The Hindu Business Line : Global Vectra Helicorp: Avoid

Investors can give the IPO of Global Vectra Helicorp (GVH) the go-by. While there is potential in the company's business, the offer, in the price band of Rs 175-200, appears on the high side. Returns from an investment in the stock at this price may not be attractive enough to compensate with the associated risk.

GVH's business

GVH is in the business of operating helicopter services for offshore transportation for the oil and gas industry. It now owns 14 Bell helicopters, making it the second biggest player in the business after Pawan Hans, a subsidiary of ONGC.

The offer, which will help the company raise Rs 49-56 crore, will partly finance the fleet expansion plans, apart from the setting up of a hangar at Mumbai's Juhu aerodrome. GVH plans to add six more helicopters to its fleet, taking the total to 20 by end-2006-07. The plan is to eventually take the fleet strength to 29 by March 2009.

Good potential

GVH's fortunes are directly linked to the offshore oil exploration activity along the east and west coasts of the country. While the company has already chartered eight helicopters to ONGC for operations in the Bombay High area, future growth hinges on an increase in exploration activity.

There is reason to be optimistic on this count as exploration companies — Indian and foreign — are investing in exploring for oil and gas, especially in the deep waters along the east coast. GVH counts Reliance Industries and Gujarat State Petroleum Corporation among its clients and both are now in the process of developing the KG-Basin deepwater fields where they have struck gas.

GVH operates in a capital-intensive business that has high entry barriers. The links that it has established with big oil companies should stand it in good stead in building on its existing business.

Competitors such as Pawan Hans and Deccan Aviation are not dedicated to oil-field services but are also into heli-tourism and other areas of activity.

Given the boom in oil exploration worldwide now, there is a long waiting period for new helicopter deliveries, which means that potential new entrants could be stymied.

Pre-owned helicopters are also not available in the market at viable prices. GVH's advantage here is that it has already placed orders for 17 new helicopters to be delivered between now and March 2009.

The company is also diversifying its existing fleet of Bell 412 helicopters by going in for machines from Eurocopter, which will help it operate services to deepwater fields.

GVH charter contracts comprise of two components — a fixed monthly charge and hourly flying charges.

The company has built-in safeguards in most of its contracts that will protect it from escalation in fuel costs.

Sticky issues

A single client accounts for about half of the company's revenue and about 65 per cent of total revenue accrues from operations in just one region- Bombay High.

This brings in a strong element of concentration risk; any disagreement with the client or a disruption in activity in the Bombay High field due to accidents or natural calamity can lead to a hit in GVH's revenues.

The dependence on this single client will continue in the foreseeable future even if GVH spreads its activity to the east coast.

The company has leased 11 of the 14 helicopters that it now operates, six of them from its promoter company, Vectra Ltd. It pays stiff charges for the leased helicopters — finance charges zoomed from Rs 2 crore in 2004-05 to Rs 23 crore in 2005-06, accounting for a quarter of the company's revenues.

With the company deciding to finance 70 per cent of its fleet expansion costs through debt, finance charges are bound to increase, further leading to a strain on the financials.

It will be critical for GVH to deploy the new helicopters at lucrative rates to cover up adequately for the increased outgo on interest and lease rentals.

Though GVHs revenues have been growing fast over the last three years, profitability shows an erratic picture. While the company posted a profit of Rs 8.2 crore in 2005-06, it registered a loss of Rs 0.04 crore the year before that.

The picture on the operating margins front is equally erratic — it was16 per cent in 2003-04, 3 per cent in 2004-05 and 50 per cent in 2005-06.

The offer price is at a multiple of 23-27 times at the lower and higher end of the price band respectively, based on the 2005-06 earnings.

This appears to be stiff, given that the company is still at a nascent stage and operates in a risky business.

The offer, lead managed by SBI Capital Markets, opened on September 29 and closes on October 6.

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