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Shiv-Vani Oil & Gas – Buy

June 2, 2010

Shiv-Vani Oil & Gas, the pre-eminent domestic player in onshore oil & gas exploration, has made aggressive investment to capitalise on the ~US$4bn pa onshore opportunity in India. With ONGC and OIL accounting for 90% of its sales, the company is breaking new ground in technologydriven services like integrated well services and directional drilling.

With only 25% of pre-NELP (New Exploration Licensing Policy) onshore blocks with ONGC and OIL being explored, the probable size of opportunity in this segment is ~US$4bn annually. If CBM (coal-bed methane) takes off, this opportunity could be significantly higher. And our calculations do not factor in most of the potential demand from private-sector owners of oil & gas blocks. With 40% market share by revenue in outsourced onshore exploration, Shiv-Vani is well-positioned to capitalise on this secular growth story that is largely indifferent to crude-price volatility.

The company has expanded aggressively over the past few years—it had 15 rigs and four seismic sets in FY06, and now has 40 rigs and 10 seismic sets. It had ~US$910m in orders as at end-FY10, and we expect a US$100m-150m annual capex run rate going forward. Scale, high-end equipment, logistics capabilities and newly-acquired technologies remain key competitive advantages.

IIFL has initiated coverage on Shiv-Vani Oil & Gas with a BUY rating. Shiv Vani Oil & Gas order book is $900mn. The company is expected to report an EPS of Rs 60 and Rs 81 for FY 11 and FY 12 respectively. IIFL says, l everage remains the key risk for this working-capital-intensive business, but valuation—P/E of 7.0x on FY11ii—is attractive, for a 36% EPS CAGR. BUY with a target price of Rs650.

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