Deep Industries Limited has come out with great results for the quarter ending September 2009.
It is a small-sized Ahmedabad-based company that provides air and gas compression services such as supply and rental of equipment, operation & maintenance and execution of turnkey projects to oil and gas exploration companies.
It is set to emerge as one of the largest coalbed methane (CBM) companies of the country with Director General of Hydrocarbons (DGH) awarding it seven CBM blocks. With this, Deep will have a total gas reserve of 7 trillion cubic feet (TCF). Deep outbid Essar, ONGC, Great Eastern, Nagarjuna, Jindal etc. in the field to bag the blocks because it had the lowest operating cost, being service providers of gas compressor and onshore rigs. The only block for which Deep did not bid went to Essar.
Deep had already bagged two CBM blocks in 2006 — one each in Madhya Pradesh and Andhra Pradesh.
It could win so many blocks because of poor market sentiment. The bids received a poor response at the auction as global companies did not participate due to lower oil prices, poor global demand and lack of easy availability of credit. Only 44 of the 80 blocks that were available for bidding got any bids. Of the 10 CBM blocks on offer, only eight received bids and seven went to Deep Industries.
Coalbed methane allows extraction of methane from coal without affecting the physical properties of coal. Normally from any CBM block, around 50 to 60 per cent reserve is recoverable. Even at 50 per cent recovery, or 3.5 TCF, the potential reserve would be valued at Rs. 78,200 crores.
Deep Industries will be the operator for all the seven blocks it won. While it has about 80% holdings in three blocks, it is in partnership with Lanco Infratech Ltd. and KGN Industries Ltd. for two blocks each.
After winning the bids, the company is in need of substantial funds to meet its capital expenditure needs for the next step of extracting all the CBM. It plans to invest Rs 150 crore in the first phase for exploration. If good potential is identified, it plans to raise finances to pump in around Rs 4,000 crore for drawing the gas. Various options are being considered for raising money including private equity, debt and follow-on public offer.
It plans to do a turnover of Rs.55- Rs.60 crores and earn a Net Profit of Rs. 15 – Rs.16 crores this year. This would mean an EPS of Rs. 7.50 to Rs.8 on present equity of Rs.20 crores. Its order book is three times the annual turnover at Rs.160 crores of which Rs.110 crores is from ONGC.
It had all time high of Rs.268 in Jan 2008 when its TTM EPS was only Rs.2.30 at a PE of 116. Even at a conservative PE of 25, the company should fetch an initial price of Rs.200 in the medium term considering FY 2009-10 earnings purely based on existing orders.
Mutual fundhouses like IDFC, Sundaram and DSP Blakrock are invested in the company (Sundaram Mutual Fund had bought shares of Deep at Rs.216 and Rs.151 in two tranches).
Once past Rs.140, the company will be in new 52 week highs.
As I said earlier also... 250 in next 6 months (almost double from this point).
And telling you friends it has a long long way to go beyond that...
So I usually call it FLC (Future Large Cap). Reasons:
1. Visonary Management
2. Solid Buisness Model.
3. Oil/Gas/Energy Sector.
4. Huge expansion Plans ahead.
5. Strong order book.
6. Backed by ONGC.
However, if you read between the lines, the company has taken on a lot of commitment on itself by bidding and winning seven out of eight CBM blocks.
Till now, when it was only executing orders of ONGC, it was getting assured familiar business with high profit margins.
Now it is exposed to larger business requirements of arranging the finances for exploration of the gas, finding buyers at competitive rates for the gas that is extracted, etc. It is also possible that some of the beds do not yield commercially viable quantum of gas reserves.
So, the new development has changed the company`s functioning from a shielded, high margin business to one with risks and one where it has to fend for itself.
A good compariosn can be that till now, it was like a person who was working for a company drawing a good salary. Now he has bid for and won a business opportunity where in he has to run a business all by himself - he has to run around to find a building for the company, employ qualified people, arrange finances and loans, find customers for products,etc. etc. He is out from a well-defined protected job and is exposed to running his own business with all associated risks.
I would prefer that you wait out a little before investing full amount - at least till the company garners the required finances for exploration of blocks and sizable CBM is discovered from few of them.
Dear PRJ, I wewnrt through your earlier message dated 18.10.09 on the Company and decided to make an entry here. I am a bit confused now after seeing your above latest message. Do you suggest I should not enter now? Kindly reply. Kind regards! -------Follower.
Everthing remains good about the company. It will continue to get its orders from ONGC while executing its own projects towards extracting CBM from the seven blocks it has won.
It is just that from a company with steady assured income, it has become slightly higher risk higher return.
Yes you are right. But since the company is on right track and seeing its past performance, I have faith in it. I think it will tide over the problems of rapid expansion and the capital involved with it. There are risks but gains will be very handsome.
| NIFTY 
