Buy Oil Country; target of Rs 50: Sunidhi Securities

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

“Incorporated in 1985, OCTL is primarily engaged in the processing of OCTGs (Tubular Goods) used in the oil drilling and exploration industry. OCTL’s product range comprises largely of drill pipes, casing pipes and production tubing; of these, OCTL largely focuses on the processing of drill pipes, which constitute major part of revenues. The complete processing activity is concentrated in a single unique integrated plant located at Narketpally in Hyderabad, India. OCTL has primarily positioned itself to cater to the requirements of oil exploration and production companies in India like ONGC, OIL India and Reliance Industries etc. OCTL exports its products largely to countries in the Middle East and USA.”

“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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