Deep Industries Ltd has specialised in providing various Oil & Gas support services for 30+ years. Deep Industries Ltd Services portfolio includes Natural Gas Compression , Natural Gas Dehydration, Workover and Drilling Rigs Services, and Integrated Project Management Services. And recently forayed into offshore oil and gas support services vai Dolphin Offshore Enterprises Ltd.
We find Deep Industries Ltd. interesting because we believe that Deep Industries Ltd. has a very strong hold in the domestic oil and gas services sector, having created a significant space for itself with E&P companies across the upstream value chain. The Indian Govt. has been putting emphasis on increasing India’s oil and gas production to reduce dependency on imports and also wants to significantly increase the proportion of natural gas in the energy mix of the country by 2030, which provides growth visibility to players like Deep Industries Ltd.
With the acquisition of Dolphin Offshore Enterprises Ltd., Deep Industries Ltd. now has exposure to the offshore sector as well. We believe the offshore oil and gas assets are poised to show strong revenues and a decent return on capital in the medium term, driven by a lack of supply of offshore assets.
Deep Industries Ltd Company Overview
Deep Industries Ltd. is a micro-cap stock in the oil and gas sector. Deep Industries Ltd. provides upstream services to oil and gas exploration and production (E&P) companies in India. Deep Industries Ltd. provides drilling and workover services, gas compression and dehydration services, and integrated project management of onshore oil and gas drilling projects. Deep Industries Ltd. also has a presence in offshore oil and gas support services via its subsidiary, Dolphin Offshore Enterprises Ltd.
Deep Industries Ltd. (the resulting company) was demerged from its parent company, Deep Energy Resources Ltd. (Erstwhile Deep Industries Ltd.) and listed on NSE and BSE in April 2021. Deep Energy Resources Ltd (a demerged company) continues to be listed on the exchanges and is involved in oil and gas exploration and production. The demerger was carried out to hive off the upstream services part of the business from the exploration and production part of the business since the two businesses are quite different from each other, with very different revenue and investment profiles.
The parent company has been listed on Indian exchanges since 2006 and was founded by Mr. Paresh Savla and Mr. Mahesh Savla (They are part of the same family, and the exact relationship is not disclosed). Deep Industries Ltd. started its journey as a private company in 1991, providing basic services in the oil and gas industry. Over time, Deep Industries Ltd. has grown to become the largest onshore oil and gas services provider in India, providing services across most of the upstream oil and gas value chain.
Deep Industries Ltd Management details
Deep Industries Ltd. continues to be led by the Savla family, with Mr. Paresh Savla acting as Chairman and Managing Director and Mr. Rupesh Savla acting as Managing Director. Mr. Paresh Savla and Mr. Rupesh Savla belong to the same extended family, although no specific relationship between them has been disclosed in the company’s annual reports.
Deep Industries Ltd Industry Overview
Global oil and gas industry landscape
The global crude oil demand in 2023 was 102.2 million barrels per day (mb/d), up 2.6% from 2022’s demand of 99.6 mb/d. The International Energy Agency (IEA) expects global oil demand to increase by 1.2 mb/d in 2024 and a further 1.1 mb/d in 2025. As per the IEA, global oil demand is expected to peak by the end of the current decade. While oil demand from aviation, shipping, and petrochemicals will continue to grow, this is expected to be more than offset by a decrease in oil consumption in transportation due to the emergence of electric vehicles. However, the demand for oil is not expected to fall off rapidly post-peak. IEA expects oil demand to continue at close to peak levels for several more years. Even as global oil demand is expected by IEA to peak by the end of this decade, oil demand in developing economies ex-China, such as India, is expected to keep growing into the 2050s.
Source: World Energy Outlook, 2023 by IEA
The IEA also expects global demand for natural gas to peak before 2030, thanks to a peak in the usage of gas-powered power stations and the usage of gas for heating buildings. The use of natural gas in industry is expected to continue to increase.
While demand for natural gas will start dropping in advanced economies in China by 2030 and 2050, demand is expected to keep increasing in other developing economies such as India.
Source: World Energy Outlook, 2023 by IEA
Global oil prices have fluctuated wildly over the last 2 and half decades, responding negatively to demand collapses such as during the onset of COVID-19 or supply gluts such as during the shale oil boom in 2014. At other times, oil prices have moved up significantly in response to supply constraints, such as in the immediate post-Covid era or during wars.
There was an extended period of pain for the oil industry in the second half of the 2010s, between 2015 and 2020, when oil prices consistently remained below the 60$/barrel range. This was largely due to the shale oil boom in the USA, which caused a supply glut in the market and OPEC’s response to the increased supply. OPEC, led by Saudi Arabia, decided not to cut production to stabilise prices, instead choosing to maintain market share. This caused a persistent downturn in oil prices.
This persistent downturn in oil prices resulted in significant production and exploration cutbacks by E&P companies. E&P companies started cutting back on non-essential investments and instead started focusing on cash flows and profitability. As a result, new upstream projects dried up, and many contracts for rigs and support vessels were cancelled. This caused extreme distress in the upstream support services industry, with many rigs and vessel-owning companies going bankrupt and many offshore assets being scrapped or stacked. This crisis period took out a significant chunk of offshore assets from active supply.
Source: GE Shipping corporate presentation
Post 2021, the global oil supply-demand dynamics started to balance each other once again, leading to a sustained up move in oil prices to $70-$80+ levels that were not seen during the 2015-2020 period. This was a result of pent-up demand coming back post-Covid, supply constraints due to E&P underinvestments in the preceding 5-6 years, geo-political tensions, and more measured investments and supply by US shale oil producers in response to investor pressure for delivering decent returns on their invested capital. Since 2021, oil prices have sustained above 64$/barrel, even touching 100$+ levels when the Russia-Ukraine war broke out.
Jack up rigs utilisation levels. Source: GE Shipping corporate presentation
The improved oil demand-supply dynamics post-2021 have resulted in better utilisation of offshore oil and gas assets. This, in turn, has led to charter hire rates for these assets going up, which in turn has resulted in better profits for upstream oil and gas service providers that own these assets. Thus, offshore service providers are currently enjoying a period of firm charter rates with very little new supply of offshore assets such as jack-up rigs or support vessels. The costs to build new offshore assets have increased significantly due to rising labour and commodity costs, high global interest rates, stricter pollution norms in countries like China, reduced shipyard capacity due to closures during the downturn, and long waiting times at shipyards as they prioritise orders for in-demand assets such as LNG carriers. Thus, new orders for rigs and support vessels are not yet getting placed in high volumes. If this situation persists, then currently deployed offshore assets will keep getting repriced higher in the near to medium term.
In the medium term, oil prices are expected to be range-bound in the 60-80$ range and are not expected to plummet to 2015-2020 levels. As long as prices remain above 60$/barrel, global E&P activity should remain robust, in turn leading to good demand for offshore upstream service providers like Dolphin Offshore Enterprises Ltd.
Indian oil and gas industry landscape
The total crude oil production in India for FY24 was 29.4 million metric tons (MMT), almost flat compared to FY23’s production of 29.2 MMT. In FY24, India imported 232.5 MMT of crude oil, which was flat again compared to FY23’s import numbers of 232.2 MMT. Thus, around 89% of India’s crude oil requirements were imported in FY24.
The total natural gas production in India for FY24 was 36438 MMSCM vs 34450 MMSCM in FY23, a 6% YoY growth. Total LNG imports in FY24 were 30917 MMSCM vs 26304 MMSCM in FY23, a growth of 18% YoY. In FY24, imports constituted 47% of India’s total natural gas requirements.
Source: Petroleum Planning and Analysis Cell, Govt of India March 2024 Report
India has a stated goal of increasing the mix of natural gas in its energy use from 6% in 2019 to 15% in 2030. A 15% mix of natural gas in India’s energy mix by 2030 would imply a supply of 500 MMSCM/day of natural gas, up from the FY24 supply of 180 MMSCM/day, an increase of ~175%. This is a tall ask as it calls for an 18% CAGR growth in the consumption of natural gas. This kind of supply would need a very fast expansion in the country’s LNG import infrastructure as a bulk of the requirement would have to be met via imports. However, these targets should also push domestic E&P players to increase domestic gas production, leading to more business for the likes of Deep Industries Ltd.
The Indian Oil Ministry has stated that it wants to expand India’s exploration acreage (area under exploration for oil and gas) to 1 mn sq KM by 2030 from the current levels of ~250k sq KM. The Union Oil & Gas Minister has recently said that the E&P sector in India offers an investment opportunity of 100bn USD by 2030. This emphasis on increased E&P activities in India should augur well for domestic upstream players like Deep Industries Ltd.
ONGC is the largest E&P player in India by far. In FY24, ONGC standalone produced 19.47 MMT of crude oil and 19970 MMSCM of natural gas, accounting for 68% and 55% of the total crude oil and natural gas produced in the country in FY24, respectively. The number of wells drilled by ONGC was the highest ever in FY24, amounting to 544. Over the last 8 years, the annual wells drilled by ONGC have remained in the vicinity of 500 (with the exception of FY22). During the previous oil downturn of FY14-FY16, the number of wells drilled by ONGC had dipped below 400.
ONGC remains the most important client for all upstream service providers in India, whether onshore or offshore. Other key E&P players in India include Cairn Energy (Vedanta), Oil India, Reliance Industries, British Petroleum (in JV with Reliance), and a host of other smaller players.
Oil and Gas value Chain (Indian Listed Universe)
The oil and gas supply chain can be broadly classified into 3 parts
1.Upstream – This is the part of the supply chain involved in extraction and production of oil and gas from reserves
2.Midstream – This is the part of the supply chain involved in the handling, storage and transportation of oil and gas. This segment acts as the link between upstream and downstream segments
3.Downstream – This is the part of the supply chain which is involved in refining, processing and marketing oil and gas and its derivatives
Image credit: Eland Cables, Edited by Congruence Advisers
Deep Industries Ltd Business Details
Deep Industries Ltd. provides various oil and gas support services to E&P players like ONGC Ltd, Cairn India, Oil India Ltd, and Vedanta Ltd. Its business is organised as follows:
- Standalone business – This provides onshore gas processing services, onshore drilling services, and onshore value-added services to domestic E&P players.
- Dolphin Offshore Enterprises Ltd – This provides offshore support services to offshore E&P and infrastructure players around the globe.
- Other subsidiaries, such as RAAS Equipments and DMCC International Ltd – Provide miscellaneous services, as discussed in detail later in the article
Let’s take a detailed look at each of the business divisions.
Standalone business
Gas compression services – Deep Industries Ltd. provides gas compression services on a charter hire basis to E&P companies for various use cases. Gas compression is required to increase the wellhead pressure in mature wells where the mature well pressure is no longer enough to help bring gas from the well to the surface. Gas compression services are also needed to increase gas pressure in transportation pipelines and to convert boil-off gas back into LNG in storage tanks. Gas compression is also required at gas-driven power plants to increase gas pressure.
Deep Industries Ltd. purchases gas compression systems from US companies and deploys them on a charter hire basis with E&P companies in India at wellheads and gas gathering stations. Gas compression services comprise ~35-40% of Deep Industries Ltd’s standalone revenues. EBITDA margins in this segment are very high, at around 55-60%. Deep Industries Ltd. claims to have an 85% market share in the outsourced segment of gas compression, with the other competitors being local players.
Drilling and workover rig services –
Drilling and workover rigs are onshore structures used to extract oil and gas from wells. Drilling rigs have various components, such as drill bits, drill pipes, mud systems, and processing systems. Rigs are typically mobile units that can be re-deployed to new locations once an oil well is completely drilled.
Drilling rigs are used specifically for the period of initial well drilling, whereas workover rigs are used to carry out future maintenance and enhancement activities at the well post initial drilling.
Drilling and workover rig services comprise ~35% of the standalone revenues of Deep Industries Ltd. Drilling services margins are much lower than gas compression services margins. Over the last 3 years, the % of revenues from drilling services has increased in Deep Industries Ltd’s standalone revenues. This has resulted in blended EBITDA margins coming down from 50%+ levels to 40% levels over the last 3 years.
Deep Industries Ltd. owns 17 rigs of various sizes. Within the rig fleet, 6 rigs are drilling rigs, and 11 rigs are workover rigs. Deep Industries Ltd. purchases rigs from China. Drilling rigs typically cost ₹ 45-50 Cr, whereas workover rigs can cost between ₹ 15-25 Cr based on capacity. Rig contracts are typically for a period of 3 years and are awarded based on tenders. Deep Industries Ltd. tries to recover the capital expenditure of a new rig within the first 3-year contract period. This enables them to bid more aggressively for subsequent contracts, resulting in a high re-bid success rate for Deep Industries Ltd.
Unlike the gas compression services business, Deep Industries Ltd. faces fair competition in the rig services business. Deep Industries Ltd. claims to have a 30% market share among outsourced onshore rigs. Other competitors in this space are John Energy, GTC, and Essar Oil.
Gas dehydration services –
Under this segment, Deep Industries Ltd. provides gas dehydration services via gas dehydration units (GDU) on a charter hire basis to E&P companies. Gas dehydration involves removing water and other heavy hydrocarbons from the drilled gas before pumping it into transportation pipelines. This is an essential process because water vapour in gas can cause the formation of hydrates in pipelines and gas processing equipment, leading to blockages and efficiency losses and, in extreme conditions, dangerous blasts and explosions. This segment comprises ~10% of Deep Industries Ltd’s standalone entity’s revenues, and this is also a high-margin segment like gas compression services.
New value added services – Integrated Project management and charter-hire of entire gas processing facilities
Over the last few years, Deep Industries Ltd. has sought to provide more value-added services to its E&P clients. With this initiative, Deep Industries Ltd intends to take over more well-head processing activities from E&P players, thus freeing up their time and bandwidth to pursue core activities such as exploration and handling challenging oil and gas fields. Deep Industries Ltd has launched two services under value-added services.
Integrated Project management services – This involves turnkey contracts to drill and complete a well or a set of wells. IPM involves well-completion services in addition to drilling. Well-completion services involve activities such as cementing, geophysical logging, hydro-fracturing, etc.
Charter hiring of entire gas processing facility – Under this segment, Deep Industries Ltd. is offering a turnkey EPC solution on a charter hire basis for receiving, processing, and delivering oil and gas at custody transfer points. Custody transfer points are designated locations where ownership of hydrocarbons changes hands from the producer to the buyer. Deep Industries Ltd. has already executed one such contract for Cairn India Ltd. for its Project Jaya in Bharuch, Gujarat.
Value-added services currently comprise ~10% of Deep Industries Ltd.’s standalone entity’s revenues. Margins in this segment are lower than the company average, but the entire business is incremental for Deep Industries Ltd. These value-added services enable Deep Industries Ltd to tap into revenues from its clients to which it previously did not have access. There is no domestic competition for value-added services for Deep Industries Ltd. The only potential competition arises from MNCs such as Baker Hughes, Schlumberger, etc., but Deep Industries Ltd. claims to have cost advantages over these MNC companies in providing these services.
Dolphin Offshore Enterprises Ltd.
Deep Industries Ltd. completed the acquisition of Dolphin Offshore Enterprises Ltd. in Dec 2022 via NCLT for ₹ 27 Cr. This marked its foray into the offshore oil and gas support services segment. At present, Deep Industries Ltd. holds a 75% stake in Dolphin Offshore Enterprises Ltd. Dolphin Offshore Enterprises Ltd. is a publicly listed company.
Dolphin Offshore Enterprises Ltd. has been providing integrated offshore services to E&P companies for 40 years and has a peak revenue and EBITDA of ₹ 400 Cr and ₹ 120 Cr, respectively, with a strong client list and experience operating in multiple international offshore locations.
Dolphin Offshore Enterprises Ltd provides various services, such as
1. Diving and underwater repair services
2. Rig and ship repair services
3. Turnkey offshore EPC projects.
At present, Deep Industries Ltd. is only focused on operationalizing one asset of Dolphin Offshore Enterprises Ltd., which is the dynamically positioned barge called Prabha. A DP barge is an offshore vessel equipped with a dynamic positioning system that allows it to maintain a precise location on water. A DP barge is used for various activities such as offshore drilling, construction support, surveying, and logistical operations.
The asset is currently undergoing renovation as it has not been operational for the last 3 years. Deep Industries Ltd. has spent ₹ 100 Cr in renovating and refurbishing the asset, and it is expected to get deployed in Mexican waters in H2 FY25. Deep Industries Ltd expects that the asset will be able to enter a 3+ year contract with a revenue potential of ₹ 100 – 125 Cr per year and EBITDA margins of 55%+.
Apart from the revenues earned by Prabha, Dolphin Offshore Enterprises Ltd has already taken up a repair works contract, which can generate ₹ 40 Cr revenues for FY25 at healthy EBITDA margins. Overall, management expects Dolphin Offshore Enterprises Ltd. to generate ₹ 70-80 Cr revenues in FY25 and ₹ 150-200 Cr revenues in FY26 as Prabha gets deployed for the full year in FY26. EBITDA margins at the Dolphin Offshore Enterprises Ltd level are expected to be north of 50%.
Other subsidiaries
Apart from Dolphin Offshore Enterprises Ltd., Deep Industries Ltd. also has a couple of other relevant subsidiaries – Deep International DMCC and RAAS Equipments.
- Deep International DMCC – Deep International DMCC is an international subsidiary of Deep Industries Ltd. based out of Dubai. It provides gas processing services across the Middle East, Africa and Asia. In FY24, Deep International DMCC recorded revenues of ₹ 36Cr and a PAT of ₹ 9.5 Cr.
- RAAS Equipments – RAAS Equipments is a subsidiary which produces advanced booster compressor packages for gas compression and transportation. This subsidiary was floated to take advantage of emerging City Gas Distribution networks. However, management has said that demand has not been coming up as per their expectations, as companies that have won CGD contracts are delaying network expansion. In FY24, this subsidiary recorded revenues of ₹ 8 Cr and recorded a PAT loss of ₹ 50 Lakhs. In FY25, the company expects RAAS to do revenues of ₹ 18-20 Cr.
Deep Industries Ltd Corporate governance
Board Composition – Deep Industries Ltd. board comprises 6 Directors, with 3 Independent Directors, meeting the requirement of at least 50% Directors being independent. The Independent Directors bring experience across Company Secretaryship, Chartered Accountancy and administration (ex-IAS) to Deep Industries Ltd Board.
Promoter Remuneration – The total remuneration drawn by promoters and their related parties (relatives and enterprises over which promoters exercise control) in the form of salaries and rent amounted to ₹ 3.4Cr in FY24. This amounted to < 3% of the PAT of Deep Industries Ltd for FY24.
Related Party Transactions – The only material related party transaction worth flagging is a loan worth ₹ 59Cr given by Deep Industries Ltd. to Prabha Energy Pvt Ltd., which is a 53% subsidiary of Deep Energy Resources Ltd. where the promoters also hold a significant stake privately. The interest received against this loan for the year was merely ₹ 17 Lakhs, which amounts to an interest rate of 0.3%. Therefore, this is virtually an interest-free inter-corporate loan.
Contingent Liabilities – The total contingent liabilities for Deep Industries Ltd. on account of disputes or claims not acknowledged as debt amounted to ₹ 10Cr, which is < 1% of the net worth of the company and hence not material.
Insider trading allegations against promoters – SEBI levied penalties on one of the promoters of Deep Industries Ltd., Mr. Rupesh Savla, in April 2018 to the tune of ₹ 1.75Cr, accusing him of making unlawful gains by trading in his company’s stock based on unpublished price sensitive information (UPSI) between July-Oct 2015
Deep Industries Ltd Financial Performance
Post demerger, Deep Industries Ltd. (the resulting company) got listed on the stock exchanges in April, 2021. The appointed date of the demerger was fixed as April 1, 2017. Thus, the financial numbers of the hived off entity are available from FY18, although the demerger was completed only in FY21 and the shares of the resulting company were listed on the exchanges only in April, 2021.
Since the listing, Deep Industries Ltd. has delivered impressive financials. Since FY21, revenues for Deep Industries Ltd. have compounded at a CAGR of 30%, while EBITDA and PAT have compounded at a CAGR of 27% and 24% respectively.
Deep Industries Ltd Return ratios, Cash Conversion and Debt ratios
ROE and ROCE have averaged at a less than impressive high single digits. Deep Industries Ltd. carries substantial goodwill on its balance sheet since the demerger. Adjusting for goodwill, the ROE and ROCE for Deep Industries Ltd. for FY24 was 12.2% and 14.3% respectively. In spite of being a B2B/B2G company, Deep Industries Ltd. has managed to convert > 75% of its EBITDA into cash flow from operations, demonstrating good control on working capital management.
Deep Industries Ltd Comparative Analysis
To understand Deep Industries Ltd investment potential, we have conducted a comprehensive analysis. This analysis includes comparing Deep Industries Ltd to its competitors (peer comparison) on various fundamental parameters and Deep Industries Ltd share performance relative to relevant benchmark and sector indices.
Deep Industries Ltd Peer Comparison
It is difficult to find an exact listed peer for Deep Industries Ltd. Hence, for comparison purposes, we have picked up a few companies that are present in the oil services segment.
- GE Shipping provides transportation of oil and bulk commodities via owned oil tankers and bulk ships. It also has a subsidiary that provides offshore support services via its fleet of offshore rigs and offshore support vessels.
- Asian Energy Services provides oil and gas and mining services. In the O&G sector, it provides 2D and 3D seismic data acquisition services and oilfield asset operations and maintenance services.
- Seamec provides offshore support services via its fleet of diving support vessels, barges, and offshore support vessels.
- Jindal Drilling provides offshore support services via charter hiring of its fleet of offshore rigs.
GE Shipping seems to have the best numbers among the peer group, with superior return on capital metrics compared to peers. Deep Industries Ltd compares quite favourably with its peers on all parameters. It is clear that growth has been very robust amongst oil and gas support services providers in the last 3 years with the revival of the oil and gas cycle post-Covid. However, oil and gas support services companies seem to struggle to post double-digit return ratios over a cycle (with the exception of GE Shipping). Adjusted for the goodwill on its books, Deep Industries Ltd.has double-digit ROCE and ROE metrics.
Deep Industries Ltd Index Comparison
Deep Industries Ltd share performance vs S&P BSE Small cap Index as the index benchmark comparison is a fundamental tool for understanding the investment potential and making informed decisions in the context of the broader market
Why You Should Consider Investing in Deep Industries Ltd?
Deep Industries Ltd offers some compelling reasons to track the this microcap closely and to consider investing if one is looking to build positions in the oil and gas sector.
Leading company in providing upstream onshore gas services in India – Deep Industries Ltd. has been in the business of providing onshore upstream services to oil and gas players since 1991. Deep Industries Ltd. has a very strong presence across gas processing services such as gas compression and gas dehydration. The company claims to have > 85% market share in outsourced gas compression, where there is virtually no competition from any other players, according to management.
Deep Industries Ltd. is deepening its capabilities in the gas processing segment by introducing value-added services to its clients, such as integrated production management and charter-hiring of the entire gas processing facility. These services are aimed at taking a larger share of upstream oil and gas processing activities from E&P players and letting the E&P players focus on their core competencies, such as discovering new oil fields and focusing their energies on operations in challenging oil and gas fields.
Govt. push towards enhancing natural gas mix in India’s energy pie – In order to push clean energy initiatives, the Indian Govt. has a stated objective of increasing natural gas mix in India’s energy consumption profile from 6% in 2023 to 15% in 2030. Natural gas is a cleaner fuel than diesel and gasoline. Currently, around 50% of India’s domestic natural gas consumption is met by domestic production, while the rest is met by LNG (liquefied natural gas) imports. LNG prices in international markets are volatile and vulnerable to geopolitical uncertainties. Therefore, the government wants to maximise the domestic production of natural gas to the highest extent possible. This push to enhance domestic production should benefit Deep Industries Ltd., which is the country’s leading gas E&P services provider.
Strong growth guidance by management in standalone business – Deep Industries Ltd Management is confident of delivering 30% YoY growth in the standalone business for a few years to come. Management has flagged that the current standalone order book is the highest ever for Deep Industries Ltd, and the bid pipeline for new orders is also unprecedented in their 30-year history. With the recently received ₹ 1400 Cr order from ONGC Ltd. contributing ₹ 100 Cr to standalone revenues each year starting from FY26, this kind of growth guidance does not look outlandish at this stage.
Offshore growth optionally has opened up with Dolphin acquisition – With the acquisition of Dolphin Offshore Enterprises Ltd. and the impending mobilisation of its barge asset in Mexican waters, Deep Industries Ltd. will open up growth in the offshore oil and gas services segment. Deep Industries Ltd. is presently negotiating a long-term contract for the deployment of Dolphin’s barge asset, Prabha, in Mexican waters. The contract is expected to start from Nov 2024. Management expects Dolphin Offshore Enterprises Ltd. to report revenues of ₹ 70-80 Cr in FY25 and ₹ 150 Cr+ in FY26. EBITDA margins in this segment are expected to be > 50%.
What are the Risks of Investing in Deep Industries Ltd?
Investors need to keep the following risks in mind if they choose to invest into this business. Risks needs to be weighed in combination with the advantages listed above to arrive at a decision that is optimal for your portfolio construct
Oil and gas is a cyclical industry – The oil and gas industry is very asset-heavy and is, therefore, very susceptible to global slowdowns in demand. There have been multiple periods of global demand shocks in the last few decades, which have led to a collapse in oil prices and further stress for E&P companies and allied service providers. For example, during the shale oil boom in the USA between 2014-16, oil prices collapsed from 115$ per barrel to 30$ per barrel, leading to severe stress for companies operating in the upstream oil and gas value chain.
Deep Industries Ltd.’s standalone business is less prone to such disruptions because it primarily caters to domestic onshore E&P companies. India’s domestic oil and gas production activities are expected to remain stable, irrespective of fluctuations in global oil prices, as India wants to reduce its dependency on imports. However, its subsidiary, Dolphin Offshore Enterprises Ltd.’s business, can be prone to disruption due to significant oil price fluctuations. Offshore oil fields may become unremunerative below a certain oil price per barrel, leading to pressure on charter hire rates for Dolphin Offshore Enterprises Ltd. and even cancellation or non-renewal of contracts.
High customer concentration – Deep Industries Ltd. has a highly concentrated customer base, with the bulk of the revenues coming from ONGC Ltd and the rest from players like Oil India Ltd, Vedanta Ltd, and Reliance Industries Ltd. The oil and gas services industry provides services to E&P players, which are few in number and usually large in size. Hence, structurally, this industry has high customer concentration. This is a feature of the industry and cannot be avoided. This exposes Deep Industries Ltd. to certain risks. A deterioration in relationship with a large client like ONGC Ltd, leading to the cancellation of existing contracts or debarment from participation in future contracts, can have a severe impact on Deep Industries Ltd.
Something like this happened to Deep Industries Ltd. in the past when ONGC Ltd cancelled two gas dehydration contracts awarded to Deep Industries Ltd, citing irregularities, and blacklisted Deep Industries Ltd. for a period of 2 years in 2017. Deep Industries successfully challenged both steps in court and managed to get a ruling in its favour, which led to damages being paid by ONGC. However, there is no guarantee that a similar incident will not recur in the future, leading to significant financial pain for Deep Industries Ltd.
Delay in deployment of Dolphin Offshore asset – Deep Industries Ltd. had originally intended to renovate and deploy Dolphin Offshore Ltd’s barge called Prabha in a new contract by the start of FY24. However, renovations and contract negotiations have taken more time than anticipated, and now the management expects the contract to start from Nov, 2024. Any further delay in the asset being deployed will lead to opportunity costs for the company. Market participants may even start speculating that Deep Industries Ltd. is finding it difficult to deploy the renovated asset at remunerative charter hire rates.
Production enhancement contract may not work out as expected – The recent production enhancement contract received by Deep Industries Ltd. from ONGC Ltd is a very large order and the first of its kind to be executed by Deep Industries Ltd. While management sounds very confident about delivering the agreed upon production enhancement from the Rajahmundry oil fields, any shortfall may lead to penalties being levied on Deep Industries Ltd. by ONGC Ltd. This can upset the economics of the new order and make it unremunerative. The risk cannot be discounted entirely, as this is the first such order undertaken by Deep Industries Ltd.
Dolphin Offshore receivables – Dolphin Offshore Enterprises Ltd. has receivables outstanding to the tune of ₹ 140 Cr, which are due for more than 3 years. This is to be expected in a company that has emerged from bankruptcy proceedings. As per Deep Industries Ltd.’s management, most of the receivables are due from large, established clients like ONGC Ltd and are thus of good quality. The management has also indicated that they have recently won arbitration awards pertaining to certain disputed receivables, although the quantum has not been specified.
Deep Industries Ltd Ltd Future Outlook
Deep Industries Ltd. looks to be a solid growth path for the medium term. With an order book of ₹ 2700 Cr in the standalone business and the Dolphin Offshore asset about to be deployed, the management has indicated their confidence of growing at 30% YoY for a few years and Dolphin Offshore Enterprises Ltd. will not need to pay taxes in FY25 and FY26 due to accumulated past losses.
Based on a conservative back-of-hand calculation We believe Deep Industries Ltd. can print a consolidated PAT of ₹ 150 Cr+ in FY25 and ₹ 200 Cr+ in FY26. At current MCap of 2580 Cr, this would place Deep Industries at 16.7x FY25 PAT and 12.5x FY26 PAT.
Deep Industries Ltd Technical Analysis
We consider technical analysis to be a useful input in taking medium-term investment decisions. Many a time price action tends to lead to fundamental developments; this is too important an aspect to be ignored by retail investors who do not have access to management outside of common forums like investor calls & AGM.
At Congruence Advisers we like to consider both the long-term weekly chart and the daily chart to arrive at a view on price action. Combined with our understanding of fundamentals, we usually end up being better placed to be able to judge both the business cycle and the stock cycle. Playing the stock cycle right is extremely important for investors looking to extract significant alpha over the medium term.
Deep Industries Ltd Price Charts
On weekly charts, since Deep Industries Ltd listing in April 2021, Deep Industries Ltd stock has moved beautifully within an upward sloping parallel channel. Deep Industries Ltd stock got listed quite cheap and with impressive YoY performance since listing, Deep Industries Ltd stock price has nicely gone up in the last three and a half years. After nearly hitting 280 levels in August, 2023, Deep Industries Ltd stock consolidated for 7 months before breaking out with significant volumes in March, 2024. Deep Industries Ltd stock then re-entered a consolidation phase between March-August 2024 between the price band of 285-325. Following that, Deep Industries Ltd stock again broke out in late August and created a gap-up in the second week of September with huge volumes following the announcement of the large ONGC contract win. The gap was filled a couple of weeks later and the gap boundary of ~400 was again re-tested in a market wide correction in the first week of October. Following the gap re-test, Deep Industries Ltd stock bounced back on higher volumes, creating a new ATH in October.Deep Industries Ltd stock looks strong technically and the gap boundary of ~400 should act as strong support for the stock in the near future.
On daily charts, one can see the two consolidation bands between Oct, 2023 to March, 2024 in the price range of 231-273 and between April, 2024 and August, 2024 in the price range of 273-330. Between 9th Sep, 2024 and 14th Oct, 2024 one can see the gap-up on extremely high volumes, followed by an ATH of 477, followed by closure of the gap, followed by a re-test of the ATH, followed by another re-test of the gap boundary of 400, followed by recovery and a new ATH of 500+.
In terms of moving averages, Deep Industries Ltd stock has consistently traded above its 200 DMA average in the last 1 year. Since the Lok Sabha election results were declared, Deep Industries Ltd stock has consistently traded above its 100 DMA and 50 DMA averages. Even in the two brief marketwide corrections in August and Oct 2024, Deep Industries Ltd stock did not breach its 50 DMA average.
In the near term, the 50 DMA average of 407 looks like a strong support level. On the upside, good results in Q2 FY25 and news regarding contract signing for the Dolphin Offshore asset can result in the stock trading on a sustained basis above the previous ATH of 477.
Deep Industries Ltd Latest Latest Result, News and Updates
Deep Industries Ltd Quarterly results
Deep Industries Ltd. posted strong consolidated results in Q1 FY25, recording a revenue growth of 22% YoY from ₹ 101 Cr to ₹ 123 Cr. EBITDA grew by 19% from ₹ 43 Cr to ₹ 51 Cr and PAT grew by 26% from ₹ 31 Cr to ₹ 39 Cr.
On a standalone basis, Deep Industries Ltd. recorded a revenue growth of 25% YoY from ₹ 90 Cr to ₹ 112 Cr in Q1 FY25. Standalone EBITDA grew by 22% YoY from ₹ 37Cr to ₹ 45 Cr and standalone PAT grew by 30% YoY from ₹ 24 Cr to ₹ 30 Cr. Deep Industries Ltd subsidiary, Dolphin Offshore, recorded a revenue of ₹ 8.4Cr in Q1 FY25 with an impressive EBITDA margin of 74% and recorded a PAT of ₹ 7.6 Cr.
Deep Industries Ltd. received a very large order worth ₹ 1402 Cr on 6th September, 2024 from ONGC Ltd for 15 years. The order received is a production enhancement contract for ONGC’s Rajahmundry onshore asset. As per this contract, Deep Industries Ltd. will help in increasing production of oil from ONGC’s Rajahmundry asset by implementing advanced techniques and higher efficiencies and in return will get a 64% share of revenues from incremental production delivered from the field. The ₹1402 Cr order value has been calculated at gas prices of 7$/MMBtu whereas current gas prices are 11-11.5$/MMBtu as per management. Hence, they expect to close the ₹ 1402 Cr order execution much before the tenure of 15 years. This order will start executing in FY26. Deep Industries Ltd. claims that it has intimate knowledge of the Rajahmundry asset as they have been providing services to that oil and gas field for multiple decades and hence does not anticipate any downsides to the revenue sharing based order value. With this order, Deep Industries Ltd’s standalone order book stood at ₹ 2700 Cr as of Sep, 2024.
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Disclosure (Updated as of Oct 30, 2024) – No position in the stock in personal portfolio
