The Hindu Business Line : Deep Industries: Avoid

Investors may refrain from investing in the initial public offering (IPO) by Deep Industries at an offer price of Rs 36 per share. The offer is stiffly priced at 17 times its trailing 2005-06 earnings. While the potential for natural gas compression services is immense, the high dependence on a key client, project execution risks in a new foray into work-over rigs, and substantial equity expansion post-offer make it relatively unattractive from an investment standpoint.

Growth opportunity

The outsourcing of natural gas compression by the oil and gas industry is expected to be a significant growth opportunity for players such as Deep. The outsourcing of compression equipment is enabling oil and gas producers to match their variable compression requirements to the production needs linked to the life of the well, apart from reducing their overall operating cost. This is a worldwide trend, which is catching on in a big way in India.

It is a capital-intensive activity, with heavy penalty linked to non-performance. The company owns a set of 10 compressor packages, which it plans to expand through this IPO. Of the project cost of Rs 60.3 crore, Rs 51.5 crore is to be used towards purchase and installation of compressor packages.

Client dependence

In this line of business, Deep is heavily dependent on ONGC for a chunk of its revenue. In a relationship that has spanned nine years, Deep has reduced the heavy penalty on sub/non-performance in recent years, which is encouraging. According to the offer document, IOC and Gujarat Alkalies are its other clients in the natural compression business. However, its heavy dependence on ONGC does expose the company to pricing and execution risks. Servicing a company such as ONGC has also meant long debtors cycle, reflected in the books for 2005-06 and thereby increasing working capital requirements.

Growing competition

The recent entry of private players such as Cairn Energy, NIKO Resources and

Reliance Industries are expected to widen the market for the company. However, the contracts will be awarded only through a bidding process, which can be quite competitive. Though the capital-intensive nature of the industry may keep new players from entering the fray, there are already a couple of established players, such as Shiv-Vani Oil and Exploration and John Energy that provide similar services.

To widen its basket of offerings, the company has forayed into the field of work-over rigs to provide rig services to the oil and gas sector. It has acquired one work-over rig of 100 tonnes, which is to be deployed for a contract awarded by ONGC for two years.

Since it is new to this business, the company's execution record in this area will be watched carefully. Apart from this, the company has also bid for two coal bed methane blocks, one in consortium with Coal Gas Mart LLC, US, and its group company, Adinath Exim Resources; and another with the former. It is close to bagging these contracts. However, not much information is available about the potential revenue and sharing agreements on these contracts. Its relative inexperience also raises the overall execution risk for the company.

In the run-up to the offer, the company has allotted shares to the promoter/promoter group and others at a price of Rs 30 vis-à-vis the offer price of Rs 36 aggregating Rs 6.60 crore. Adinath Exim Resources (one of the joint bidders for coal bed methane) has a fairly indifferent track record. Considering all these elements, investors may be better off tracking the earnings and execution record of the company before taking an exposure in the stock at a later date.

The offer opens on August 29 and closes on September 4. The lead manager is IDBI Capital.

More Stories on : IPOs | Recommendation | Engineering | Petroleum

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page