United Drilling Tools Limited- A Company To Benefit from Favourable Market Dynamics
United Drilling Tools Limited has delivered industry leading performance as it has executed long-term growth strategy. The company has expanded international presence to maintain its growth appetite. Financial soundness is exhibited as it has doubled its capacity from its own investment funds. It is a debt-free company and generated INR143.52 crore in cash profit over past five years.
Overview of United Drilling Tools Limited
United Drilling Tools Limited is a single manufacturer of a range of oil drilling items including connectors, wireline winches, gas lift valves and large OD multi-start connectors in India. The company provides solutions and it has its presence across downhole tools, wireline, well service equipment and gas lift equipment. The company focuses on improving its global presence in 16+ countries such as USA, UK, Indonesia, UAE, Oman, Malaysia, Vietnam etc. It has 35 years of deep industry experience and addresses oil exploration & production sector. It offers installation training and onsite support and has capacity to handle large volumes of orders.
United Drilling Tools Ltd is being counted as one of world’s leading manufacturer of high-quality products and these find application in upstream operations. Production facilities of the company are specially adapted to manufacture standard precision equipments and special tools of international standards as per customer’s particular specifications.
Growth Enablers of United Drilling Tools Limited:
- Strong Base with Competitive Strengths: United Drilling Tools Limited has healthy financials, which gets exhibited from its revenue growth which has been over seven times over last 13 years. The company has a zero-debt balance sheet. It has seen consistent operational performance, with average order book size of INR800 million. Focus of United Drilling Tools Limited is on improving operational efficiency. The company continues to focus on growing its overseas opportunity. It aggressively scouts for opportunities in international market. Collaboration with US company concluded in Oct 2019, restricting its access to overseas market. The company enjoys benefit of competitive pricing as its products are cheaper by 15% to 25% against those of overseas players. In past, it has been successful to win against them in ICB tenders in India and it knows pricing mechanism. This is principally about cheap labour, lower overhead cost and being a part of MSME sector. Continuous R&D enhances the company’s quality of existing products and new product lines, enabling a range of business opportunities.
- Competitive Advantages: High-entry barriers, strong R&D team, healthy order mix and sizeable market share are some of competitive advantages lending support to United Drilling Tools Limited. The company has a benefit of first mover advantage and it has seen long learning curve in an industry with strict eligibility criteria and lower competition. Making new manufacturing facility, getting API certificates, arranging site visits, placing trial orders and successful run of products are definite pre-requisites for a new player to make its position in market. All of these factors lead to high-entry barriers and make entire process time-consuming, tedious and difficult for new venture to engage in manufacturing of hi-tech products. Since these products are critical in nature, it needs 5-7 years for approval to be a supplier to oil PSUs. The company has laid continuous thrust on technology improvement and expanding its product offerings. Technology is at centre of the company’s manufacturing, while being supported by innovation and prudent diversification.
- Strong Market Opportunity: India continues to increase production and there has been a growing demand of crude oil & gas in this country. India has been categorised as 3rd largest energy consumer globally while it produces only ~17% of total requirement for crude oil & gas. Studies reveal that demand for energy is expected to increase 3x by CY35 to 1,516 million tonnes. Indian Government continues to promote oil extraction and the company has been serving India's growing oil demand.
- Favourable Market Dynamics: There have been recent decisions from oil ministry which are expected to boost Oil & Gas industry and which should support the company’s performance. Oil drilling equipment and tools are needed to have 50% local content in first year, 60% in next 2 years and 70% in next two years for getting purchase preference. Preference for local content is expected to increase as state-run firms are likely to implement policy where local companies are expected to see more participation across value chain. Global market size of the company’s high-tech products is significant. Size of casing pipes and connectors and winches has been pegged at INR6,000 crore and INR2,000 crore respectively.
- Strategies Focused to Improve Business: In India, the company focuses on diversifying its product range and changing sale of its product mix. Both these strategies are expected to help the company expand revenues by ~40%. Plans are there to grow order book by improving its global outreach. The company has confirmed orders of INR400 million in hand. It has submitted bids for INR2500 million and it anticipates strong conversion of these bids into orders of INR1,200 million- INR1500 million. These should be executed in FY22. It has significant ability to scale higher. Capacity utilisation of the company at 50-60% exhibits high opportunity to speed up manufacturing. Increase of wallet share, expansion of capacities and focus on new technologies are expected to strengthen its presence in India. The company continues to increase registrations in international markets and add footprints in South East Asia, Middle East and Africa. It continues to scale capacities of all product lines.
- Strategies to Enhance Global Presence: Global market size from countries such as Middle East, United States, South America and South East Asia is pegged at INR10,000 crore and industry should compound at 8-10% over next 3-5 years. United Drilling Tools Limited has added a new customer named Aquatterra Energy in UK which led to a receipt of an export order worth INR1 crore in year FY21. The company executed this order in 1Q22. The company has an approved vendor status with some leading oil field drilling companies and oil service providers such as Cairn India, Focus Energy, Quippo Oil & Gas etc. It has hired marketing representatives in Dubai, Vietnam, UAE, Oman, United States and Indonesia. Over next five years, the company should be able to see its export order book grow multi-fold. It expects export order to make up 30% of business revenue over five years. Government has reserved tenders of up to INR200 crore for Indian companies and this gives Indian companies an edge to extract its business from overseas oil drilling companies. The company now aims at acquisition of companies engaged in manufacturing of inputs which should help it increase product range with help of new product developments or M&As. These acquisitions are expected to reduce cost of production and enhance revenue and profit margins of the company.
Conclusion
In 3Q22, United Drilling Tools Limited saw net income of INR4,614.26 lakhs, exhibiting 41% growth year-over-year. Its EBITDA jumped 30% year-over-year to INR1,995.14 lakhs. Net profit of the company was INR1,303.42 lakhs, exhibiting year-over-year growth of 8%. The company has confirmed 7,000 lakhs orders in hand. The company has seen several developments in 3Q22 as it has got design patent registered in UK for multi-start casing pipe connectors, metal to metal seal casing pipe connectors and weight set casing pipe connectors. Registration remains valid for 5 years. The company appointed marketing representatives in Egypt, Libya and Vietnam to promote products. This should help the company expand market base in these countries.
The company has gained significant market share in India and it has its eyes on international markets. These markets have an estimated market size of ~INR7,000 crore. United Drilling Tools Limited is positive on its international expansion, giving it confidence to work out on additional manufacturing unit closer to port at Mundra, Gujarat.
Stock of the company has gone up by ~89.4% between Mar 22, 2021- Mar 17, 2022. This strong increase in its stock price stemmed from integrated value chain, technologically advanced operating facilities and strategised order acquisition.
Comparatively, SENSEX has risen by only ~16.3% between Mar 22, 2021- Mar 17, 2022.
Factoring in its healthy order mix and growing product portfolio, the company should be able to compound its EPS at ~35.98% over FY18-FY22E. At its CMP, stock of the company trades at ~30.59x of FY21 EPS. This compares to sectoral average of ~41.12x, exhibiting that stock trades at deep discount. This means investors can consider going long on this stock.
