When
Mark Mobius’ Templeton Asset Management (TAML) announced an investment of $20.6 million in shares of
Shiv-Vani Oil and Gas Exploration Services on March 29, 2010, these were trading at Rs 412 each.
Soon after the deal, Mobius, executive chairman of TAML, said: “We are
impressed with Shiv-Vani’s oil and gas exploration services capabilities
and are confident these can be leveraged to assist oil & gas
companies around the world.” The investment, he was confident, would
fund the ongoing equipment and technology needs to make Shiv-Vani a
force to reckon with in the global arena for exploration services. “This
investment fits well with our global exposure to the energy sector and
we look forward to working with Shiv-Vani’s management and promoters to
make this a landmark relationship,” the star fund manager had said.
Strengthening this outlook, Rohan Consultancy Services, a promoter group
entity, purchased 277,178 shares in May 2010 at Rs 423 a share.
As Mobius had said, Shiv-Vani was ideally positioned as the largest
onshore rig owner-cum-operator to benefit from the Union government’s
expansion plans and increased spending in onshore exploration. It also
had a healthy order book of around Rs 4,000 crore, in a sector where
entry barriers are high. Most important, Shiv-Vani had a healthy
business relationship with the government’s Oil and Natural Gas
Corporation (ONGC), the largest exploration entity. It certainly looked
like a good investment.
Today, Shiv-Vani shares are trading around Rs 28 and show no sign of
recovering. At this price, the entire company is valued at a paltry Rs
130 crore. At current exchange rates, this is marginally above $20.6
million, the amount Templeton paid for its 5.3 per cent stake three
years earlier.
In it, along with Templeton, are other marquee names such as Citi
Venture, Reliance Capital, Aviva Life and Religare Finvest. Is this 93
per cent crash in stock prices justified or are the prices running ahead
of fundamentals?
Templeton, which has since raised its stake to eight per cent, did not
respond to an email query on the investment. A Templeton India
spokesperson said the fund did not comment on stock-specific queries.
What went wrong?
Fund managers with exposure to the company said Shiv-Vani has been
facing trouble on multiple fronts over several months and has not done
enough to fight these. While the business outlook became grim following
lower government spending, several operational issues erupted as the
company found it difficult to service high-cost debt. Investor circles
also said the company had initially benefited from association with the
brass in some public sector firms, whose contracts it was executing, and
suffered when these ties snapped.
Rajan Gupta, chief financial officer, Shiv-Vani, told Business Standard:
“Revenue is good in this business. But the financing we had taken was
short-period financing. Being a capital-intensive industry and no way to
raise equity, all our expansion was through debt. Despite the good
profitability, most of the revenue was spent in servicing debt.”
Gupta dismissed the conspiracy theories but agrees things got difficult
when ONGC, Shiv-Vani’s primary client, was in the middle of a leadership
change. “ONGC was headless for about a year. Contract renewals did not
take place during the period. This affected the cash flow.” These
financial constraints made the company default on tax payments.
In January this year, the Central Board of Excise and Customs registered
a case of service tax evasion of Rs 200 crore. Reports said the firm
had not filed service tax returns since October 2010. The company
agreed to the liability but cited “financial constraints” for
non-payment.
What could be the financial constraints of a company that made revenue
of Rs 1,484 crore in FY12 and net profit of around Rs 200 crore every
year since FY09?
Suspicion
Some lenders fear the worst. “Based on our diligence, we believe the
company is inflating its (annual) revenue by $80-90 mn. Accordingly, the
number of rigs could be inflated by 30-40 per cent, assuming a few are
genuinely idle,” said a creditor in an internal note reviewed by
Business Standard. The note says of the 40 rigs claimed to have been
owned by the company, only 15 were credibly verifiable. A fund manager
with an exposure to the hybrid instruments of the company also said,
“The company claims it has deployed 12 rigs with ONGC. Our own diligence
showed they had only six.”
By the company’s latest financials, the gross block was around Rs 3,000
crore. “According to our estimates, Shiv-Vani probably spent around Rs
1,200 crore acquiring equipment,” the note added.
Gupta said he’d already adequately addressed several queries raised by
the creditors. “Of the 40 rigs, 17 were 1,000 Hp or more. This is the
minimum capacity required in drilling.” According to him, three of the
remaining rigs were deployed in Oman. “Of the smaller rigs, we have got
regular contracts running on five more, though these account for very
little revenue. Other rigs are idle.”
The company has been blacklisted by some private sector exploration
companies, such as Cairn India. Recently, Oil India, another state-owned
explorer, sought vigilance department clearance for contracting the
services of Shiv-Vani, though it was the lowest bidder.
It was also briefly banned by ONGC for certain violations. Gupta brushed
it aside as a minor issue. “There was a small contract on compression
services. We should not have applied for that. But, we wanted to use
machinery which was lying idle. Instead of deploying staff, we had
outsourced it. This person could not complete the job due to some
issues. We explained the situation and ONGC accepted it. This matter has
been blown out of proportion.”
Now
On the falling stock prices, Gupta said investors in India are yet to
understand the nature of this business. “I don’t have much control over
stock prices. Globally, this business is highly geared. Here people look
at the debt-equity ratio, refer to the FCCB (foreign currency
convertible bond) liabilities and get worried.” The company has raised
FCCBs worth $80 mn, maturing in August 2015. Several public and private
sector lenders have also lent to Shiv-Vani for purchase of equipment
and other capital expenditure. These include ICICI Bank, State Bank of
India, Punjab National Bank, YES Bank, Corporation Bank and IFCI.
A total of 57 promoter group entities, led by brothers Prem and Padam
Singhee, own 49.38 per cent in the company. As the debts mount, about 85
per cent of these shares held by the promoter group are pledged with
lenders. This could also be putting pressure on the stock prices, as
every fall triggers new margin calls and fresh selling creating a
vicious cycle, say analysts.
Even as some lenders began asking tough questions, Shiv-Vani moved for a
corporate debt restructuring (CDR) plan. Gupta hopes the company will
bounce back after the CDR. “The restructuring of debts will result in
improvement in the liquidity and strengthen the core operations, which
will lead to value addition of the stake holders in the long term.”
