Wednesday, November 12, 2008

SAAG RR Infra - E&P Services bet

Saag RR Infra Ltd (SRRI) is a Public Limited Company listed on the Bombay Stock Exchange (BSE Scrip Code : 531374). The paid up capital of the company is Rs.10.5 crores.

SRRI was established in 1995 with the primary objective of property development. It later evolved into a versatile infrastructure company. A few years ago it was taken over by Saag Consolidated (M) Bhd (Saag), a key player in the oil and gas sector in Malaysia and the Asia-Pacific , with a view to using the local company as their vehicle to tap the enormous potential India has to offer in the Oil & Gas - Exploration &Production (E&P) Services sector, specifically in pipe-laying and well services technology. Saag targetted SRRI as the latter was already executing various construction projects for the Oil PSU's in India , and hence was already engaged with & had a relationship with the target clients, though in a different capacity.

After a few years of effort, the company made it's first breakthrough in the Oil & Gas E&P Services sector in India with a prestigious order of Rs 288 Cr from ONGC for charter hire of two offshore modular workover rigs, for a tenure of three years

Some months later it was successful in getting a second order from ONGC, but this was subsequently cancelled as the proposed sub-contractor to SRRI did not meet the required parameters.

Salient points about SRRI :
· The Infrastructure division has the capability and expertise of executing projects in the construction , water & sewarage domains. Current order book is about 60 Cr for this division.
· The E&P Services division of SRRI has bagged a 288 Cr order from ONGC , and is bidding for further projects in the Oil & Gas E&P space.
· The company had earlier planned to raise capital for expansion/working capital via a preferential issue, but the same has been shelved due to market conditions, The company will raise debt instead.
· The ONGC order will be executed over 3 years timeframe spanning 4 financial years, starting from Feb/March 2009. Approximate execution would be along the lines of 20 Cr, 96 Cr, 96 Cr & 76 Cr over the 4 financial years starting FY0809.
· Assuming a 15-20% NPM on the ONGC order, and (a) not assuming profitability from the construction division and (b) not considering further E&P Services orders , the company could still achive the following EPS for the next few years on current equity of Rs 10.5 Cr :-
200809 - Rs 3 - Rs 5
200910 - Rs 14.5 - Rs 19
201011 - Rs 14.5 - Rs 19
201112 - Rs 11.5 - Rs 14.5

Recommendation :
Assuming the company can deliver on this prestigious break-through order it will open up huge avenues for further business in the E&P sector. Given that the E&P industry will likely recover in a couple of years as global economies come out of recession and oil prices firm up again, and with enough visibility of earnings in the interim, we can consider an investment in Saag RR Infra at CMP of Rs 20.95 (closing price as on 12th Nov, 2008) and all declines, for multi-bagger returns over a 3-5 years holding period.

Author : Bosco Menezes

Recommendation Date : 12.11.2008

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