We maintain ?hold? rating on Aban Offshore with a 12-month target of Rs 425. We value Aban on DCF with a WACC of 11.9%, based on Deutsche Bank?s cost of equity assumptions for India (6.5% risk-free rate, 7.6% risk premium) and a terminal growth of 3%. Key risks are a stronger global economy that can push oil prices, thereby, driving up rig day rates, lower rig utilisation rates which will negatively affect earnings.
We expect Aban Offshore to gain from revival in global jack-up demand offsetting concerns over excess supply. With 85% jack-ups in rig fleet, 60% of which are high-spec, Aban could be a key beneficiary of the uptrend in global jack-up rig market. However, high leverage and low interest coverage remain key concerns. Rig utilisation and day rates hold the key to cutting leverage in the long term.
In the third quarter, Aban Offshore reported a net profit of R80.3 crore (up 152% y-o-y, and 3% q-o-q), above our estimates, but below consensus. Revenue (Rs 990 crore; up 9% y-o-y, down 1% q-o-q) and ebitda (Rs 560 crore; up 15% y-o-y and 5% q-o-q) rose over last year, helped by a weaker rupee (>90% of Aban?s realisation is dollar denominated). Interest expense remained higher at Rs 300 crore on weaker rupee (over 90% of debt is dollar denominated).