Assignment on Fundamental Analysis of 5 Companies

Aban Offshore: - Sector - Oil Drilling and Exploration

1. Industry Wise analysis: -

a. Government: - New government also initiated the way to help

Oil sector companies by reduction of customs duty on some

petrochemical intermediaries that could marginally reduce their

prices.

b. Technology: - Industry is far more technology conscious than

before. It is mentioned in a report published by Lux research

that new oil drilling technologies could increase the world’s

petroleum supplies six-fold in the coming years to 10.2 trillion

barrels worldwide and also from investor point of view it is not a

fast changing technology sector like e-commerce or 2000

technological bubble. So it is safer to invest in oil drilling

industry from technology point of view.

c. Labor conditions: - Oil and drilling industry is more capital

intensive. The working conditions are more harsh that either

robotics or other technologies are start taking place of remaining

laborers. So there is not problem of strike or any human causing

problem for future. Onshore, work is mostly performed outdoors

in remote locations.

2. Company Wise Analysis

a. Liquidity and Solvency Ratios

Current Ratio 0.42 0.58 0.42 1.30 1.18

Quick Ratio 0.40 0.47 0.48 2.10 1.24

Debt Equity

Ratio3.05 4.05 4.64 7.40 7.81

As shown above current ratio is not on par with requirement of

investment analyst but still I would like to recommend this stock

as keeping inventories in today’s situation is really bad idea. It

can make the company bankrupt if oil prices further declined. So

low inventory creates current ratio low and quick ratio almost

equal to current ratio. DE ratio is 3 which is again not same as

should be but still CARE has upgraded its debenture rating from

D to –BB which resulted in 17% rise in the stock. So it is also

justifiable. Aban Offshore has raised equity through placements

of shares via QIB and conversion of preferential warrants to

equity from the promoters. The company raised Rs. 850 crore

from issuances of new equity shares. Also, refinancing of its

high cost rupee debt with foreign debt at lower costs

would also help to reduce the company’s finance costs.

Better cash flow from the company over the last two years have

reduced Aban’s interest cost to EBITDA ratio from 59.4% in FY13

to 47.9% in Q3FY15. We expect the company’s interest costs to

reduce from 1,140.6 crore in FY14 to 898.6 crore in FY17E, so

Liquidity and Solvency justify BUY recommendation.

b. Profitability Ratios

Aban offshore

Ratio 2014 2013 2012 2011 2010

Operating Profit Margin(%) 55.98 54.07 58.18 66.64 63.91

Return On Capital

Employed(%)10.80 10.04 9.54 11.55 10.44

Return on Assets 883.96 690.12 593.12 415.42 426.33

ONGC (market Leader)

Profitability Ratios 2014 2013 2012 2011 2010

Operating Profit Margin(%) 33.22 33.78 39.86 43.01 43.84

Gross Profit Margin(%) 23.72 26.34 31.08 33.55 25.53

Net Profit Margin(%) 14.61 14.42 18.50 18.16 18.34

Return On Capital

Employed(%)18.27 21.52 26.42 28.63 23.70

Return on Assets 201.2

2178.28 159.48 133.87 470.18

CAIRN India

Profitability Ratios 2014 2013 2012 2011 2010

Operating Profit Margin(%) 72.94 74.37 78.02 80.31 46.28

Gross Profit Margin(%) 60.70 63.83 65.88 68.70 36.80

Net Profit Margin(%) 61.34 64.95 62.02 60.90 58.93

Return On Capital

Employed(%)22.44 25.62 18.12 16.73 2.13

Return on Assets Including 301.10 249.71253.18 211.07178.2

9

Above mentioned figures shows the strong position of Aban Offshore in

whole industry. CAIRN india is better investment from profitability point of

view as it is also a zero debt company but it is not a investment friendly

company as Aban Offshore has a track record of paying dividend for last 20

years. Its price fluctuations are also less as compared to Cairn India. As

compared to industry leader ONGC, Aban Offshore is much better

profitability conditions after Cairn. RoA is best in case of Aban Offshore at

883.96 and it is continually improving which shows that management is

efficiently using the resources to earn profit for shareholders. Other ratios

Operating Profit Margin(%) is at 55.98 means out of sales Rs. 1, 56% is

converting into profit. Gross Profit Margin(%) is at 42.05, Net Profit

Margin(%) 9.90. So all in all it can be concluded from profitability point of

view that this company is best buy as compared to other firm in same

industry. Here whether CAIRN has some of ratios better but still due to

inconsistency of dividend and other factors I recommend Aban Offshore

rather than CAIRN.

Conclusive remarks: - Considering all the above mentioned factors a BUY

recommendation is suitable for Aban Offshore. Its valuations are also under

so by the time it reached to 545 with multiple of 5.43, investors will be able

to encash opportunity of profit or taking into consideration the projects in

hand and future prospect of oil industry HOLD will also be suitable option for

buyers after buying this undervalued scrip.