Dolphin Offshore Ltd (Dolphin) reported a net loss of Rs 123.1 mn in Q1FY11 as against a net profit of Rs 120.1 mn in Q1FY10, which was well below CRISIL’s estimates. During the quarter, the company undertook significant additional work resulting in extra time and cost for two EPC contracts. However, the company has not booked the revenue against this as it is yet to receive change orders for such work. The company’s order book has increased by just around 4 per cent in Q1FY11 over the previous quarter due to the slow tendering process of its major client – ONGC. This slow pace of order book addition has led us to lower our yearly projections for FY11. Assuming that the management will quantify and receive claims for the change orders for additional work done in the remaining quarters of FY11, we continue to assign Dolphin a fundamental grade of ‘3/5’, indicating that its fundamentals are ‘good’ relative to other listed securities in India. However, given its client concentration risk any delays in receipt of change orders or order book could result in a revision of its fundamental grade. We assign a valuation grade of ‘4/5’, indicating the market price has upside potential from its current level of Rs 273 (August 12, 2010).

Q1FY11 result analysis
- Dolphin’s Q1FY11 revenues declined by 51% y-o-y and 30% q-o-q to Rs 802 mn as the company has not booked revenue against additional work done during the quarter on 2 EPC contracts on which it is yet to receive change orders.

- The company’s EBITDA margins for Q1FY11 were in negative at around 12% as against a positive 6% and 13.9% in Q4FY10 and Q1FY10 respectively.

- Dolphin registered a net loss of Rs 123 mn in Q1FY11 as it incurred heavy marine spends on the additional work against which it couldn’t book revenues.

Order book growth remains subdued, increased competition to impact margins
- As on June 30, 2010, the outstanding order book of the company is Rs 2.4 bn – a net

addition of Rs 100 mn during Q1FY11. This was largely due to a delay in the tendering process from ONGC, its major client.

- ONGC is expected to invite tenders for contracts worth Rs 30 bn in FY11. We expect Dolphin to bag around 16% of these orders.

- Although we assume that the management will quantify and receive claims for the change orders for additional work done in the remaining quarters of FY11, the lower visibility on the company’s order book compels us to revise our revenue forecasts downwards.

- Further, on account of the steep decline in oil prices and the BP oil spill, there has been a slowdown in the global oil field equipment and services market. As a result, lot of overseas assets are lying idle and owners of these assets have been putting pressure on prices in India to try and pick up work and get deployment. These factors are expected to put pressure on the company’s margins in FY11 and FY12. These factors have led us to reduce our EPS estimates for FY11E and FY12E by 10% and 6% to Rs 24 and Rs 35, respectively.

To read the full report: DOLPHIN OFFSHORE