Unlocking value

 

Great Offshore, the demerged entity of GE Shipping, got listed on the Bombay Stock Exchange and will result in value unlocking for the offshore business. The offshore business commands a higher valuation compared with the shipping business mainly on account higher cyclicality in shipping segment and if one takes into account the upsurge in exploration and production activities undertaken by companies to find new oil reserves in order to reduce dependence on traditionally oil rich regions.

 

Great Offshore has a total fleet size of 38, comprising two exploratory oil rigs, 24 offshore support vessels (OSV), 11 harbour tugs and one marine construction barge. The company will further add asset backlog of three OSVs and one jack up rig over the next two years.

 

At the end of the first two quarters of fiscal 2007, revenue grew by 60% to Rs 240 crore (from part utilisation of the rigs and construction barge). As a result, operating profit also posted a 70% rise to Rs 125 crore. For the next two quarters of fiscal 2007, the company is expected to see repairs and maintenance expenditure, as the rigs - Badrinath is scheduled for dry dock for three-four months in 2007 at estimated cost of $8-10 million. Also the newly acquired MSV is scheduled for extensive upgradation to have full ROV (remotely operated vehicle) and diving capabilities with dynamic positioning-2 (DP-2) installed. However, the contract for Badrinath has been renewed at a rate upward of $80,000 from the present day rate of $35,000. Moreover, the outlook on demand for offshore support vessels (used for construction and maintenance of oil rigs, where there is a great demand supply mismatch), which contributed to 67% of Great Offshore’s revenues and accounts for 57% of the EBITDA margins, is robust. It is a function of the exploration and production activities undertaken across the globe, which in turn is a function of crude oil prices. Analysts worldwide believe that investments in these activities will not ebb unless the crude prices fall below USD 42-45 per barrel, which seems unlikely.

 

The outlook for Great Offshore’s business looks robust in the long run though the current quarter and next could be a little subdued on account of extensive repair work. The stock which listed at Rs 702 on December 21 closed at Rs 837.5. It is trading at an estimated PE of 30 for fiscal 2007 and merits attention from long-term investors.

 

 

Gitanjali Gems, as the name goes, deals in diamonds and jewellery. To expand its presence in the world’s largest jewellery market, Gitanjali acquired a 97% stake in Samuels Jewelers Inc, USA, for nearly Rs 100 crore. Samuels, which operates 97 stores spread across 18 US states under trade names Samuels, Schubach and Samuels Diamonds, had reported revenues of $97.2 million (up 1.31%) and profit of $4.98 million for fiscal 2006. Soon, Gitanjali intends to pump in another Rs 100 crore towards refurbishing inventories and expansion of Samuels’ retail network to 120 stores by March 2007, which should help Samuels’ increase sales growth and margins.

 

This acquisition is in line with its strategy of increasing thrust on the retail-end of the value-chain. Last month, Gitanjali had also entered into an agreement with Saudi-based Sulieman Al Othaim to set up an equal venture to tap the Saudi retail market.

 

That apart, Gitanjali already sells diamond and jewellery products through a range brands, including Gili (mid-segment brand and 65% owned by Gitanjali), Nakshatra and Asmi (in license with DTC), Sangini (joint venture) and D’Damas (in license with Dubai-based Damas) in the domestic market.

 

But despite that, for Gitanjali, branded retailing still accounts for a small (10-15%) part of consolidated revenues of Rs 2,403 crore (net profit at Rs 51.44 crore) for 2005-06. However, this business segment is expected to grow at a fast clip in the coming years. The reason: for the industry, organised players still account for less than 5% of the total estimated market, as traditionally, Indians have relied on close relatives, friends or people known to them for procuring precious jewellery. But the equation is expected to gradually change in favour of organised players.

 

Gitanjali is also among the largest integrated player (domestic market) with operations spanning imports of rough diamonds to cutting and polishing to finished diamonds, manufacture of gold and studded jewellery, exports and lastly, retailing of jewellery. While integration has its own benefits, the thrust on branded retailing is not without reason.

 

Apart from huge growth potential, branded retail segment is also where the margins are, estimated at around 12-15%. The diamond business (85% of revenues in 2005-06) reported margins of 3%, whereas the jewellery business reported margins of 10.5%; a small part was exported to Sterling, J C Penny and the likes.

 

With its own network, Samuels and its domestic network of 840 retail outlets, Gitanjali hopes to retain the high margins, which otherwise would have gone to the middle-men involved in the value chain, within the company.

 

Gitanjali seems to be on the right track. However, don’t expect benefits to accrue overnight. Keep a watch on this counter. At Rs 220.35, the stock trades at a PE of 17.2 times its trailing 12 months EPS of Rs 12.85.