Mar 23, 2013 03:16 PM IST | Source:

Buy Oil Country Tubular; target Rs 50: Sunidhi Securities

Sunidhi Securities is bullish on Oil Country Tubular (OCTL) and has recommended buy rating on the stock with a target price of Rs 50 in its March 22, 2013 research report.

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Sunidhi Securities is bullish on Oil Country Tubular (OCTL) and has recommended buy rating on the stock with a target price of Rs 50 in its March 22, 2013 research report.

"OCTL is promoted by United Steel Allied Industries Private Limited (USAIPL), belonging to the Hyderabad based Kamineni Group of companies. The Group has diversified interests in steel, healthcare and education. Major Group companies, apart from OCTL, include: USAIPL: which undertakes heavy industrial projects in thermal/nuclear power, steel, aluminium etc., United Seamless Tubular Private Limited: a JV between USAIPL, OCTL (19 percent holding) and UMW India Ventures, a 3, 00,000 tpa seamless pipe manufacturer, Kamineni Hospitals Private Limited: which owns and operates hospitals in Hyderabad (total bed capacity – 300 beds) besides medical, dental and nursing hospitals. Mr. K. Suryanarayana, promoter of the Kamineni Group of companies, is the Managing Director of OCTL; he is aided in the day to day management by his son, Mr. K. Sridhar, Joint MD of OCTL.

Products & Services:
OCTL's wide product range covers Drill Pipe, Heavy Weight Drill Pipe, Drill Collars, Production Tubing, Casing, Tool Joints, Couplings, Pup Joints, Nipples, Subs, and Cross Overs. Its Oil Field Accessories include Rotary Subs, Lift Plugs /Lift Subs, Cross Overs (Drill Pipe to Drill Collar or Drill Collar to Drill Collar), Stabilizer Sleeves, Welded Blade Stabilizers & Integral Stabilizers and Cast Steel Lifting Bails. Services include Tool Joint Hard banding, Make and Break of Tool Joints, Internal Plastic Coating of Drill Pipe and Tubing, Re-threading of Drill Pipe, Tubing and Casing and Field Inspection of Tubulars.

During Q3FY13, sales and other operating income remained almost flat at Rs 121.6 crore but net profit rose 156.3 percent to Rs 8.2 crore. (YoY). OPM and NPM stood at 26.2 percent and 6.7 percent compared to 15.4 percent and 2.6 percent respectively in Q3FY12. Q3FY13 EPS stands at Rs 1.9. During 9MFY13, sales advanced 27.3 percent to Rs 413.8 crore and net profit rose 43.4 percent to Rs 35.7 crore. (YoY). OPM and NPM stood at 18.7 percent and 8.6 percent compared to 15.3 percent and 7.7 percent respectively in 9MFY12. EPS for 9MFY13 stands at Rs 8.1 Vs Rs 5.6 in 9MFY12. During FY12, sales and operating income advanced by 46.8 percent to Rs 479.5 crore and net profit by 25.6 percent to Rs 38.3 crore. OP and NP margin stood at 16.3 percent and 8.0 percent Vs 19.3 percent and 9.3 percent respectively in the corresponding period last year. EPS stood at Rs 8.6. A dividend of 20 percent was paid. With the debts of Rs 248 crore, the debt-equity ratio as on FY12 stood at 1.1:1 whereas the value of the gross block including capital work in progress of Rs 108 crore stood at Rs 448 crore.

OCTL is a dominant supplier of drill pipes to Indian E&P companies. Approx 50 percent of OCTL's revenues are derived from exports largely to drilling contractors operating in the USA and the Middle East region: Major customers include MB Petroleum Services LLC, Schlumberger, JIVA International etc.

The global market for OCTGs is largely dominated by a few players, namely, Grant Prideco Inc., based in USA, Tenaris S.A., based in Luxembourg and Vallourec & Mannesmann Tubes, based in France. Within the domestic market, OCTL services the requirements of Indian E&P companies namely: ONGC and Oil India (OIL). Given the stringent quality standards in the oil industry, the qualification process is usually long drawn and demanding and serves as an important barrier to entry, thereby limiting competition.

Going forward, revenue growth is expected to be supported by the expected improvement in demand for OCTGs given the steady oil prices, OCTL's continued strong competitive positioning and the enhancement in capacities. While product-wise margins are expected to sustain, there could be a moderation in overall operating profitability given the expected growing proportion of relatively lower added casing pipes (trebling of capacity) in the overall product mix.

Going forward, OCTL's revenues (around 50 percent) are expected to come from exports. While it has ventured to new geographies like Brazil, Canada and Algeria, it also stands to gain from offtake commitments from US based clients to USTPL. Nevertheless, it will continue to be a key supplier to domestic clients Oil India, ONGC and Reliance Industries. In the drill pipes and premium casings segment, OCTL will continue to enjoy leadership over the medium term as the expanded capacities have come up in the basic segments. At the CMP of Rs 39, the share is trading at a P/E of 3.4x on FY13E and 2.7x on FY14. We recommend BUY with a target price of Rs 50 at which the share will trade at a P/E of 4.4 on FY13E," says Sunidhi Securities research report.

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