UNITED DRILLING TOOLS LTD - ONE STOCK TO WATCH

 

 

Self sufficiency in energy resources is the key for the growth of any economy.Unfortunately ,at present , position of our country in this matter is a reason for concern. Lack of  framing and implementing  policies, red tapism..etc are the major reason for our failure. Be it coal or oil our policies are vague  and can be interpreted in different ways. Only these type vague policies will help to earn maximum bribery for the officials and hence majority of the babu’s are not interested to frame a concrete policy which is clear and without any doubt. Take the case of oil exploration ,where no major global players are keen to explore in India when our government invites tenders for NELP .In the past ,our govt announces one policy at the time of inviting tenders and change that policy when a company identify oil after spending crores for exploration activities. Even after finding oil ,it will take years to get permission to erect pipes and other facilities to link the well with refinery  .This is why  still we meets close to 80% of its oil needs and half of its natural gas requirement through imports. There is  lot of tax,environment related issues  which is quite natural but the  time lag to sort out such matters makes global giants desperate to bring their technology and efforts to a country like India. Any govt with a vision should be  aware about the  importance of energy security and the importance of the same  to become a super power.In  a recent interview ,our new minister emphasizes the importance of this factor and let us hope for the best going forward.

                                           Any positive effort in this direction will revive many sectors like mining ,oil exploration,shipping,engineering..etc. About six months back we have discussed some companies like Alphageo, Selan Oil Exploration etc from oil exploration and allied sectors. This week let us look into one more company related with this sector- United Drilling Tools. This company may be  an unknown one to the investor fraternity and I believe it even not discussed anywhere in message boards  or discussion forums.In one sense it is a niche company in the listed space from the oil exploration related business.Company manufacturing many sophisticated equipments used in oil exploration industry like Winches,Gas lift valves,mandrels,sliding sleeves ..etc. These equipments are critical parts of oil exploration industry , sophisticated in nature and manufactured by very few companies in India.Earlier company was supplying products mainly to ONGC and Oil India but with the completion of its two units one each at Kandla and Noida ,company is planning to ramp up exports.In another move ,promoters are merging  privately owned companies with the listed entity .Recently they merged P&K Hitech Systems P. Ltd and another one Macro Steel engineers is in progress.Post merger UDT’s equity will be close to Rs.8 Crore.

Financials 

 

2013-14 was the first full year of operations post merger of P&K hitech systems . Company reported a Sales of Rs.78 Cr and a net profit of Rs.4.72 Cr in this years .In the previous FY ( Prior to the merger of P&K hitech systems ) it was Rs.36 Cr and Rs.87 lakhs. It is noted that in this FY’s numbers there was an extra ordinary income of Rs.1.96 Cr . Clarity on this point will be available only on receipt of latest balance sheet.The next company to be merged (Macro Steel Engineers) seems small in size but as per management claim  they are holding some  patented niche technology in this field.Post merger of this company, promoter’s stake will be close to 74% and non promoter body corporates’ stake will increase from less than 1% to more than 13 %  .I believe ,this non promoter corporate entities are linked with promoters itself and the share holding pattern arranged in a manner to avoid the violation of public share holding norms of listed entities.Other than this corporate entities ,general public will hold less than 15% stake post merger.

Conclusion

Potential of oil exploration sector is bright especially if the government is committed and the power to implement policies . Company producing niche and import substitute  products for this sector. Starting of export from new units will minimise the uncertainties of local market and reduce the volatility of earnings .In many other cases promoters merging their loss making private companies with the listed ones but here the top line and bottom line improved substantially post merger.Company’s results are volatile on a quarter to quarter basis, profit margins are also highly volatile.Management clarified that this is because of the tender based purchasing method by oil PSU’s  and hence there is no rationale in analysing company’s performance on a quarterly  basis . This volatility is expected to come down once there is improvement in earnings from exports going forward. This is an unknown company with unknown promoters which always increase the risk of investment,but at the same time it is a niche one with good potential.Last year company reported an EPS of Rs.8.72 and currently trading with a P/E multiple of close to  3.Even if we reduce the entire other income and re calculate the EPS ,P/E is only 6 at current market price of Rs.30 .All together ,a high risk high profit kind opportunity and suitable only for investors with high risk profile  . Others can keep this stock in your watch list and take decision after seeing the consistency in performance for the next few years. Stock listed only in BSE with trade code .522014 and CMP is Rs.30

Link to company website  HERE

Disc: I have vested interest in this stock