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Wednesday, October 28, 2009

Jindal Drilling & Industries Ltd:Future growth prospects and outlook

Scripscan:Jindal Drilling & Industries Ltd

Story:Jindal Drilling Industries Ltd (JDIL) provides offshore drilling services byoperating leased rigs. The company does not own rigs but hires them from Noble, Virtue Drilling and Discovery Drilling. Owing to low operating margins, slow down in E&P capex worldwide and lower day rates for rigs,we expect the company’s growth momentum to slow down.JDIL does not own rigs. The company has chartered three rigs from Noble and one each from Discovery Drilling and Virtual Drilling. For this, it has to pay more than 80% of the day rates as hire charges.Owing to the hire charges in addition to the operating expenses that JDIL pays, it is left with an operating margin of 8-10%.JDIL’s rigs Noble Ed Holt (NED) and Noble Charlie Yester (NCY) thatare in alliance with Noble are due for renewal in January 2010 and October 2009, respectively. We expect the rigs to be contracted at lower day rates. This will directly lead to a fall in revenues post FY10E,as more than 85% of revenues come from offshore drilling segment.Directional drilling and the mud logging segments, which form a verysmall part of the company’s operation with 12% and 2% contribution,respectively, in total sales, has a higher operating margin compared to the offshore segment. Though the company expects these two segments to grow at a rate of 13% (directional drilling) and 12% (mud logging), we expect the contribution from these segments in total revenues to decline to 7% and 1% in FY11E, respectively.The offshore drilling segment is directly linked to oil prices. Movement in oil prices impacts E&P capex and affects the earnings and valuations of offshore drilling companies globally. JDIL is a small player with low operating margins compared to its peers. Further, the company does not own any rigs but has an arrangement with Noble for hire charter of three rigs. Non-renewal of this arrangement wouldbe a risk. JDIL is trading at a P/E of over 14x FY09 earnings of Rs 15.9.Sell at higher levels to move on to better and cheaper bets.

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