HAL Offshore Ltd (HAL) is an unlisted public company, part of Delhi based MM group and a leading ‘End to End’ solution provider of underwater services and EPC services to the Indian Oil and Gas Industry catering complete need of both offshore and Onshore requirements. The company has two distinct businesses viz., EPC & Vessel Division and Investment Division (consist of investment in real estate, shares and other securities), major clients being ONGC, Oil India and Cairns. Having a Networth of Rs 216.93 crores as on June 30, 2017.

Seamec Ltd is a listed public company and a subsidiary of HAL offshore, one of the largest provider of diving support vessel in the Asia Pacific region, has experience in the ongoing subsea inspection, repair, maintenance and light construction required for the efficient and productive support of offshore oil production. The Company has a market cap of Rs 452 crores, shares are listed on BSE and on NSE.

Transaction

  • HAL offshore will demerge its EPC & Vessel Division business into Seamec Ltd with an appointed date of 1st July, 2017. Total consideration is around Rs 54 crores which is to be discharged as follows:
    • 10 shares of Rs 10 each of Seamec for every 30 shares of HAL offshore.
    • 99 6% Non-cumulative Compulsory Redeemable Preference shares of Rs 10 each of Seamec for every 30 shares of HAL offshore, for a period of 20 years with a redemption premium of Rs 151 per share.
  • Reason to issue preference shares is to avoid non-compliance of SEBI’s requirement of minimum Public shareholding in listed companies (Refer Shareholding pattern table).
  • Post demerger there will not be any change in management

HAL-Offshore-Demerger-Seamec-1

Shareholding Pattern

Table 1: Pre & Post Merger Shareholing Pattern

Shareholder HAL Offshore** Seamec Ltd (Pre-Merger) Seamec (Post Merger)
No of Shares % Holding No of shares % Holding No of shares % Holding
Promoter Group 1,48,73,780 100% 1,76,87,475* 69.57% 2,26,45,401 74.53%
Public 77,37,525 30.43% 77,37,525 25.47%
Total 1,48,73,780 100% 2,54,25,000 100% 3,03,82,926 100%

*Shares held by HAL Offshore Ltd
**No change in shareholding post demerger

Financial

Table 2: Brief financials as on Mar-17 (Amount in Rs Cr)

Particular HAL Offshore Seamec
Net Worth 247.22 271.41
Turnover 379.92 225.18
Total Expenditure 302.09 370.64
PBT 77.83 (145.46)
PAT 48.87 (149.59)
Cash Profit 87.33 39.53
EPS 26.15 (58.84)
Book Value 129.64 106.33

Table 3: EPC & Vessel Division of HAL offshore Ltd as on June-17

Particular Amt (Rs. in Cr
Assets
Non-current Assets 85.62
Current Assets 164.45
Total (A) 250.07
Liabilities
Non-current Liabilities 54.96
Current Liabilities 145.31
Total (B) 200.27
Net Assets (A-B) 49.80
Net worth of HAL offshore Ltd 216.93
% Contribution in total NW 23%
Turnover (June Qtr.) 95.99
PAT (June Qtr.) 18.92

Margins

EPC & Vessel division of HAL offshore is having a healthy profit margin of 20%, whereas Seamec is struggling to get profits from existing business.

For HAL offshore June Qtr. entire revenue and profit are coming from EPC & Vessel Division (Mar-17 figures of EPC & Vessel division are not available)

Particulars HAL Offshore Ltd EPC & Vessel Division Seamec Ltd
30-06-2017 31-03-2017 30-06-2017 30-06-2017 31-03-2017
Income from Operations (A) 95.98 356.76 95.99 53.95 207.57
Total Income 96.97 379.92 95.99 58.53 225.17
PAT (B) 17.94 48.87 18.92 1.00 -149.59*
PAT Margin % (B/A) 19% 14% 20% 2% -72%
EPS 12.06 32.86 12.72 0.39 -58.84
Annualised EPS (including EPC division) 20.22**

*due to provision of Rs 138 crores in the books for doubtful debts
**On annualised basis after actual profit of June & Sept-17 qtr. of Seamec Ltd

Accounting Treatment

In the books of HAL Offshore (Demerge company)

  • All assets and liabilities of demerged undertaking will be reduced from the books of HAL offshore at respective book value.
  • Difference between assets and liabilities pertaining to demerged business will be adjusted against securities premium and other reserves and surplus.

In the books of Seamec Ltd (Resultant company)

  • It shall record all assets and liabilities at their respective book value
  • Any difference between net asset and the aggregate face value of new equity and Preference shares issued shall be credited/debited to the capital reserve.Table 4: Accounting Treatment in the books of Seamec Ltd (Resultant company)
    Particular Amount (in Cr)
    Net Asset of EPC division 49.80
    Issue of Equity & Preference Sh. 54.04
    Adjustment to Capital Reserve (Debit) 4.24

 

Valuation of EPC & Vessel Division

  • Demerged division is valued at 3.64 times of Seamec Ltd.’s weighted average share price, which gives total valuation of Rs 872 crores for the EPC & vessel Division. Out of which, approx. 10% is paid by way of Equity share capital and balance by way of Preference Shares.
    Particular EPC & Vessel Division
    No of shares 1,48,73,780
    Fair value per Share* 586.3
    Total fair valuation 8,72,04,97,214

    *As per valuation report

  • Revised Earning per shares of Seamec including EPC division will be Rs 20.22 as compare to Rs (58.84) per share(Mar-17) on annualised basis considering actual figures of June and Sept quarter of Seamec and annualised figures of EPC division. Considering present cash flow, it will be difficult for Seamec to redeem preference shares out of its operating cash flow. Further, it will not be able to have free cash flow for expansion till it make arrangements for redemption of preference shares
  • Net asset value attributable to equity shareholders of Seamec post demerger will be around Rs 105 per share no major change from pre-demerger.

Other information

  • Seamec has become subsidiary of HAL offshore with effect from 3rd June 2014 by acquiring 75% stake from Coflexip Stena Offshore Mauritius Ltd.
  • Seamec has offered its shareholders Buyback of 8,47,5000 shares @ Rs. 125/- per share. Buyback commenced on 2nd November, 2015 and concluded on 19th November, 2015. Consequent upon Buyback of shares promoter’s shareholding stands at 1,85,27,475 (72.87%), further promoter divests 3.3% stake in June quarter making it to 69.27% in the company.
  • Seamec has given a vessel and work class remotely operated vessel on hire to HAL offshore for its projects in year 2016 for a period of 3 years at a cost of USD 30,540/day.
  • HAL is paying Mr. Sanjeev Agrawal (one of the promoter Rs. 3 crores per Quarter wef Oct 2016 for Corporate Advisor to the company, it is not clear whether it is in relation to EPC & Vessel business or as company as whole and whether it will be continued to be paid post demerger.
  • HAL offshore has carried out a reduction of share capital through buy-back of shares, share capital is reduced from Rs 19.06 crores to Rs 14.87 crores.

Seamec Ltd Shareholding pattern for other transactions:

Particular Pre Buy-back Post Buy Back Post disinvestment
Sep-15 % Dec-15 % Jun-17 %
Promoter Group 2,54,25,000 75% 1,85,27,475 72.87% 1,76,87,475 69.57%
Public 84,75,000 25% 68,97,525 27.13% 77,37,525 30.43%
Total 3,39,00,000 100% 2,54,25,000 100% 2,54,25,000 100%

Demerger Impact

To Seamec

  • 90 crores Preference shares are to be redeemed at a value of Rs 161 which comes out to be Rs 790 crores, from where company will get the money to pay off this amount as currently company does not have any major cash flows.
  • Preference shares are carrying Put and call option for early redemption, company need to have funds to pay off the same in case of option exercised.
  • Margins and earning per share will certainly improve after consolidation of EPV division from the existing level, constant improvement is needed for future sustainability and repayment of preference shares.

To HAL offshore

  • HAL shareholders will get the good valuation for EPC & Vessel division, which otherwise would have not possible being unlisted.
  • Management can now focus and work on improving the profitability and margins of Investment division.

Conclusion

Demerging EPC & Vessel division into Seamec will consolidate onshore and offshore business and give impression that it will help Seamec to improve its margins and will contribute in much needed profits. But redemption/repayment option to preference shareholders of Rs 800 crores is big challenge for the future growth of the merged entity. Promotors are now assured of tax free returns though insignificant till the same is redeemed Further company need to improve revenue and cash flows to arrange the fund for redemption of preference shares.  So, unless merged entity is able to scale up and diversify into lucrative EPC business and as a result improve its profitability, transaction will create more value for HAL offshore’s shareholders by protecting the downside for 90% of its assets value transferred.

Please feel free to share/retweet the article and as always you can write down in the comment box below for anything related to the article. We would love to answer.
print