The augmentation of assets by the company is well timed in the industry upcycle. The heightened exploration activity has resulted in severe shortage of resources with service providers, leading to firming up of day rates (or billing rates per km in case of seismic survey) for various services. w Healthy order book provides growth visibility: In addition to the favourable business environment, the existing order backlog of Rs2,950 crore itself provides a strong revenue growth visibility over the next two years.

 

Almost 70% of the order backlog (excluding the Oman order) is executable over the next 24-30 months. The company also has a healthy order pipeline with planned bids worth over Rs5,000 crore for global tenders over the next few quarters. Moreover, to further consolidate its leadership position and effectively tap the huge opportunity, the company has planned an aggressive capital expenditure (capex) of around Rs1,000 crore over the three-year period CY2006-09.

 

Margins to improve:

 

SOGEL has reported a healthy operating profit margin (OPM) of 35% in CY2006, which is expected to improve by 300 basis points to 38% by CY2009. The improvement in its OPM would be driven by higher realisation (day rates or billing rates per km) and more efficient utilisation of its assets. Attractive valuation: The consolidated revenues and earnings are expected to grow at compounded annual growth rate (CAGR) of 60.3% and 72.7% respectively, over the three-year period CY2006-09. Despite the robust growth prospects, the stock is available at attractive valuations of 11.3x CY2008 and 8.5x CY2009 earnings estimates. We recommend Buy call on the stock with a price target of Rs480.

 

 

Any further delay in CBM project The success of the CBM project is critical to achieve the estimated growth in revenues during CY2008 and CY2009. The revenue growth in CY2007 was affected by the delay in the commencement of the CBM project by the operator ONGC. We expect the project to commence in the current quarter and any delay on this front could have an adverse impact on our estimates and the company.s valuations.

 

Rupee appreciation:

 

The steep appreciation of the rupee could adversely affect the financial performance as most of its billing is done in US Dollars. Though the company also incurs a large part of its cost (including the wage cost) in US Dollar which provides a natural hedge, it is further insulting itself from the exchange rate fluctuation risk by quoting in rupee terms in case of some of its contracts.

 

 

The consolidated revenues and earnings are expected to grow at CAGR of 60.3% and 72.7% respectively over the three-year period CY2006-09. Despite the robust growth prospects, the stock is available at attractive valuations of 11.3x CY2008 and 8.5x CY2009 earnings estimates (on a fully diluted equity base of 4.4 crore shares). We recommend a Buy call on the stock with a price target of Rs480.