Deep Industries Limited (DEEPINDS) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to the Q4 FY '23 Earnings Conference Call for Deep Industries Limited, hosted by Go India Advisors. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Sana Kapoor from Go India Advisors. Thank you, and over to you, ma'am.

Thank you, Lizanne. Good morning, everybody. Welcome to the Deep Industries earnings call to discuss the Q4 and FY '23 results. We have on the call Mr. Paras Savla, Chairman and Managing Director; and Mr. Rohan Shah, Director of Finance and Group CFO. We must remind you that the discussion on today's call may include certain forward-looking statements and must be, therefore, viewed in conjunction with the risks that the company faces. May I now request Mr. Paras Savla to take us through the company's business outlook and financial highlights, subsequent to which we will open the floor for Q&A. Thank you, and over to you, sir.

Good morning, everyone. Thank you for joining Deep Industries' Quarter 4 and FY '23 Earnings Conference Call. I hope that you have got a chance to go through our earnings presentation that has been uploaded on the website and stock exchanges. FY '23 has been a great year for us from both financial as well as operational aspects. Deep has achieved higher revenues, profits and order book in line with our stated guidance. Before Mr. Rohan discusses the financial performance, let me throw some light on the strategic updates of the company. I'm pleased to announce book has exceeded INR 1,000 crores order book, reaching INR 1,078 crores at the close of FY '23. This represents a Y-o-Y increase of 71% and a Q-o-Q increase of 10%. Deep recently secured an order worth INR 106 crores from ONGC for the hire of mobile drilling rig over a period of 3 years. As you are aware, Deep is a leader in natural gas compression market, commanding a market share of approximately 75%. In addition to this, we have a strategic presence in natural gas, dehydration, workover and drilling rigs, integrated project management and manufacturing of CNG Booster Compressors. The Indian government's goal to raise the proportion of natural gas in the country's primary energy mix from 6.5% to 15% by 2030, coupled with supportive policy changes such as refunds in domestic gas pricing guidelines bodes well for our company. These developments will stimulate the demand and supply of natural gas, creating a need of natural gas processing in which our company plays a significant role. Hence, Deep Industries is poised to benefit from the gas pricing policy changes and the potential surge in natural gas consumption. Furthermore, we are optimistic about the strong bidding pipeline and anticipate substantial conversions in the near future. During FY '23, we completed the acquisition of Dolphin Offshore through IBC route and have initiated the implementation of revival strategy. This acquisition will grant Deep with a quick market access to offshore services, which otherwise would have taken 2 to 3 years to achieve the required classification. This will also lead to the diversification of the business verticals of Deep and synergy benefits from existing client relationships. With the overall revival plan in place, the integration process has commenced with the appointment of key managerial personnel and the Board, taking control of assets and establishment of offices. Refurbishment of the major assets have begun, and the operational activities are projected to commence in about next 6 months approximately. We expect Dolphin Offshore to start contributing to the operational revenues by second half of FY '24. Deep focuses on superior wealth creation for its shareholders. And thus, I'm happy to share that Board has recommended a final dividend of INR 1.85 for equity. Face value of the share is INR 5. Deep has also executed a stock split of 1:2 ratio during the financial year. With this, I would like to hand over the call to Mr. Rohan Shah, our CFO and Director of Finance, to take us through quarter 4 and FY '23 financial performance. Thank you.

Thank you, Paras, sir. Good morning, everyone. I'll now present a brief overview of our quarterly and annual financial performance, after which we will open the floor for question and answer. For fair comparison, we will be comparing numbers on a year-on-year basis. Starting with consolidated financial performance, on annual basis, I'm happy to share that Deep has achieved record-high annual financial performance. Deep has achieved highest-ever revenue of INR 341 crores, which is up by 6% compared to last year. Additionally, Deep has accomplished record-breaking profit this year with EBITDA soaring by 19% to INR 142 crores and PAT reaching an impressive INR 125 crores. PAT adjusted for exceptional items is INR 81 crores, which has increased by 11%. This year, in quarter 4, we had an exceptional item of INR 44 crores consisting of net gains from writing back of operational liabilities and writing off of receivables of Dolphin Offshore post its acquisition. EBITDA and adjusted PAT margins are strong at 40% and 23% for the year. I'm happy to share that Deep has maintained its status of being zero net debt company with healthy balance sheet and a very strong liquidity position. Presently, Deep has total gross liquidity of INR 90 crores that places Deep in comfortable position to capture next phase of growth. On a quarterly basis, revenue has increased by 23% to INR 103 crores, whereas EBITDA and adjusted PAT has increased to INR 47 crores and INR 28 crores, up by 54% and 61%, respectively. EBITDA and adjusted PAT margins for the quarter have improved from Q4 FY '22 and are strong at 43% and 25%, respectively. Coming to standalone performance. On annual basis, revenue has increased by 11% to INR 301 crores. EBITDA and PAT also showed an increasing trend and were up by 18% and 13%, respectively. On quarterly basis also, Deep showed a rising trend in terms of revenue, EBITDA and PAT which were up by 15%, 32% and 32% expected. Overall, FY '23 has been a strong year, and we expect to deliver great performance for the years to come. We can now open the floor for question and answers. Thank you.

[Operator Instructions] The first question is from the line of Surya Narayan from Sunidhi Securities.

Just if you can throw some light on the segmentalized revenue breakout for last year? And how do you expect these segments to grow in FY '24? And because we -- on the revenue side, the revenue visibility is there. So what kind of CAGR in the revenue we can expect? And plus, what is the need to go for the stock split? For a small -- we are actually not facing liquidity issues, so what are the reasons for going stock split? Yes, I will come in queue.

Sure. So with regards to revenue split, I'll answer that. So out of total INR 301 crores on a standalone basis, our revenue from gas compression division is almost 43%. From rigs division, it is around 40%. From gas dehydration units, it is around 5%, and balance is from integrated project management and other small services. With regards to growth coming up in the next financial year, since we have a good amount of order book in place and almost sure kind of revenue for next 2, 2.5 years, we expect to grow around 20% on a conservative basis on CAGR. So that is what we expect for years to come. And with regards to stock split, it was basically just to increase the liquidity in market and to allow small investors to participate in our stock. That was the only reason. I think there was no other reason for the stock split, yes.

Okay. And regarding the integrated project management, we were actually hoping for a bigger pie. So what is happening in that segment, sir?

So in integrated project management, we have successfully completed our first project and we are doing some small integrated projects with Oil India and SELAN as well. With ONGC, we have bidded for another integrated project, and we are expecting to have some good outcome in that as well.

Okay. And with oil and gas prices remaining benign, going forward, beyond this INR 1,000 crores of orders, so are we expecting the budget from the upstream players to increase or how -- because generally, we tend to be very cautious on that front if oil prices remains benign or soft. So what is your call?

See, in domestic market, we have been there since last 30 years now, and we have seen that foreign players are not that aggressive in coming into India because of various reasons. And crude oil price being benign, I think since we are into pure services business, our business has not much impact of crude or gas prices because at the end of day, our services are indispensable kind of services. Whatever the price would be, our services would be required by every producers and transporters, yes.

Okay. And sir, any color on the goodwill amortization front going forward? So any time line regarding that?

With regards to goodwill since we follow IndAS, we'll have to do impairment testing on every year-end. And if that impairment testing report suggests to impair the goodwill, we'll have to impair. This year, the impairment testing is not suggesting any impairment on goodwill. So we would continue to have this goodwill on our books. So that testing will done on every year-end as required by IndAS. So we cannot comment on that.

But will you be appointing any external agencies to check whether the impairment is fair or not?

Yes, yes. We'll have to hire some registered valuer, the outside agency only, who will give their report on impairment by testing various routes of impairment testing. And on their conclusion, they'll give their report. So it is, of course, outside agency.

The next question is from the line of Manan Shah from Moneybee Investment Advisors.

Congratulations for a good set of numbers. Can you highlight what contracts are expected to commence in the upcoming quarters? And whether this should be towards the gas dehydration, compression or rigging?

So yes, in current quarter, we are executing some gas compression contracts, which are under mobilization stage. So I believe there are 3 gas compression contracts, which are getting added by this current quarter and will start coming into revenue.

Okay. So -- and any CapEx that we are projecting for the upcoming year?

Yes. So we are expecting to have immediate CapEx of 1,000 horsepower drilling rig, which we are anticipating to get an order probably in the next 1 or 2 months. And based on that order, we may acquire one new 1,000 horsepower drilling rig.

Can you quantify this CapEx?

That would be in a range of around INR 45 crores.

Okay. Understood. My next question was, so I understand that you've written off a large part of operating liabilities of Dolphin. However, receivables still continue at almost upwards of INR 140 crores in Dolphin. So I mean how confident are we about recovering these receivables? Or from whom are these receivables? Or if you can just throw some sense on this.

Sure. So based on NCLT order, we are not supposed to discharge any operating liabilities other than what we have agreed in resolution plan. So after paying of the liability as per resolution plan, we have written back all other liabilities in our books. With regards to receivables, we have written off sizable receivables, which were not recoverable at all. And the receivables, which we believe we can recover that we have kept on our books as receivables, out of INR 140 crores, almost INR 40 crores are receivable of their overseas subsidiary, where active arbitration is going on and award is in our favor as well. So we expect to have receipts out of that receivable. And with regards to Indian receivables, the majority of them are from ONGC and a few of them are from other contracts as well, other clients, where we are quite positive to recover them.

Okay. Understood. And if you can also comment on the order that you had won against ONGC, any updates? When are we expecting this to come?

Sorry, which order?

We won this case, right, at Deep Industries against ONGC, where you are expecting INR 104 crores.

The arbitration one, yes.

The arbitration one.

Yes. Of that arbitration award, we have received 75% of the award amount. And we expect to receive balance on completion of the formalities because client has approached the higher forum, higher legal forum in High Court. So once that case will be awarded in favor, balance amount will be received.

So this 75% which we've received, we have parked this money in some liquid debt or something?

Yes. We have parked as of now into bank FDs and liquid funds.

Okay. My next question was on -- again, on the Dolphin side. So I believe we would be required to do some sort of refurbishment for the assets. So what is that number that you're projecting to spend in this year? And how is the same will be funded?

Yes. So refurbishment process has already been started. And since it is a refurbishment of an equipment, which was idle for more than 3 years, as of now, a clear estimate is not with us. But yes, it would not be that great amount and we expect to fund it either through our accounts or we may go for loan as well.

Okay. But we would start bidding for this? I mean applying for bids only post refurbishment or we've already started applying for the bids for this asset?

No. So we have already started getting expressions from various clients, and the response is excellent because the asset which we are having, I think it is one of the rare asset, and there are only 6 to 7 such assets in the entire world. So we are quite bullish on getting business on that asset.

And the contracts over here are largely long term in nature, I mean, 2, 3 years or longer?

Yes, yes. Sometimes it may be longer than 2, 3 years as well. But yes, it depends on what price and what amount we agree.

[Operator Instructions] The next question is from the line of Karan Dubey from Anubhuti Advisors LLP.

Just wanted an update as to how much revenue are you expecting to get in from second half of '24 from the Dolphin Offshore? And also, what will be the margins for the same?

See, that depends on how early we put that asset into operation. So as of now, it is difficult to comment on how much revenue we can book out of Dolphin, but we are quite bullish. Even if we get revenue of, say, 5, 6 months, then it would be more than INR 30 crores, INR 35 crores.

Okay. And margins, if we get...

The business would be almost same as our business margin. There can be some higher margins as well. But conservatively, we are expecting 40%, 45% EBITDA.

Okay. And my next question is, is there -- what are your thoughts on the natural gas dehydration? Can you throw some color on it? And are we seeing any progress over there?

So natural gas dehydration has, as we had already been saying that it has got a good prospect. And there is a lot amount of pipeline already laid, and there is a lot of pipeline being laid. So it is a clear-cut requirement from PNGRB that any new line whenever the gas is to be injected, it has to be dehydrated. So on that front, I think that prospects are still there. But this process is on. So there's a lot of process to be done before that. There are some pipelines which are being under installation and all, and there are certain tendering process. This momentum can happen at any point in time. We believe it's a great business and highly prospective.

As of now, how much it does contribute in your revenue?

As of now, it is contributing around 5%.

[Operator Instructions] The next question is from the line of Yogesh from Arihant Capital Markets Limited.

Sorry, sir. I actually joined a little late, so it might be a repetitive question. So how do you see the growth of the IPM segment? And if -- what would be your outlook for growth on an overall basis for revenue and profitability in FY '25 for the company?

So under IPM, we have successfully completed our first project with ONGC. And currently, we are operating on integrated project management projects of Oil India and SELAN. And we have bidded a few more projects under IPM with ONGC as well, with Vedanta as well. So we expect a good amount of conversion going forward, and we are quite bullish on this particular business.

And sir, what would be your outlook for the coming FY '24 in terms of revenue growth and profitability?

On revenue growth, conservatively, we are expecting 20% CAGR. And profitability, we would continue to maintain our existing percentage.

Sure, sir. And finally, sir, on the debt profile, what would be the debt trajectory going forward? And is there any threshold on taking debt for the company?

So currently, we are net debt free, and we always believe to keep our debt at a very minimal level. In our history, we have never crossed debt equity as one. And our recent decision is to keep debt as 0.5 of equity to the maximum level.

[Operator Instructions] The next question is from the line of Mayur Liman from Profitmart Securities.

Congratulations on the great set of numbers. Sir, I just want to ask the capital utilization of gas compress has increased. I wanted to know the exact status of how many compressors we have as of now. And how are we seeing this segment to grow going forward as we are already a leader in this segment?

Yes, with regards to gas compression division, our capacity utilization has improved. And with new projects of gas compressor coming in, we are doing CapEx also to acquire new compressor packages as well. So going forward, gas compression division, we expect to grow quite a good way. And it should continue to contribute more than 40% in our overall revenue.

Okay. And my second question is what is the bidding pipeline? If you can let me know the sum number for that? And also, what do we expect our order book to be one year from now?

The order book conversion is not in our control. It always depends on award of contract based on your bids. But yes, the way we have seen FY '23 to grow, so demand in our industry is excellent for our type of services, and we expect to grow order book in this current financial year as well. So yes, we are quite bullish. Our order -- our bidding pipeline is as good as around INR 800 crores, and of which we are expecting some good amount of conversion in current year as well.

[Operator Instructions] The next question is from the line of Parin Gala from SageOne.

Sir, I'm relatively new to the company, so pardon if some of my questions sound silly. Sir, I understand that majority of your business comes from ONGC because of gas compression and all that. And you've been doing this for a very, very long time with them. In such a scenario, sir, why does any kind of a contractual dispute or something that arises with your primary client, and then you have to go for arbitration and things like that? I mean when it's well defined in the contract, why do these disputes come up?

See, in the matters of contracts, worldwide, if you see there are always disputes, which are on either side. And normally, these kind of disputes are largely based on the interpretations. This is not something that disputes can never happen. In every single contract whenever the execution happens, there is certain amount of nonalignment of the client and the service providers. So this is not something very new, which is happening to this business. This is very, very common. And not in India, I believe it is across the globe. These arbitrations are definitely all the resolutions or the disputes resolution are something which are intently kept so that such disputes are being resolved.

Okay. And generally, when such disputes arise, typically, what is the time line for them to get resolved?

After the completion of the contract, it cannot normally happen during the ongoing operations of the contract. Normally, once the contract is over, and the disputes -- if there are serious disputes, the same have been referred for an arbitration. So I believe after the completion of the contract normally, hearing and all those stuff depending on the claim and all, may take anywhere a period from 1 year to 1.5 years.

One year to 1.5 years, okay. So sir, in all these contracts, especially ONGC and when you're dealing with government and things like that, when you're -- how is the payment schedule -- whatever services you provide you get immediately paid? And is there some retainer money which is kept till the end of the contract or how does it work?

No, no. There is nothing called retainer money. Every invoices are paid in the due course of time. So normally, we have seen a trend of payments being in the ranges of about 90 days to 100 days as an average for all the monthly billings. Normally, it's a process that the invoices go to the field, they get certified through various hierarchies, and then they move to the different locations. So that is -- I mean some of the clients would have been paying early, some of them paying little late. But largely, we believe that the monthly billing cycle is in the ranges of 90 to 100 days.

And these invoices are raised after the service is provided or during the period of the contract?

It is within the period of the contract, but the end of the month in the few days from the next preceding month, we make the invoice and send it to our clients.

The next question is from the line of Kashvi Dedhia from Centra Advisors.

Congratulations on a great set of numbers. I have 2 questions. Firstly, can you share the segment-wise breakup for order book that you received for INR 1,078 crores? And secondly, the order which we received from ONGC for mobile drilling of INR 106 crores. Is it recognized or by when will it get recognized?

Yes. So I'll answer your second question first. So the INR 106 crore order is for over a period of 3 years. So it is part of our rig division, and it is for drilling rig with Ahmedabad assets. So you can say, INR 106 crores would be -- revenue would be earned in 3 years' time. And with regards to breakup of our order book, out of INR 1,078 crores of order, almost gas compression consists of 52% of order book. Rig consists of around 36% of order book. Gas dehydration consists around 5% of order book. And rest is from integrated project management.

The next question is from the line of Sanjay Shah from KSA Securities Private Limited.

Paras, sir, I have one question to understand from you about our acquisition that is Dolphin Offshore, which is maybe more than 40 years old company and having a pioneer position in the business. So what went wrong? And why are we so optimistic about it and acquired that being in a troubled company because our -- they are into something different that is diving underwater services and other services. So what expertise we see in an integration we can do to revive this and what confidence we have in the company?

See, coming to the first question, you said that what went wrong with Dolphin. I'm sure the things that went wrong was their financial management. They were doing things when they were not able to manage the company in the best financial discipline that was required. That's what we believe. They have been definitely in a very dominating position as well as the services, as well as repairs of the well platform goes or diving services. So they have been leaders for all these years. Even before the acquisition, we met our clients, and there is a lot of vacuum in this industry. Business has always been very good in offshore segment, and there has been a demand. So if you have to ask me today, we see a lot of demand in this segment. There's a lot of vacuum to the kind of growth that is happening. We believe the kind of experience that Dolphin has would definitely bring a lot of opportunity for the company going forward. So we believe if there is an amount of -- a decent amount of financial discipline, utilization, recognition, and getting the funds from the clients in a proper systematic way, then the company should not face any difficulty. As usual, we have been into the same sector, but the difference is Dolphin is offshore and what we were used to do is onshore. So we almost have a sense of what the clients are, what the requirements are, and we are also operating company for more than 30 years now. So we have a fair and decent idea of how to manage these kind of difficulties. So with this, it allows us a lot of opportunity to be in both these segments. And that's why we feel that we will be fairly successful.

That's good. So can we take -- understand that previously, Dolphin used to do around INR 300 crore, INR 400 crore, INR 500 crore top line. Is that market of that size still there available for us?

Honestly speaking, I believe it is much, much, much more than what even they were doing because they were doing this before 4, 5 years now. And in these 4, 5 years, the level of requirement, the level of services, see, a lot of equipment, what they used to or a lot of services what they used to provide in the market. I think the demand has superseded to what the supply is. So I'm just being optimistic. I do not have a clarity on what the answer could be in terms of numbers. But the only thing that I clearly understand is that these numbers are very, very easily achievable in a span of time.

That's great. So we are retaining the old staff of the Dolphin or we have our own expertise in that?

We are trying to source the best possible talent on the market. And we are trying to see what best we can do. We are not very sure that what amount of stock that already Dolphin had, we will be taking use of them or not. But going forward, I believe there is a lot of talent already available in the market. So we'll try to see what best we can get in the best interest of the company.

The next question is from the line of Mayank Mamania from Mavira Investments.

Sir, I wanted to understand what was the turnover of our subsidiary RAAS in Q4? And what is the outlook of FY '24 for RAAS?

So RAAS has achieved INR 17 crores over a year for FY '23. And going forward, we expect to increase this at quite a good pace because currently, the demand is a little low because the GA allottees who have been awarded the areas to install this gas compressor packages and stations and pipeline, they are taking a little long with some extensions with government. And that is how the demand is not picking up as per our expectation. So in current financial year, we expect to pick it up.

Okay. And sir, the refurbishment of Dolphin as it will be completed and put to use in H2. So what kind of revenue visibility will be there in H2 from Dolphin?