Buy Alphageo: Sushil Finance

Investment Highlights

 

The emerging Rs.80 billion seismic services market in India is driven by a complement of rising oil demand, under penetrated geography and a bullish oil market, leading to substantial growth in not only new exploration projects but also encouraging the revival of abandoned fields. About 50% of this business opportunity will be addressed by merchant third party crews like AIL, given that large companies like ONGC & OIL also have in-house crews to handle their seismic service requirements. AIL introduced the fast growing 3D seismic services to its service portfolio during FY05.

 

The potential for 3D services is growing rapidly, although there is a limited scope for growth in 2D services. So the company has put conscious efforts towards development of expertise in the 3D services arena. In fact, within two years of launching its 3D services, the company achieved unprecedented success. During FY07, nearly 77% of the total revenues of the company were derived from the 3D services as compared to 43.7% in the corresponding period last year. AIL has not only demonstrated its ability to absorb the new technology (with capacity to scale up at a great pace), but has also reinforced its reputation as a leading 3D player in the country.

 

The company is now standing on a strong foundation and is very well positioned to reap rich benefits from the boom in the E&P activities (in India and abroad). The company has an outstanding order book position which stood at around Rs.1171 million (more than 2x its FY07 revenues), to be executed in the near term. Out of this order book, 85% of the orders are from the 3D service segment and rest is for the 2D services. With the strong order backlog and the ensuing demand growth, we believe the company would be able to maintain its low cost regime and thus would be able to maintain high operating margins over the next 2-3 years.

 

Outlook & Valuation

 

The company is expected to deliver a robust growth in the top line (55% CAGR) as well the bottom line (65% CAGR) during FY07-FY09 period. At the current market price of Rs.411, the stock is available at 16.7x & 11.0x its FY08E & FY09E earnings of Rs.24.5 & Rs.37.4 respectively. Considering that the company can show robust growth in the next 2-3 years, we are initiating a Desk Research call on the stock & believe it can deliver strong returns over the next 2 years.