Aban Offshore Ltd’s shares have remained weak after it announced a lower-than-expected profit for the December quarter. Revenue grew by merely 5% to Rs.909 crore, while operating profit margin dropped by around 420 basis points. After accounting for the company’s huge interest cost outflow and increased tax provisions, net profit fell by as much as 60% from a year ago to Rs.29.1 crore.
A basis point is one-hundredth of a percentage point.
The silver lining in all this is that interest costs are likely to reduce marginally going forward. Aban Offshore has said that it has refinanced loans worth $140 million (around Rs.750 crore today) in the December quarter. The company is aiming to refinance a total of about $350 million of domestic loans with external commercial borrowings.
According to analysts, this will help Aban Offshore save around 700-800 basis points on these loans. Be that as it may, it must be noted that the company’s total debt is around Rs.13,800 crore. While interest cost savings on a fraction of the total debt will help, it will certainly not go a long way in alleviating the company’s problems.
It’s little wonder that the stock has lost 20% of its value since October, despite reports that Aban Offshore is looking to refinance part of its debt to save costs. Interest costs amounted to nearly one-third of the company’s revenue last quarter. As a post-earnings note by Kotak Securities Ltd states, “We expect the company to continue restructuring its debt over the next few years as estimated cash flows from operations are not sufficient to service its repayment schedule for existing debt obligations.”
Another concern for investors is whether Aban Offshore’s rigs will get deployed at higher contract rates. Although the management is confident that three rigs deployed in Iran and one in India will fetch higher rates, the contract renewal for some may be delayed by a quarter, which could slow revenue growth. Last quarter’s muted revenue growth as well as the drop in margins reflect relatively weak utilization levels.
The outlook and investor confidence now hinge on the deployment of its assets and resultant cash flow generation. Another factor that could impact growth in earnings per share is the company’s planned qualified institutional placement of around $100 million. Considering that Aban Offshore has a market capitalization of only Rs.1,500 crore, this will lead to a dilution of more than 25%.