Exploring New Horizons

If you thought that the hydrocarbon sector and its allied services will be out of favour owing to a prolonged downturn in the crude price, that clearly doesn’t seem to be the case.  Ajay Relan, the former private equity head at Citi and who now runs his own successful PE fund, CX Partners, has taken fancy to a proxy play in the hydrocarbon sector. Relan, who in his personal capacity has invested in quite a few stocks in the past, has now bought into Alphageo India, a company engaged in the niche seismic survey business. The Hyderabad-based company is the country’s largest onshore integrated seismic service provider in the private sector and is a market leader.

Relan, who has in the past has courted eClerx, Ashapura Intimates, and Careerpoint, last week bought 40,000 shares of Alphageo at Rs.1,055 from the open market in a transaction worth Rs.4.2 crore. Incidentally, on the same day its promoter and managing director Dinesh Alla sold 191,000 shares or 3.37%. Alla and family though continue to hold 29.14% in the company. Alphageo, which provides seismic 2D- and 3D-based surveys for the hydrocarbon sector, has maintained a sales turnover around Rs.90 crore over the past three financial years years. It makes close to 30% operating profit and 10% net profit margin with very little to negligible debt on its book.

Despite being in a niche business, the opportunity size was till now very limited as evident in the company’s turnover. But that is set to change now with the company bagging an order worth Rs.1,482 crore from just one public sector undertaking. The order, nearly 16 times its existing turnover, has been handed over by ONGC. To be completed by end of 2019, the order entails acquiring 2D seismic data in un-appraised sedimentary basins as a part of the country’s National Seismic Program. Besides, the company has also bagged an order worth Rs.242 crore for providing 3D seismic data in the KG Basin and which will be executed by June 2017. In fact, this is the biggest 3D volume of on-land seismic data acquisition work undertaken by the PSU till date.

Post this, the company's order book currently stands at about Rs.1,528 crore. Historically, this is the highest order book the company has ever had, providing visibility for the next three financial years. Incidentally, the purchase by Relan comes at a time when the stock is trading at its all-time high, after more than doubling from January this year. With a market cap of Rs.600 crore, the stock is currently trading at 5x book value and 43x its FY16 profit. Valuation is stretched because of the high expectation from the future both in terms of its current order book and prospects of more orders from the domestic market, particularly from Oil India. Given that Relan has stuck his neck out and bought the stock, it could well mean that the PE stalwart believes the seismic data provider is worth more than what it is currently worth.