Smallcap Play for India's 'Energy Security' Watchlist 

Dear Viewers

Last few weeks have been a bit volatile for stock investors for multiple reasons.

Earnings season and misses from the expectations, foreign money outflows amid China stimulus, and tensions between Iran and Israel have made markets a bit nervous.

The impact of most of these macro events will even out, appearing as noise for the long term investors.

However, there is one event that has once again brought to the forefront the question of India's energy security.

In the recent years, themes like electrification and green energy have taken over any discussion on energy.

Yet, the truth is we are still dependent on imports for 85% of energy requirements.

And any supply disruption or sharp price risein crude oil is negative for India's growth story.

Bottomline - We need to be self-sufficient for our energy needs.

To be fair, policies been focusing on this.

A case in point is the shift from NELP (New Exploration and Licensing Policy) to OALP (Open Acreage Licensing Policy) in 2016-17 for oil and natural gas exploration.

Under NELP, it was the Government that used to put a oil and gas block on tender. However under OALP, the players can select the exploration block on its own. This is likely to bring more area under exploration and production. To encourage this, geo scientific data is made accessible to all players under National Data repository.

If the block selected by a player is suitable for award, competitive bids are invited under twice a year bidding system. Unlike NELP where government's income was from profit sharing, OALP is marked by revenue sharing. In the previous profit sharing system, the government had to carefully examine the cost information provided by private players, that led to delays and disagreements..

The new system also allows for single, uniform licensing system to cover all hydrocarbons.

The ninth round of OALP was concluded in September. The next round is expected early next year. In the 10th round, areas or regions that were termed 'no-go' earlier will be offered, opening up more opportunities for exploration and production companies.

As some of you know, the gestation period in oil and gas exploration can be long. And the final output or yield is not certain despite initial investments. As such, instead of dwelling on oil and gas exploration and production companies, I'm focused on the companies in the ecosystem.

And that brings me to a specific smallcap player - Deep Industries.

For over three decades, Deep Industries has been providing various oil and gas support services. These include natural gas compression to ensure flow of natural gas through pipeline and dehydration of gas. Dehydration is a regulatory requirement for gas production and transportation to avoid blasts and other hazards. It also offers workover and drilling rigs services, and Integrated Project Management Services. Its offerings find applications right from exploration and production to mid-stream services. Across most of these offerings, Deep Industries is the pioneer, the only player and the market leader. Its latest industry segment is EPC (engineering, procurement and construction) of entire gas processing facilities on charter hire basis.

With this, Deep covers over 70% of post exploration in the oil and gas service value chain.

Its clients include almost all leading oil and gas players like ONGC, Cairn, OIL, GSPC, GAIL, Vedanta, Reliance, Essar, GSPL, Selan Exploration to name some.

Apart from oil and gas players, its target industries under offshore services markets communication, transmission and transportation , undersea power and data cables.

The latest quarter ended September has been highest ever for the company in terms of revenue and net profit. The return ratios have been on a rising trajectory. The return on equity and capital employed (excluding intangibles) have been at 14.4% and 15.6% in the half year so far. The debt to equity ratio is at 0.16x.

The company has been awarded production enhancement contract recently, leading to a 119% YoY orderbook growth.

Its orderbook at over Rs 26 bn is over 5X of its trailing 12 month revenue. The management has guided for over 35% growth for next 2 years.

The stock is trading at a trailing 12 months price to earnings ratio of 22x and price earnings to growth or PEG of 0.4x.

Now do note that this is not a recommendation. Any investment is subject to risk and needs due diligence, and Deep is no exception. That said, as India gets serious about energy security, this is a must have stock for your watchlist.

Hope you found this information useful. Let me know through your likes. Please share your feedback in the comment section. For more such opportunities in smallcap space, subscribe to Profit Hunter.