Policy Support For Gas Infrastructure Will Drive Long Term Contract Opportunities

Catalysts

About Deep Industries

Deep Industries provides oil and gas services including onshore drilling, workover operations, gas processing and production enhancement contracts.

What are the underlying business or industry changes driving this perspective?

• Government measures to open more exploration acreage, shrink no go zones and promote an exploration first approach in India increase the potential project pool for onshore drilling and integrated services, which can support order inflows and revenue visibility.
• Policy support for natural gas as a bridge fuel and expansion of gas pipeline and LNG regasification infrastructure create more demand for gas processing and compression services, which can help sustain utilisation levels and operating margins.
• Royalty reforms that aim to improve economics for upstream producers encourage more drilling and production activity, which can support Deep Industries' rig utilisation and contribute to EBITDA and earnings from new and renewed contracts.
• Long duration production enhancement contracts with free gas price mechanisms are positioned to benefit if gas prices remain supportive, which can lift project level cash flows, overall EBITDA margin and earnings contribution over time.
• Plans to add higher capacity drilling rigs, expand offshore assets through Dolphin Offshore and pursue new PEC tenders increase the addressable opportunity set, which can feed into order book growth, revenue scale and returns on newly deployed capital.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Deep Industries's revenue will grow by 19.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.7% today to 31.3% in 3 years time.
• Analysts expect earnings to reach ₹5.1 billion (and earnings per share of ₹79.21) by about May 2029, up from ₹1.8 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.8x on those 2029 earnings, down from 15.8x today. This future PE is lower than the current PE for the IN Energy Services industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.9%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Long dated production enhancement contracts depend on safe and uninterrupted operations. The recent gas leak and stop production order at the Mori 5 well show how safety or environmental incidents can delay volumes, which can weigh on revenue and earnings if similar events recur or if regulators impose tighter conditions that slow activity.
• The order book is revolving around ₹3,000 crores, and management commentary suggests that future revenue growth relies on winning new tenders in areas such as higher capacity rigs, new PECs and offshore. Any slowdown in tendering, increased competition or failure to secure bids at attractive terms could limit top line growth and pressure margins and earnings.
• The business is planning sizeable CapEx, including around ₹300 crores in FY 2027 and potential spending of around ₹100 crores to ₹120 crores per higher horsepower rig, which increases execution and return risk. If utilisation or pricing are weaker than expected, this could drag on return ratios and dilute cash flow and net margins.
• Exposure to subsidiaries and legacy assets, including earlier write offs of ₹2.08b of Kandla receivables and continuing reliance on arbitration outcomes for around ₹160 crores of Dolphin receivables, points to residual balance sheet risk. Any further write downs or slower collections could affect reported profit, cash conversion and reported equity.
• The company benefits from current policy support for domestic oil and gas, including royalty changes and expansion of gas infrastructure. Longer term shifts toward alternative energy and electrification, or a change in government priorities or pricing frameworks, could limit new drilling and gas processing work, which would affect revenue growth and potentially compress EBITDA margins and earnings over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹650.0 for Deep Industries based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ₹16.3 billion, earnings will come to ₹5.1 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 12.9%.
• Given the current share price of ₹445.6, the analyst price target of ₹650.0 is 31.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.