Garware Offshore: Number in line-Hold: Emkay

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Garware Offshore

Number in line-Maintain Hold

HOLD

CMP: Rs173                                        Target Price: Rs160

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n     Garware Offshore Services ltd (GOSL’s) Q2FY11 net profit at Rs43.1 mn (-32% yoy) is in line with estimates. Revenues decline 8.9% yoy on account of lower day rates

n     21.8% yoy increase in employee expenditure, drag down EBIDTA (Rs188 mn) by 17.3% yoy, (Est- Rs179 mn). EBIDTA margins at 38.1% declined 386bps yoy

n     Downgrade earnings by 18.5% for FY11 led by lower day rates for vessels in Singapore subsidiary and delayed delivery of the new PSV

n     GOSL expected to bag term contracts for 2 AHTs  (currently operating in spot), improving revenue backlog by 30% to USD 62mn. Upgrade target to Rs160 – Maintain HOLD

Revenue declined 8.9% yoy on account lower day rate of idle vessels

GOSL’s consolidated revenue for the quarter at Rs493 mn (our est Rs463 mn) declined

8.9% on account of lower day rates in the spot market (2 vessels operating in spot) and

partially idle status of two bareboat charter vessels (in the Singapore subsidiary). Also

Q2FY10 had revenue from PSV Everest which the company sold in Q3FY10.

EBIDTA margins decline by ~386 bps dragging EBIDTA down by 17.3%

With lower revenues and a 21.8% yoy increase in employee expenditure, EBIDTA for

the quarter at Rs188 mn declined by 17.3% yoy with EBIDTA margins at 38.1%

declined by 386 bps yoy.

Net profit decline 32% yoy

With repayment of debt from the funds received from sale of PSV Everest, interest

expenses declined 20.2% yoy. Similarly depreciation charges declined 4.6% yoy to

Rs81.3 mn. Net profit declined by 32% yoy to Rs43 mn against our estimate of

Rs42.5mn.

Downgrade Earnings -– Maintain HOLD

We are downgrading our FY11 earnings by 18% due to: 1. Lower day rates for vessels

in Singapore subsidiary 2.Delayed delivery of large PSV (operations expected in Feb-11

v/s earlier Dec 10. GOSL expected to bag term contracts for 2 AHTs (currently

operating in spot), improving revenue backlog by 30% to USD 62mn. Further term

contract @ USD 30K/day for the large PSV can improve backlog by further 50%.

Upgrade target to Rs160 on account of improving visibility. However valuations at PER

if 7.5 and EV/EBIDTA of 7.3 leaves little upside from current levels – Maintain HOLD