Post on 16-Jan-2016
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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.