers, resulting in income predictability for itself
 and asset availability for its customer, a win-win counter-cyclicality
 proposition for both.
 
 We continue to anticipate profitable and sustainable growth over the
 foreseeable future. By 2009-10, all the new rigs under construction
 should enjoy medium-term contracts at attractive rates. In view of
 this, we expect to report a significant increase in income over the
 three years from 2007-08. We do not expect any dilution in our EBIDTA
 margins as the re-pricing of all old contracts at higher day rates come
 into play over the next 15 months. In view of this, shareholders can
 look forward to a robust increase in our cash flow, which could again
 reinforce our war chest with which to make significant acquisitions
 should we come across any opportunity in the foreseeable future.
 
 Chennai                                                Yours sincerely
 
 21-06-2007                                                REJI ABRAHAM