Analysis: Asian Energy Services Ltd

The current section of the “Analysis” series covers Asian Energy Services Ltd, previously known as Asian Oilfield Services Limited, an Indian company specializing in generating seismic data for oil & gas exploration. The company also provides operation and maintenance of oil & gas production units.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Asian Energy Services Ltd Research Report by Reader

Dear Dr  Vijay

Attached is my analysis of Asian Energy Services Ltd based on my learning with you. Please let me know your views.

Thanks.

Sunil Udupa

Business Analysis of Asian Energy Services Ltd

The company is a service provider for the oil & gas industry with the primary offering of 2D and 3D seismic services to locate hydrocarbon deposits.  It has recently expanded into providing other services including turnkey drilling, production facility construction (EPC), facility operation and maintenance (O&M) and Enhanced oil recovery.

Asian Energy Services Ltd has a technical collaboration with the Geophysical Institute of Israel (GII) mainly for seismic detection technology.

The company has a global presence and operate in India, Iraq, Nigeria, Myanmar, Indonesia and Dubai.

Asian Energy Services Ltd has collaborated with Wireless Seismic, one of the largest onshore producers and the largest user of seismic data in the United States, to provide real-time seismic data acquisition.  This collaboration will provide Asian Energy Services Ltd with superior technical expertise.

Order Book of Asian Energy Services Ltd:

The company has received a letter of award (LOA) for the acquisition of 2D and 3D seismic data of the oil blocks located in Rajasthan and Gujarat. The total value of the LOA received is about Rs. 640 cr. After the current award, the executable order book has crossed Rs. 1,400 crore giving good revenue visibility.

Asian Energy Services Ltd.’s key customers include – ONGC, Oil India, GAIL India, and L&T amongst 15 others.  It is also pre-qualified with eight clients.

Analysis of Asian Energy Services Ltd for the last 10 years:

Mr. Gautam Gode is a promoter director of the Company. He is also the director of Samara Indian Advisors Pvt. Ltd.  Samara first invested in Asian Energy Services Ltd in 2008, and later assumed management control from 2010 with 36.33% of shares.

In FY2011, the company made considerable profits of Rs. 9.93 Cr against Rs. 3.39 cr in the previous year. However, almost 85% of this was wiped out due to “provisions for bad linter-corporate Loans” amounting to Rs. 7 Cr. That resulted in a net loss of approx. Rs. 7 cr. This is not considered good in terms of management quality and intent.

From March 2012 to March 2017, the expenses were more than sales resulting in considerable losses every year.  This indicates poor operations or orders taken at loss – both of which are not good management traits.

In FY2012, Asian Energy Services Ltd received only two orders that is indicated by its low sales revenue.  This year also saw a fall in crude oil prices that affected their order prospects. With low orders, the company could not control expenses that stood at 115% of sales that resulted in considerable losses. Sales were flat in FY2013 at Rs. 49 Cr.  This year, the company expanded internationally.

The management expected revenue of Rs. 300 Cr by FY2016. However, it was not even close at ₹78 Cr.  The same factors resulted in poor order numbers and the company reported losses.

The management was changed; however, even that does not seem to work. Despite losses and poor performance, the salaries of key managerial executives increased 3 times from Rs. 42 lacs to Rs. 1.4 cr! Provision from inter-corporate doubtful loans still exists in the books.

In FY2014, sales increased substantially from Rs. 49 cr to Rs. 122 cr.  This is due to the focus of the new government on Indian oil reserves exploration.  However, the expenses overshot its revenues again resulting in losses. (Not sure; however, it looks like the provisions have disappeared. Does that indicate a write-off or is it a sign of siphoning?).

Asian Energy Services Ltd was fined Rs. 20 lacs by SEBI for not disclosing the purchase of shares by Samara in 2012.

In FY2015, the sales of Asian Energy Services Ltd further increased to Rs. 140 cr. However, again the expenses overshot sales resulting in losses.

The same story of inefficiency despite a good market and good orders continues until FY2017 when Oilmax Energy Pvt Ltd took over the company.

The new management has set out clear goals for strengthening the balance sheet and controlling costs.  This focus is heartening.

The management has a record of consistent delivery without major delays.  No penalties have been levied on the company. No fishy transactions or doubtful loans.

The result of excellent management is seen in the financial numbers post FY2017.  This is the proof of the pudding.

New Management Analysis:

Oilmax Energy Private Limited has acquired a majority stake in the company in FY2017. Oilmax Energy Pvt Ltd is owned by Mr Kapil Garg and Rabi Bistia, both of whom are professionals in this field with a good track record.

Mr Kapil Garg is a graduate of the Indian Institute of Technology (IIT), Roorkee. He started his career with ONGC Ltd as a production engineer and then moved to Enron Oil and Gas India Ltd.

Dr Rabi Narayan Bastia (Padma Shri) is a post-graduate in Petroleum Exploration from Norwegian Technological University, Norway. He has obtained his doctoral degree in Geology from IIT, Kharagpur. He headed the exploration group of Reliance Industries Ltd for more than 16 years.

Both of them are professionals with good experience and a proven record.  They have cleaned up the balance sheet and turnaround the operations of Asian Energy Services Ltd as is evident in the financial summary.

Mr Ashutosh Kumar is the chief executive officer (CEO) who has 25 years of experience in the oil & gas industry.  He has worked with companies like ONGC, Enron and BG Group.  His remuneration is well within the ceiling.

The company has done well in the last 5 years and has grown with good diligence.

The self-sustainable growth rate (SSGR) is low when compared to its high sales-growth rate. Therefore, Asian Energy Services Ltd may issue additional shares/rights issue or take in additional debt in the next 2 years (i.e. until FY2023)

Performance guarantee liabilities: Approximately Rs. 15 cr is withheld by the customers towards non-satisfactory performance.

Credit rating has been withdrawn by CRISIL.  Asian Energy Services Ltd now does not have debt and therefore, it does not require credit ratings.

Insider share purchase/sale: Insiders have purchased shares in the last 12 months. No one has sold the shares in the last 12 months.

Peer comparison with Alphageo (India) Ltd indicates that Asian Energy Services Ltd will always be in a better position to win orders.

Summary:

Asian Energy Services Ltd has performed well with a quality, strong and prudent management team.  The company has improved almost all its financial parameters.  The growing operating profit margin (OPM) shows a good competitive advantage (moat).

The company is in a unique position to eat into the orders of its competitors. Its main competitor, Alphageo (India) Ltd, is a loss-making company with poor financial metrics.

The zero debt along with an increase in OPM, net profits & earnings per share (EPS) are good signs. Asian Energy Services Ltd is in a strong position to give dividends in future. Currently, institutions hold only 1.3%.

Please let me know your views.

Thanks.

Sunil Udupa

Dr Vijay Malik’s Response

Dear Sunil,

Thanks for sharing the analysis of Asian Energy Services Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing Asian Energy Services Ltd, an investor would notice that over the last 10-years, the company has had multiple subsidiaries, both in India as well as overseas. On March 31, 2021, Asian Energy Services Ltd had the following subsidiaries (FY2021 annual report, page 110):

• Asian Energy & Energy Services DMCC (in UAE)
• AOSL Petroleum Pte. Limited (in Singapore)
• Ivorene Oil Services Nigeria Limited (up to 17 June 2020) (in Nigeria)
• AOSL Energy Services Limited (in India)
• Optimum Oil & Gas Private Limited (in India)

As a result, the company reported both standalone as well as consolidated financials over the entire period of the last 10 years.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in this analysis of Asian Energy Services Ltd, we have studied the consolidated financial performance of the company.

With this background, let us analyse the financial performance of the company.

Financial and Business Analysis of Asian Energy Services Ltd:

While analyzing the financials of Asian Energy Services Ltd, an investor notices that the sales of the company have grown at a pace of more than 20% year on year from ₹41 cr in FY2012 to ₹229 cr in FY2021. Further, the sales of the company have increased to ₹236 cr in the 12-months ended June 30, 2021, i.e. during July 2020-June 2021.

While analysing the revenue growth of the company over the last 10-years, an investor notices that the journey of the company has not been smooth. Asian Energy Services Ltd witnessed its sales decline multiple times. In FY2016, the sales of the company declined by 45% from ₹141 cr in FY2015 to ₹78 cr in FY2016. In FY2019, the sales of the company declined by 13% from ₹222 cr in FY2018 to ₹194 cr in FY2019. Thereafter, in FY2021, the sales of the company declined by 16% from ₹273 cr in FY2020 to ₹229 cr in FY2021.

Therefore, an investor would appreciate that the business of Asian Energy Services Ltd has witnessed significant fluctuations over the last 10-years.

On similar lines, when an investor observes the operating profit margin (OPM) of Asian Energy Services Ltd over the last 10-years (FY2012-FY2021), then she notices that for the first 6 years (FY2012-FY2017), the company continuously reported operating losses. Thereafter, from FY2018 onwards, Asian Energy Services Ltd started reporting profits and the OPM of the company increased from 18% in FY2018 to 24% in FY2021. The OPM of the company improved further to 29% in the 12-months ended June 2021.

To understand the reasons for the decline in the revenue of the company in FY2016, FY2019 and FY2021, the reasons for operating losses until FY2017, and the improvement in its OPM later on, an investor needs to read the publicly available documents of the company like annual reports, credit rating reports, open offer documents as well as its corporate announcements.

After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of Asian Energy Services Ltd. An investor needs to keep these factors in her mind while she makes any predictions about the performance of the company.

1) Main business of seismic data collection is cyclical and uncertain:

While analysing Asian Energy Services Ltd, an investor notices that the business of seismic data collection, which is its core business is cyclical in nature. The availability of orders in this business is highly dependent on the following factors:

• prevailing crude oil price because it determines the economic viability of exploration activities and
• the amount of budget available with the oil & gas exploration companies because they are the main customers of Asian Energy Services Ltd

In the FY2007 annual report, the company has highlighted to its shareholders that the oil exploration activities become unviable when crude oil prices fall below $20, which may affect the entire seismic data collection business.

FY2007 annual report, page 20:

A decline in the price of oil below $20 a barrel could make exploration activities unviable and jeopardise all seismic assignments.

An investor would appreciate that when the crude oil price is higher, then the exploration companies make a good profit on their oil discoveries. As a result, they are willing to spend more money on exploration activities including seismic data collection. However, when the crude oil prices decline, then due to a lack of economic incentives, they cut down on the budgets allocated to exploration activities. This, in turn, reduces the business available to seismic data collection companies like Asian Energy Services Ltd.

While looking at the historical trend of crude oil prices, an investor would notice that they have been very volatile throughout the last 20-years (2001-2021).

From the above data, an investor would notice that the crude oil prices have been fluctuating between $20 to $140 with intermittent periods of increasing oil prices and decreasing oil prices.

While reading the annual reports of Asian Energy Services Ltd, an investor comes across that most of the periods of its poor business performance have coincided with periods of declining crude oil prices. E.g. in FY2016, when the company witnessed a 45% decline in sales, then it mentioned a decline in oil prices and resultant exploration activities as the reason for lower demand for its services.

FY2016 annual report, page 8:

With falling crude oil prices and decreasing oil & gas exploration activities, we have re-grouped and worked around our strategies to adapt to the persistently weak demand.

Once again, in FY2019, an investor would notice that the decline in the business of the company coincided with the decline in the crude oil prices.

Apart from declining crude oil prices, general cycles of economic activity also affect the budgets of exploration companies, which in turn affects the business available to seismic data collection companies like Asian Energy Services Ltd.

There have been numerous occasions where deferment of spending by exploration companies affected the business of Asian Energy Services Ltd.

During FY2010-FY2012, when the company reported a poor business performance including operating losses, then the company blamed deferment of spending by exploration companies for it.

FY2013 annual report, page 9:

Over 2010-12, the Company’s revenues and profitability were adversely impacted by the deferment of capital expenditure by E&P companies following the global economic slowdown.

In the FY2015 annual report, once again, Asian Energy Services Ltd mentioned the deferment of capital expenditure by exploration companies as the reason for its poor performance.

FY2015 annual report, page 8:

Going into the year 2014-15, we witnessed deteriorating demand and utilisation in seismic industry on the back of substantial decline in oil prices. The increase in oil supply and corresponding market instability had a cascading effect on budgets allocated for seismic exploration by the Oil & Gas companies.

softening of the oil prices led to the oil industry cancelling most of the tenders in 2014-15.

The credit rating agency, CRISIL, also highlighted in its report for Asian Energy Services Ltd in April 2017 that the investments by oil & gas exploration companies follow a cyclical pattern, which affects the business of seismic data providers like Asian Energy Services Ltd.

AOSL’s revenue driver is the business of onshore seismic survey for oil exploration companies and oilfield O&M services. The investment cycles of these companies result in fluctuations in revenue of oilfield services companies such as AOSL.

Therefore, an investor would appreciate that the business opportunity available to Asian Energy Services Ltd in the seismic data collection is highly cyclical. The orders from exploration companies depend on factors like prevailing crude oil prices, availability of budgets and the phase of the economic cycle.

The company has intimated its shareholders on multiple occasions that seismic data collection companies benefit from the minimum seismic mapping requirement put by the govt. while allocating exploration blocks.

FY2008 annual report, page 16:

The government mandated the conduct of minimum 2D surveys for all oil and gas exploration and production companies for their NELP blocks.

As a result, companies and investors have assumed that seismic data collection companies would always have a minimum level of business opportunity available to them due to the compulsion of allottee companies to do a minimum amount of seismic surveys. However, an investor should appreciate that if the allottee of an exploration block is facing economic challenges due to the crude oil price down-cycle and the oil exploration has become economically unviable, then it is not going to spend money on doing seismic studies of unexplored blocks.

Therefore, companies like Asian Energy Services Ltd may witness periods of large order inflows where they get business more than what it can handle. However, soon thereafter, when the cycle turns, then they may face periods where there are no orders to justify the investments done by the company in its man & machinery. As a result, an investor needs to be very cautious before she projects the business performance of the recent past into the future.

From the above chart, an investor would notice that in the recent past, crude oil prices have started increasing. In light of the same, it does not come as a surprise that seismic data collection companies like Asian Energy Services Ltd have started receiving many orders.

When an investor reads the comments of the management in its different conference calls, then she can feel the enthusiasm. In fact, the management seems so optimistic that they have started denying the cyclicity in the business.

February 2020 conference call, page 8:

Ashutosh Kumar:….the demand for seismic activities in country is so high, that for the next two – three years there is no scarcity of tenders, so that cyclicity is gone.

The management also highlighted that the company has become very choosy in accepting orders.

February 2020 conference call, page 9:

Kranthi Bathini: Okay you are very choosy in terms of selecting the orders.

Ashutosh Kumar: Yes.

From the above discussion, an investor would appreciate that the business opportunity available to seismic data collection companies like Asian Energy Services Ltd witnesses a cyclical pattern. Factors like crude oil prices and exploration budgets available with their customers determine the order inflow. Therefore, they witness periods of high order inflow followed by periods of low order inflow.

During the periods of high order inflows, if the management loses sight of the overall big picture of the cyclical nature of business, then it may get hurt when the cycle turns and the company might be left with a large investment in man & machinery but with no orders to execute.

In the past, Asian Energy Services Ltd has faced challenges when its investment decisions were not optimal and the business situation changed leading to the near bankruptcy stage. As a result, it had to be sold to different owners multiple times in the last 15 years.

Its original promoters, Mr Krishna Kant and Mr Avinash Manchanda could not run the company profitably and gave up control of the company to Samara Capital in 2010. Thereafter, Samara Capital also could not run the company profitably and then sold it to Oilmax Energy in 2016.

Therefore, an investor should always keep in her mind the cyclical nature of the seismic data collection business and not ignore its cyclical nature even if the management of the company states that the cyclicity is gone.

Advised reading: Why We cannot always Trust What Management Claims

2) High competition:

The seismic data collection is a specialized business with the presence of only a few independent players like Asian Energy Services Ltd. However, the business opportunity available to the independent players is limited, which increases the competitive intensity among the independent players.

Asian Energy Services Ltd intimated to its shareholders in the FY2008 annual report, page 16, that India had only three key third party seismic data collection players.

The Indian seismic services industry is marked by only three large-scale third-party service providers.

A presence of only three key players in the industry may give an impression to the investor that the competitive intensity in the industry is low. However, investors should keep in mind that most of the seismic data collection is done by the exploration companies on their own. This is because exploration companies have in-house seismic data collection teams. As a result, they only outsource some seismic data collection business to outside third-party players.

As per Asian Energy Services Ltd, nearly 50% of the total seismic data collection activities are done by the exploration companies in-house.

FY2007 annual report, page 16:

Around 50% of this emerging business opportunity will be explored through captive in-house crews of ONGC and OIL who possess their own crews while the remaining will be executed by private third party crews.

Therefore, an investor would appreciate that third party seismic data collectors like Asian Energy Services Ltd get only a limited business opportunity for which they have to compete with other players.

The credit rating agency, CRISIL, highlighted the aspect of intense competition in its report for the company in April 2017.

AOSL is also exposed to competition from peers due to limited market size.

Because of the intense competition, on multiple occasions, Asian Energy Services Ltd had to accept business at very low prices, which has been one of the reasons for its poor business performance and operating losses in the past.

In FY2005, when the sales, as well as net profits of the company, declined, then it intimated its shareholders that it was due to taking up very difficult contracts at very low prices.

FY2005 annual report, page 3:

The reduction in the income and therefore in the profits has been caused due to our having secured contracts on very competitive rates and that too in difficult areas of operations.

In FY2019, when the company won orders, it intimated to the shareholders that it won the orders by offering discounted prices.

FY2019 annual report, page 9:

Attractive Bidding Price: We offer discounted bidding price, which is reasonable. It has helped us to bag orders of worth more than ₹ 850 Crores.

In the past, an investor notices that the company did not quote proper prices, which might have factored in all the risks (geopolitical and environmental) in the contracts. As a result, the company ended up making losses even after completing the project.

In FY2015, the company reported losses because it could not profitably complete the contract bid by it in Kurdistan, Iraq. The geopolitical issues increased the cost of executing the contract and as a result, the company reported losses despite completing the contract.

The credit rating agency, CRISIL, highlighted the operating losses of the company in FY2015 due to geopolitical issues of the Kurdistan project in its report in August 2015.

The losses during 2014-15 were mainly on account of significant increase in operating cost due to emergence of geopolitical issues in the Kurdistan region where AOSL had its largest order and the company chose to complete the project even in spite of a force majeure event.

The insufficiency of the bid price for this project came up again in FY2017 when the company had to write off all the equipment it had used in Kurdistan, Iraq because transporting them back to India proved economically unviable.

FY2017 annual report, page 137:

IMPAIRMENT LOSS: The Group recorded an impairment loss of ₹ 27,098,563 (under the head “other expenses” in its consolidated financial statements) relating to its fixed assets… The fixed assets were in Iraq where the subsidiary Company no longer has any presence and considering the high transportation cost of importing these fixed assets, same were impaired.

As a result, an investor would appreciate that due to limited business opportunities available to third-party seismic data collectors, Asian Energy Services Ltd has won contracts at discounted prices, which have proved loss-making for the company.

The limited business opportunity available to the company becomes apparent to the investor when she notices that in FY2014, Asian Energy Services Ltd presents the Middle-East North Africa (MENA) region as highly attractive while simultaneously highlighting that two large players had shut down their operations in the region.

FY2014 annual report, page 13:

While the market scenario remains temporarily unclear, optimism emanates from the fact that the market space is marked by low competition. Over the recent past, two leading players withdrew services in the Middle East, creating a wider space for our Company

It seems that due to limited business opportunities, seismic data collection companies end up targeting tough markets and projects that others have already given up. Moreover, due to competition, they end up bidding contracts at non-profitable prices.

In light of the same, it does not come as a surprise to the investor that the company reported operating losses for years together, reached the bankruptcy stage multiple times and had to be sold off by its owners repeatedly.

Advised reading: How to do Business Analysis of a Company

3) Risks faced by Asian Energy Services Ltd in its business:

While analysing the annual reports and other public documents about Asian Energy Services Ltd, an investor comes across numerous risks that it faces in its business, which an investor should always keep in her mind.

3.1) Geopolitical risk:

This is one of the major challenges faced by Asian Energy Services Ltd. Most of the time, oil exploration activities take place in areas, which are less developed. Such areas are usually a focus of civil protests, sometimes armed protests, raising demands of the local population. Under such circumstances, carrying out seismic data collection activities may prove impossible or very costly. As a result, companies like Asian Energy Services Ltd taking up projects in such areas face project delays and operating losses.

In the above discussion, an investor would remember the incidence of the project taken up by Asian Energy Services Ltd in Kurdistan, Iraq where the company faced operating losses due to high operating costs due to geopolitical issues. Moreover, it faced additional losses when it had to write off its equipment in this area as it was unviable to bring the equipment back from Kurdistan.

However, such issues are not limited to troubled overseas areas like Iraq. Within India also, Asian Energy Services Ltd has faced many instances of geopolitical issues.

In FY2009, the company faced a sharp decline in its profits. While discussing its performance, the company highlighted that its profits had declined due to the sudden stoppage of one of its projects.

FY2009 annual report, page 1:

Unexpected suspension of one of the key projects hit the margins and returns of your Company. Net profit declined to Rs. 53 million as compared to Rs. 96 million in the previous year

Upon further analysis, an investor gets to know that it was a project allotted by ONGC in Nagaland where due to socio-political issues; differences arose between ONGC and the Govt. of Nagaland. As a result, the company faced the consequences of geopolitical risk.

FY2009 annual report, page 7:

ONGC decided to stall the project in February, 2009 owing to political issues in the region. The Government of Nagaland and ONGC were unable to reach an understanding over a long standing issue… The revenue loss due to suspension of work was immense for the Company

Even in FY2008, the company has faced disruption in its project execution in North East India when insurgency/violence affected the working of its people. Similarly, bomb blasts in Assam also created challenges in project execution.

FY2008 annual report, page 9:

We are operating in the Northeast where insurgency is prevalent. During the last season, violence disrupted operations in one of our crews. While we have deployed security…

October Assam blasts made it emotionally difficult for our employees; and our planned growth is dependent on a peaceful working environment in Nagaland.

Thereafter, as discussed above, in 2015-2017, the company faced significant losses due to geopolitical issues in Kurdistan, Iraq.

Again, in FY2018, Asian Energy Services Ltd faced geopolitical challenges when it could not work properly on one of the projects in the state of Manipur.

FY2018 annual report, page 5:

The Company is witnessing local challenges at Oil India Ltd, Manipur project, resulting in slower progress in this project

Similarly, in FY2020, the company faced delays in the commencement of a project in Iraq due to local unrest and geopolitical tensions in the region.

FY2020 annual report, page 6:

The seismic data capturing project in Iraq has been delayed owing to the geopolitical tensions and local unrest in the region

Read: Understanding the Annual Report of a Company

In light of the above instances, an investor should appreciate that most of the projects undertaken by the company are in areas, which are undeveloped and have socio-political issues. As a result, there is a continuous state of uncertainty related to project execution and progress. It might happen that a project, which has been progressing well for a period, is stalled suddenly due to local unrest. An investor should keep this very important risk due to geo-political factors always in her mind.

3.2) Environment and weather risk:

Another major risk faced by Asian Energy Services Ltd in its project execution is related to the environment. It includes both the harsh geographical terrain as well as unfavourable working conditions like monsoons.

In the FY2013 annual report, the company highlighted to its shareholders that it runs the risk of cost overruns in its projects due to difficult terrain.

FY2013 annual report, page 21:

The business is exposed to cost overruns due to a substantial part of the project being conducted in inhospitable terrains.

In FY2010 when the company faced a very sharp decline in its revenue and reported losses, it highlighted to its investors that the key reason for the poor performance was slow progress on its project in North East India where it is difficult to transport equipment by vehicles like tractors. The company has to move equipment using human labour, which has resulted in a slow project progress.

FY2010 annual report, page 9:

almost all the revenues for the seismic vertical for the 9 months ending March 2010, was contributed by a single 2D project being executed in North East. The primary reason for this slow pace of execution for this project compared to last year is that the terrain, where fieldwork is being executed currently, is not accessible by tractor mounted rigs. The shot hole drilling is currently being carried out by man portable rigs.

In FY2009 as well, Asian Energy Services Ltd had faced challenges in executing a project in Mizoram, where the company had to allocate more resources to the project and import special equipment, which people can carry to the difficult project location.

FY2009 annual report, page 7:

we were a little behind the set target since the work coincided with the onset of monsoon season and because of the teething problems associated with project execution in the difficult geographical landscape of Mizoram. We have realized our shortcomings in this scenario and accordingly we have increased our resources to carry out Seismic Data Acquisition. We have imported especially designed Man Portable Drilling Rigs for the tough terrains of Mizoram.

An investor would appreciate that whenever a company is not able to assess the difficulty level in execution of a project, then it ends up bidding at a price where it may not recover its costs and as a result, it ends up making operating losses.

Apart from the difficulty in accessing the project site, Asian Energy Services Ltd also faces challenges in executing the projects during monsoon season. This is because monsoons present multiple challenges in seismic data collection:

First, the project sites become difficult to assess. Second, the life of the equipment deteriorates during monsoons. Third, the quality of seismic data collected during the monsoons is not good.

FY2008 annual report, page 9:

Unseasonal rainfall and logistics in remote areas represent another challenge, as many of our areas of operation do not have regular paved roads.

FY2019 annual report, page 16-17:

Due to monsoon impact, the seismic data collected during the monsoon season could be erratic. Another challenge involved is of logistics, to move the rigs at respective safe places as wet weather deteriorates the lifespan of the equipment.

As a result, many times, if the monsoon season gets prolonged, then the project execution by Asian Energy Services Ltd gets affected. In such a situation, the company needs to deploy additional resources to meet the project deadlines, which increases the project cost.

For example, in FY2018, the company’s project work suffered a loss of about 45 days due to prolonged monsoon season and the company had to increase resources for the project.

FY2018 annual report, page 5:

The Company’s seismic services projects in North-east India saw a loss of 45 operational days in October/November 2017 owing to prolonged rainfall; however, the Company has deployed necessary resources to ensure timely completion of project

In addition, an investor should also note that seismic data collection damages the local environment. Therefore, Asian Energy Services Ltd might face hurdles on part of its project execution as well.

FY2013 annual report, page 21:

Environmental Risk: The process of seismic data acquisition involves environmental degradation that can invite regulatory censure.

Therefore, an investor should always keep the risks related to social-political/geopolitical factors, environmental damages, difficult operating terrain and weather risks to the project execution in her mind whenever she assesses the order book of the company.

In the past, Asian Energy Services Ltd has suffered because of these risks and has resulted in losses. Going ahead, an investor should be cautious while assessing the project execution of the company.

She should be aware that the oil exploration activities and as a result, seismic data collection business is cyclical in nature, which depends upon the crude oil prices, exploration budgets of companies as well as the general economic cycle of the country. As a result, the investor should be very cautious while projecting the performance of the company into the future. This is because; the performance of the recent past may be a result of upcycle in the crude oil prices or the general economy. During the down cycle, Asian Energy Services Ltd had reported operating losses for multiple years on a stretch.

While analysing the tax payout ratio of Asian Energy Services Ltd., an investor notices that for most of the years, the tax payout ratio of the company has been lower than the standard corporate tax rate prevalent in India.

During FY2012-FY2017, the company had reported losses. As a result, the company was not required to pay any taxes. However, even from FY2018 onwards, when the company started reporting profits, its tax payout ratio is lower than the standard corporate tax rate.

While going through the annual reports of the company, an investor notices that the key reasons for a lower tax payout ratio for Asian Energy Services Ltd are (i) carried forward losses and (ii) differences in the tax rates of overseas countries where subsidiaries are located e.g. UAE.

FY2021 annual report, page 132:

The above table from the FY2021 annual report shows the income tax reconciliation between the standard corporate tax rate applicable in India and the tax payout in the profit & loss (P&L) statement of Asian Energy Services Ltd. An investor may notice that the carried forward losses is the biggest factor leading to a lower tax payout ratio for Asian Energy Services Ltd in both FY2020 as well as FY2021.

FY2019 annual report, page 133:

The above table from the FY2019 annual report shows that “difference tax rate in countries in which group operates” is the biggest factor leading to a lower tax payout ratio for Asian Energy Services Ltd in both FY2018 as well as FY2019.

In addition, an investor may also note that govt. keep giving incentives to the activities of oil & gas exploration in order to increase domestic production. In the FY2007 annual report, Asian Energy Services Ltd highlighted that the oilfield services provider were taxable at 10% of their gross receipts.

FY2007 annual report, page 17:

Attractive fiscal Incentives, 1999-2003: Oilfield service provider taxable on 10% of gross receipts

An investor may contact the company directly to understand more about the income tax incentives available to it.

Going ahead, an investor may keep a close watch on the tax payout ratio of the company and understand more about the tax incentives available to the company.

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Asian Energy Services Ltd:

a) Net fixed asset turnover (NFAT) of Asian Energy Services Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Asian Energy Services Ltd in the past years (FY2013-21), then she notices that the NFAT of the company has improved from 1.3 in FY2013 to 2.1 in FY2021. The NFAT reached a low of 0.8 in FY2016 and a high of 3.1 in FY2020. Nevertheless, on an overall basis, the NFAT has seen an improvement over the last 10-years.

An investor would appreciate that the NFAT of any company represents its asset utilization efficiency. An increasing NFAT indicates an improved utilization of fixed assets of the company whereas a declining NFAT indicates a deterioration in the asset utilization efficiency.

In addition, the level of NFAT indicates whether the business of any company is capital intensive or asset-light.

Over the years, Asian Energy Services Ltd has seen three different managements controlling it. The original promoters controlled it from 1992 to 2010. Samsara Capital controlled it from 2010 to 2016 and thereafter, Oilmax Energy took over its control from 2016 onwards until now.

While reading the history of Asian Energy Services Ltd, its business strategy under three different managements, an investor notices that different managements have managed the strategy of its assets in very contrasting ways.

a.1) First phase: Original promoters: Shift from asset-light model to asset-heavy model:

The original promoters, which included Mr Krishna Kant and Mr Avinash Manchanda, originally attempted to manage the company in an asset-light manner. They tried to rely on leasing equipment whenever needed.

FY2007 annual report, page 8:

Till 2005-06 we took our survey equipment on lease and that limited our gross margins on projects. We were fairly comfortable with this arrangement as we did not require to invest in the direct ownership of assets

However, they realized that to grow in the business of seismic data collection, they need to buy the equipment. After this realization, the promoters started to invest money in owning the seismic exploration equipment. They even had to dilute a stake in the company by bringing in an investor.

FY2007 annual report, page 8:

In 2006, when we saw the huge opportunity unfolding in the oil exploration space in India, we realized that in order to scale we needed to own our equipment and also increase the number of crews we were operating. Working on this strategy we roped in strategic investor (Consolidated Securities Limited) to fund the purchasing of our assets.

As per the promoters, they had realized that in the seismic data collection business, ownership of assets provides a competitive advantage. In subsequent annual reports, they highlighted the importance of buying/owning equipment as a competitive advantage to the shareholders.

FY2008 annual report, page 12:

Capital assets represent a robust competitive edge in the business of seismic services. Asian Oilfield consistently invested substantial amounts in fixed assets.

FY2008 annual report, page 8:

In a business where gross block strength represents competitive advantage, we invested in capital assets.

After owning seismic assets, the company intimated to its shareholders that its profit margins have improved.

FY2007 annual report, page 18:

EBIDTA margin improved, thanks to the following reasons: Deployment of own assets against leased assets

Therefore, an investor would notice that under the original promoters, Asian Energy Services Ltd shifted its strategy from being asset-light to asset-heavy i.e. capital intensive stating that ownership of the assets provides a competitive advantage.

a.2) Second phase: Samsara Capital: claims of shifting to asset-light strategy:

Samsara Capital took control of Asian Energy Services Ltd in 2010 and brought in a new management team for the company.

The new management team decided that instead of owning equipment, the strategy of being asset-light would provide a competitive advantage. Therefore, the new management started to focus on leasing equipment as and when needed.

FY2012 annual report, page 7:

The new management has embarked on a strategy to reduce the cost of asset engagement as its first step towards competitiveness. The Company is leveraging the benefit of low-cost leasable assets…

this approach will make it possible for the Company to lease assets across international geographies, reducing the turnaround time in responding to new orders and reducing logistic costs.

Therefore, an investor would notice that the original promoters believed that in the seismic data business, owning the assets provides a competitive advantage. However, the new management under Samsara Capital took a complete U-turn and said that being asset-light and leasing assets, when needed, would provide a competitive advantage.

The new management also stated that the main reason for the failure of many companies in the seismic data collection business had been buying equipment by taking a loan.

FY2012 annual report, page 12:

We recognise that the principal cause of failure of a number of companies engaged in our business has been a predominant preference for debt-financed assets. Our business model will be dictated by an asset-light approach that leverages the availability of low-cost leasable crews and asset

However, when an investor notices the investment decisions of the management under Samsara Capital from FY2010 to FY2016, then she notices that during this period, the gross fixed assets of Asian Energy Services Ltd increased from ₹50 cr in FY2010 (page 42 of FY2010 annual report) to ₹170 cr in FY2016 (page 143 of FY2016 annual report).

Therefore, despite declaring a strategy of being asset-light, Samsara Capital invested heavily in seismic equipment and increased the gross block by about 3.5 times over the period of its ownership by investing about ₹120 cr in fixed assets.

For example, in the FY2013 annual report, on page 8, the management under Samsara Capital highlighted how over the last 3 years, the company had invested about ₹95 cr (₹22.4 cr + ₹72.2 cr) in buying seismic equipment.

The Company invested ₹224 million in India over the last three financial years in seismic and drilling equipment. During the first half of the 2012-13, it procured seismic equipment (including seismic systems, vibroseis trucks, drilling rigs and other ground electronic equipment) aggregating over ₹722 million for its Indian and overseas operations.

However, at the same time, the management kept on claiming that it is following an asset-light strategy.

FY2014 annual report, page 13:

Over the last three years, the management at Asian Oilfield has virtually reinvented itself through various initiatives: Proactively responded with an asset-light business model

Therefore, during this second phase period of ownership of Samsara Capital, the company seemed to contradict its own stated strategy of being asset-light and invested in fixed assets despite claiming to stay asset-light in the annual reports.

Advised reading: Why We cannot always Trust What Management Claims

At the same time, an investor would notice that during the entire period under the ownership of Samsara Capital, i.e. FY2010-FY2016, Asian Energy Services Ltd never reported a profit.

Therefore, it seems that Samsara Capital decided to sell its investment in Asian Energy Services Ltd to Oilmax Energy.

a.3) Third phase: Oilmax Energy: Stressing on asset-light strategy:

When Oilmax Energy took over Asian Energy Services Ltd in 2016, then immediately, it started claiming to prioritize an asset-light strategy.

FY2017 annual report, pages 1 and 7:

The Management Changed. So did the way of doing business. FY 2016-17 will be marked as the year of change and turnaround in the Company’s history.

Replacing capital intensive business model to an asset-light model

When an investor notices the change in gross fixed assets over FY2016-FY2021, then she notices that the gross fixed assets of Asian Energy Services Ltd have increased from ₹170 cr in FY2016 (page 145 of FY2016 annual report) to ₹212 cr in FY2021 (page 129 of FY2021 annual report).

Therefore, an investor notices that in relation to the strategy around the ownership of assets and equipment, different managements of Asian Energy Services Ltd have focused on different approaches.

The original promoters believed that owning the assets provides a competitive advantage and therefore, invested money in buying seismic equipment.

Samsara Capital stated that being asset-light provides a competitive advantage; however, invested heavily in buying seismic equipment. Moreover, the company never made any profits under the management of Samsara Capital. In addition, the NFAT, an indicator for asset utilization efficiency by the company, declined during this period.

Oilmax Energy also claimed about focusing on being asset-light. However, even it ended up investing more than ₹50 cr in assets over FY2017-FY2021. However, during this period, the NFAT increased showing an improvement in the asset utilization efficiency.

Going ahead, an investor should focus on the disclosures by the management about their strategy regarding ownership of assets as well as whether they are able to utilize the assets efficiently. She should focus on her own assessment of the actual asset strategy followed by the company instead of claims by the management in its annual reports.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Asian Energy Services Ltd:

While analysing the efficiency of inventory utilization by Asian Energy Services Ltd, an investor notices that over the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has been very high, above 25 and at times above 100 as well. This is because, due to the services nature of business, the company does not need to maintain a lot of inventory.

As a result, the inventory turnover ratio is not highly relevant in the assessment of Asian Energy Services Ltd.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Asian Energy Services Ltd:

Over the last 10 years, the receivables days of Asian Energy Services Ltd have consistently been above 100 days, even though for a few years, the company reported lower receivables days of about 40 days in FY2014-FY2015. However, during most of the period, the receivables days have been high and in FY2021, the company reported the highest receivables days of 170 days.

If an investor compares the receivables days over the last 10 years, then she notices that it has increased from 125 days in FY2013 to 170 days in FY2021. An increase in receivables days over the years indicates a deterioration in the collection efficiency of the company.

In FY2021, against the revenue of ₹229 cr, the company has trade receivables of ₹125 cr at the end of the year. Therefore, more than half of the sales reported by the company in FY2021 is yet to be recovered by the company from its customers. Moreover, as per the FY2021 annual report, page 145, out of these trade receivables, about ₹57 cr (i.e. 45%) are outstanding for more than 6 months from the date they became due for payment.

While doing her analysis, an investor notices multiple reasons for high receivables days for Asian Energy Services Ltd.

c.1) Most of the project execution work in Q4 of the financial year:

Asian Energy Services Ltd highlighted to its investors that its project execution work is impacted by seasons. The work is stopped during monsoons and picks up after the rainy season stops. As a result, most of the project execution work happens in the last quarter of the financial year.

In FY2007, when the company reported receivables of about ₹18 cr, which were almost two-third of the revenue of ₹27 cr for the year, it explained that such high receivables are normal for its business because most of the project work happens in March & April. The bills raised by the company in the work done in March remain outstanding at the year-end.

FY2007 annual report, page 19:

Sundry debtors: The Company’s receivables increased from Rs. 6.31 cr to Rs. 18.35 cr in line with an increase in its operations. This is a normal part of the business cycle as the business is at its peak during the month of March and April.

c.2) Project nature of work with progressive billing: Delayed receivables + unbilled revenue:

The contracts undertaken by the company are in the nature of projects where it completes a part of the project/seismic data collection and then raises bills on the customer. In such an arrangement, many times, disputes arise between the company and the customers about the amount of work done, whether done within agreed timelines etc.

While Asian Energy Services Ltd may claim that it has done the required work with satisfactory quality and within the agreed time, the customer may dispute the quality and as well as timeliness of work. As a result, the customer may refuse to release the payments against the bills raised by the company.

Another aspect of the project nature of work is that at times, Asian Energy Services Ltd completes some work on the project site; however, it recognizes it as revenue even when it has not raised any bill on the customer. This is called unbilled revenue. In such instances, the customer may dispute the amount of work done by the company and investors may realize that the unbilled revenue, which is already recognized in the profit & loss statement, was not correct.

For example in FY2017, Asian Energy Services Ltd reported unbilled revenue of ₹24.5 cr (page 128 of FY2017 annual report), which was almost 20% of the revenue of ₹124 cr reported by the company in FY2017.

In FY2018, the company reported an unbilled revenue of ₹17.13 cr (page 119 of FY2018 annual report).

Previously, the company used to report accrued service income on similar lines. As per the FY2012 annual report, page 57, Asian Energy Services Ltd reported an accrued service income of ₹6.7 cr, which was more than 16% of the revenue of ₹41 cr reported by the company in FY2012.

On similar lines, in FY2020, Asian Energy Services Ltd reported unbilled work in progress of about ₹7.4 cr, which looks like the project work done by the company for its customers, which it had not yet billed to them. However, in the same report, the company mentioned that it has impaired its unbilled work in progress by ₹5.78 cr.

FY2020 annual report, page 150:

Contract assets – unbilled work in progress: 740.62

• Less: Allowance for impairment: (578.34)

Therefore, it looked like a case, where Asian Energy Services Ltd worked for its customers on a project and invested ₹7.4 cr in the same; however, before billing, the customer rejected the work worth ₹5.78 cr and the company had to impair the same.

As a result, while analysing Asian Energy Services Ltd, an investor notices that there have been numerous instances where the company could not recover money from its customers, it had to write-off its receivables; customers did not agree with the amount of unbilled receivables and the company had to make provisions.

One of the biggest incidences where Asian Energy Services Ltd had already recognized revenue when the receipt of a large sum of money is under dispute from the customer is in relation to the operation and maintenance work done by the company for one of the clients in Nigeria, M/s Amni International. In this case, Asian Energy Services Ltd has already recognized revenue for ₹62.5 cr ($8.5 million) whereas the company and the customer are continuously in a dispute about the contract.

As a result, in the FY2021 annual report, the auditor of the company qualified its opinion on the financial statements stating that receivables of $8.5 million are unconfirmed.

FY2021 annual report, page 105:

Accounts receivable amounting to USD 8,499,254/- remain unconfirmed as at reporting date from one customer M/s Amni International Petroleum Development OML 52 Company Limited, who has issued a notice of suspension of the contract.

An investor would appreciate that if the company is not able to recover this money, then its sales, profits, as well as net worth reported in the past would be inflated.

An investor should note that in FY2021, Asian Energy Services Ltd has reported unbilled work in progress of ₹31 cr (page 134 of FY2021 annual report).

The below table shows all the write-offs done by Asian Energy Services Ltd in the last 5-years (FY2017-FY2021) on the money it had to recover from others. An investor is surprised to note that in the last 5-years, the company has written off more than ₹85 cr.

An investor would appreciate that this ₹85 cr of write-off represents the money that the company either had given to others as advances or had done the work for the customers, which others are now refusing to pay. Such big write-offs raise a question on the credit risk assessment done by the company before it accepts contracts from customers or decides to give advances to the suppliers. An investor would appreciate that if a company does not do a proper credit risk assessment of its counterparties, then there is a high chance that the other parties will run away with its money or refuse to pay it back when demanded.

In the FY2015 annual report, on page 155, an investor is surprised to notice that the company has made provisions for ₹77,000 for advances given to the employee of the company. It looks like an employee of the company took the money from the company and refused to pay it back. Moreover, the company could not recover the money.

At times, the auditor of the company had to highlight the poor chances of recovery of money in its report as a qualified opinion or emphasis of matter.

In the FY2015 annual report, the auditor of the company highlighted to the investor as a qualified opinion that it does not think that the company can recover almost ₹14 cr of receivables and advances due from others.

FY2015 annual report, page 60:

Basis for Qualified Opinion: The Company’s trade receivables, short term loans & advances and long term loans & advances as at 31st March, 2015 include Rs. 313.53 Lacs, Rs. 993.99 Lacs and Rs. 95.70 Lacs respectively, which are due for a period exceeding one year. Based on the information and explanations given to us, we are of the opinion that these are doubtful of recovery

An investor may contact the company directly about such write-offs and provisions because it looks like so many counterparties like customers, suppliers, and employees are taking money and services from the company and are refusing to pay. As a result, the shareholders of the company have to pay the price for poor credit risk assessment by the management of the company.

Going ahead, an investor needs to keep a close watch on the receivables position of the company. She should monitor its disclosures for checking write-offs of receivables, provisions or reversals of unbilled receivables etc. This is because, if the customers dispute the amount of money claimed by Asian Energy Services Ltd from them, then the reported financial statements by the company may not represent the true financial position.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Asian Energy Services Ltd for FY2012-21 then she notices that despite cumulative losses over the last 10-years (FY2012-FY2021), the company has reported a positive cash flow from operations.

Over FY2012-21, Asian Energy Services Ltd reported a total cumulative net loss of (₹44) cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹97 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Asian Energy Services Ltd is higher than the cPAT due to the following factors:

• Depreciation expense of ₹162 cr (a non-cash expense) over FY2012-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹59 cr (a non-operating expense) over FY2012-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Asian Energy Services Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of Asian Energy Services Ltd, an investor would notice that over the years, the company had a very low to negative SSGR in the range of -45% to 0%. At the same time, she would notice that Asian Energy Services Ltd has grown at a CAGR of about 21% in the last 10-years from ₹41 cr in FY2012 to ₹229 cr in FY2021.

Asian Energy Services Ltd has grown at a pace, which is higher than what its internal resources can afford; therefore, over the years, the company had to rely on additional funds by way of equity dilution to meet its growth requirements.

On March 31, 2021, Asian Energy Services Ltd is a debt-free company. However, an investor should not believe that the company is debt-free because, over the years, it had generated a lot of surplus from its operations. On the contrary, on a cumulative basis, the company has reported net losses in the last 10-years. The company is debt-free due to a significant amount of money infused by its shareholders in the form of equity dilutions.

The weakness in the operating business of Asian Energy Services Ltd can be assessed from the fact that the lenders to the company charged very high-interest rates on the loans given by them. It was as if the lenders treated the company as a very risky borrower with a very high possibility of default.

For example, as per the FY2016 annual report, page 141, the State Bank of India (SBI) had given a cash credit loan of ₹6 cr to Asian Energy Services Ltd. On this loan, SBI charged an interest rate of 16.7%, which was despite having the security of fixed deposit of ₹5.1 cr in addition to other securities like

• All current assets (inventory + receivables) of the company.
• Company’s office building at Vadodara, Gujarat
• A shop in Vadodara
• 2 million shares of the company owned by Samara Capital
• All the fixed assets of the company including plant, machinery, and equipment viz.
• Guarantee by Samara Capital, Mauritius.

An investor would appreciate that SBI asked for a very extensive security arrangement, in addition to the fixed deposit of ₹5.1 cr, which is 85% of the loan amount of ₹6 cr and still it charged an interest rate of 16.7% on the loan. It indicated that SBI almost did not have any faith in the business of the company and felt that the company had a very high probability of defaulting in repayment of the loan.

Such security arrangements asked by the lenders of Asian Energy Services Ltd are a sign of the weaknesses in the business model of the company.

Moreover, all the fears of the lenders came true as Asian Energy Services Ltd did default in repayments to its lenders. In essence, it had become bankrupt.

The credit rating agency, CRISIL had to downgrade its credit rating to “D” indicating a default when the company failed to repay its lenders.

CRISIL has downgraded its ratings on the bank facilities of Asian Oilfield Services Limited (AOSL) to ‘CRISIL D/CRISIL D’ from ‘CRISIL BB-/Negative/CRISIL A4’. The rating downgrade reflects non-payment of interest for over 30 consecutive days, as continued losses weakened liquidity.

Read: Credit Rating Reports: A Complete Guide for Stock Investors

When an investor analyses the business history of Asian Energy Services Ltd, then she notices that the company had to raise capital continuously year after year in order to buy equipment, meet the net worth criteria of tenders, repay lenders etc. The operating business of the company seems to be weak throughout the year where it could not sustain its expenses as well as its investment needs.

Let us analyse various instances of capital raising done by Asian Energy Services Ltd to meet its funds’ requirements when its operating business profits turned out to be insufficient.

FY2007:

• ₹3.38 cr by issuing 1,650,000 shares at ₹20.5 to Consolidated Securities Ltd (FY2007 annual report, page 18).
• ₹3.21 cr: issued 3,00,000 warrants to a promoter group company, Nimit Finance Pvt Ltd and 12,70,000 warrants to Consolidated Securities Ltd. Each warrant was convertible into one equity share at ₹ 20.50 (FY2007 annual report, page 18).

FY2008:

• ₹28.50 cr: from Samara Capital: issue of 1,500,000 shares at ₹190 per share. (FY2008 annual report, page 11).
• ₹22.8 cr: issued 750,000 warrants to Samara Capital and 450,000 warrants to other investors at ₹190 each (FY2008 annual report, page 19).
• ₹30.8 cr: issued 4,062,900 warrants to promoters and other strategic investors at ₹76 each (FY2008 annual report, page 19).
• Some of these warrants were forfeited later on as the investor chose not to put in additional money in the company.

FY2010:

• ₹24.8 cr: issued 4,050,000 shares at ₹61.2 per share to Samara Capital (FY2010 annual report, page 6).

FY2014:

• ₹15 cr: issued 7,000,000 shares at ₹50 to Samara Capital (FY2014 annual report, page 87).

FY2017:

• ₹116 cr: issued 10,000,000 warrants to Oilmax Energy at ₹80 each and 4,500,000 warrants to non-resident investor (Mr Balram Chinrai) at ₹80 each (FY2017 annual report, page 122).
• ₹20.6 cr: issued 1,250,000 shares at ₹165 each to a non-resident investor (Mr Balram Chinrai) (FY2017 annual report, page 121).

Advised reading: Stock Warrants to Promoters: How to Analyse

From the above discussion an investor would appreciate that over the last 15 years, Asian Energy Services Ltd raised more than ₹250 cr by way of equity dilution (preferential allotment of shares and warrants) to meet its funds’ requirements.

Apart from the above instances of direct equity infusion, Asian Energy Services Ltd also got indirect equity infusion when the promoters/shareholders who had given loans to the company by way of inter-corporate deposits, wrote them off and did not receive a part of their money back. The amount of money whose repayment was waived off by the shareholders is an indirect equity infusion by the shareholders in Asian Energy Services Ltd.

In FY2017, after Oilmax Energy took over Asian Energy Services Ltd, then it negotiated with the outgoing owners (Samsara Capital and its other associate companies) on the inter-corporate deposits given by them to the company. Oilmax Energy succeeded in offering a full & final settlement to Samsara Capital and its associates, which was lower by about ₹20 cr than the principal and interest outstanding to these entities. As a result, in FY2017, Asian Energy Services Ltd reported a non-operating income of more than ₹20 cr, which was effectively savings from non-payment to Samsara Capital and its associates.

As per FY2017 annual report, page 124: under the details of inter-corporate deposits (unsecured), an investor notices the following details:

i) ₹12.7 cr was waived off by Samara Capital Partners: On March 31, 2016, the outstanding amount was ₹34.18 cr and interest liability was ₹4.65 cr. During FY2017, the company also took a loan of $300,000 (₹1.94 cr). The company repaid ₹14.11 cr and entered into a settlement agreement to repay ₹13.94 cr on June 30, 2017, and therefore, ₹12.7 cr is recorded as an exceptional income.

ii) ₹3.47 cr waived off by Global Coal and Mining Private Limited: On March 31, 2016, the outstanding amount was ₹11.5 cr lacs and interest liability was ₹ 8.47 cr. The company entered into a settlement agreement and repaid ₹ 16.5 cr as full and final settlement and recorded ₹3.47 cr lacs as exceptional income.

iii) ₹2.97 cr waived off by Thriveni Earthmovers Private Limited:  On March 31, 2016, the outstanding amount was ₹11 cr and interest liability was ₹2.97 cr. The company entered into a settlement agreement to pay ₹11 cr on June 30, 2017, and therefore, ₹2.97 cr is recorded as an exceptional income.

Therefore, in total, about ₹19.14 cr was waived off by Samsara Capital and its associates when they exited the company in FY2017. This amount of ₹19.14 cr is an indirect equity infusion by the shareholders in Asian Energy Services Ltd.

Therefore, an investor would appreciate that over the years, Asian Energy Services Ltd attempted to grow at a pace of 21% year on year whereas its operating business was not strong enough for sustaining its operating expenses as well as investment needs. As a result, the company reported multiple years of operating losses and defaulted to its lenders. The company had to dilute equity multiple times and had to raise almost ₹270 cr from its shareholders to survive and meet its growth requirements.

An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Asian Energy Services Ltd.

b) Free Cash Flow (FCF) Analysis of Asian Energy Services Ltd:

While looking at the cash flow performance of Asian Energy Services Ltd, an investor notices that during FY2012-2021, it generated cash flow from operations of ₹97 cr. During the same period, it did a capital expenditure of about ₹246 cr.

Therefore, during this period (FY2012-2021), Asian Energy Services Ltd had a negative free cash flow (FCF) of (₹149) cr (=97 – 246).

In addition, during this period, the company had a non-operating income of ₹50 cr and an interest expense of ₹59 cr. As a result, the company had a total negative free cash flow of (₹208) cr (= -149 + 50 – 59). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

After looking at the above cash flow shortfall of ₹208 cr in the last 10-years, an investor would appreciate that the company had to raise money by way of equity dilution over ₹200 cr as discussed in the above section on SSGR.

Going ahead, an investor should keep a close watch on the free cash flow generation by Asian Energy Services Ltd to understand whether the company continues to remain a cash consuming business or it starts to generate surplus cash for its shareholders.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Asian Energy Services Ltd:

On analysing Asian Energy Services Ltd and after reading annual reports, DRHP, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Asian Energy Services Ltd:

Currently, the majority shareholding of Asian Energy Services Ltd is owned by Oilmax Energy Private Ltd, which, in turn, is controlled by Mr Kapil Garg and Ms Ritu Garg.

July 2016 open offer document by Oilmax Energy Pvt. Ltd (Source: SEBI), page 9:

The key shareholders / person in control of the Acquirer are Mrs. Ritu Garg and Mr. Kapil Garg in their personal capacities as well as through entities controlled by them.

Currently, Mr Kapil Garg is present on the board of directors of Asian Energy Services Ltd as a non-executive promoter-director.

When Oilmax Energy had taken over the control of the company in FY2017, then it had appointed Mr Rohit Agarwal as whole-time director (WTD) to manage the affairs. Later on, it replaced him with Mr Ashutosh Kumar from August 1, 2018, and since then Mr Kumar is looking at the day-to-day operations of the company as its chief executive officer (CEO) and whole-time director (WTD).

Looking at multiple instances of change in the control over Asian Energy Services Ltd in the last 15-years, it looks like different owners are now buying it as a financial investment and deploy professional managers for day-to-day execution.

Therefore, an investor may closely monitor the developments about Asian Energy Services Ltd to understand whether Oilmax Energy intends to be a long-term shareholder of the company or it intends to sell its stake as and when it is able to get a profitable exit.

An investor may contact the company directly to seek clarifications in this regard.

Further advised reading: How to do Management Analysis of Companies?

2) Transaction between Samara Capital and Oilmax Energy:

An investor notices that in FY2017, Oilmax Energy bought the entire stake of Samara Capital in Asian Energy Services Ltd and took over its management control.

When an investor analyses different publicly available documents about this transaction, then she gets to know that apart from the deal where Oilmax Energy bought out stake of Samara Capital in Asian Energy Services Ltd, there was another transaction where Samara Capital put in a large amount of money in Oilmax Energy.

2.1) Oilmax Energy bought out shares from Samara Capital and put in more money in Asian Energy Services Ltd:

In May 2016, Oilmax Energy bought out a 56.32% stake of Asian Energy Services Ltd owned by Samara Capital for about ₹30 cr.

FY2016 annual report, page 156:

On May 23, 2016 the Holding Company of AOSL “Samara Capital Partners Fund I Limited” has entered into an Share Purchase Agreement (“SPA”) with Oilmax Energy Private Limited “Acquirer”… Pursuant to the SPA, the Acquirer agreed to acquire 12,572,600 equity shares representing 56.32% of fully paid-up equity share capital of the Company in two tranches at a price of ₹23.86 per share aggregating to ₹299.98 million.

In addition, Oilmax Energy agreed to put in ₹60 cr in Asian Energy Services Ltd as an inter-corporate deposit.

July 2016 open offer document by Oilmax Energy Pvt. Ltd (Source: SEBI), page 13:

The Acquirer has entered into an agreement with the Target Company where under the Acquirer has agreed to provide inter corporate deposit of Rs. 60,00,00,000/- (Rupees Sixty Crores) to the Target Company, in mutually agreed tranches.

Therefore, an investor would appreciate that in FY2017, Oilmax Energy agreed to put in a total of ₹90 cr in the form of buying out shares from Samara Capital (₹30 cr) and inter-corporate deposit to Asian Energy Services Ltd (₹60 cr).

Now, let us see the other leg of the transaction between Samara Capital and Oilmax Energy.

2.2) Samara Capital puts in ₹100 cr in Oilmax Energy:

As per the letter of open offer filed by Oilmax Energy to SEBI in July 2016, Samara Capital agreed to give ₹100 cr to Oilmax Energy.

July 2016 open offer document by Oilmax Energy Pvt. Ltd (Source: SEBI), page 10:

The Seller has agreed to make an investment of Rs. 100 Crores (Rupees One Hundred Crores) in the Acquirer in two tranches by subscribing to 4,63,821 (Four Lac Sixty Three Thousand Eight Hundred Twenty One) equity shares of the Acquirer constituting 8.40% of emerging equity share capital of the Acquirer under a separate share subscription agreement dated May 13, 2016.

An investor would notice that this agreement was entered by Samara and Oilmax on May 13, 2016, which is 10 days before the date of purchase of shares of Asian Energy Services Ltd by Oilmax Energy on May 23, 2016.

In addition, out of the promised ₹100 cr (8.40% stake), Samara Capital invested more than ₹71 cr (6.03%) in Oilmax Energy on May 18, 2016, i.e. 5 days before the date of purchase of shares of Asian Energy Services Ltd by Oilmax Energy on May 23, 2016.

July 2016 open offer document by Oilmax Energy Pvt. Ltd (Source: SEBI), page 10:

1st tranche 3,24,675 (Three Lac Twenty Four Thousand Six Hundred Seventy Five) equity shares constituting 6.03% of present equity share capital of Acquirer has already been subscribed and allotted on May 18, 2016.

An investor should analyse both the set of transactions between Samara Capital and Oilmax Energy together, i.e. Samara Capital putting in money in Oilmax Energy and then Oilmax Energy buying out shares held by Samara Capital in Asian Energy Services Ltd and agreeing to put in more money in the company. Looking at both the transactions together, she would notice that Oilmax Energy agreed to put money in Asian Energy Services Ltd only after getting money from Samara Capital.

Therefore, it looks like a possibility where Samara Capital arranged and funded its own exit from Asian Energy Services Ltd by finding a buyer in the form of Oilmax Energy and then giving it money to buy it out.

However, before arriving at any final conclusion in this regard, an investor may contact the company directly and seek clarifications in this regard.

3) Assumption that private equity funds can bring in money and professional management, which can turn around sick businesses:

Asian Energy Services Ltd presents a case study where a private equity company decided to take over the control of one of its portfolio companies, bring in new management and invest more money in order to turn it around.

Initially, Samara Capital invested ₹28.5 cr in Asian Energy Services Ltd in FY2008 to take a 14.9% stake by buying 1,500,000 shares at a price of ₹190 per share.

FY2008 annual report, page 11:

We mobilised Rs 28.50 cr from Samara Capital, a reputed global private equity (PE) major, through the issue of 15 lakh shares at a price of Rs 190 per share.

FY2009 annual report, page 3:

2007: Samara Capital invests for a 14.9% stake in the Company

Thereafter, Samara Capital decided to take over full control of Asian Energy Services Ltd and in FY2010, it invested an additional ₹24.8 cr in the company by buying 4,050,000 shares at ₹61.2 per share.

FY2010 annual report, page 6:

During the period under review, 40,50,000 Equity Shares of Rs.10/- each were issued and allotted to M/s. Samara Capital Partners Fund I Ltd. on a premium of Rs.51.20 per share

In one of the subsequent annual reports (FY2012), the company highlighted this change of ownership and management control in 2010 as a means by Samara Capital to provide its intellectual capital and help the company grow.

FY2012 annual report, page 12:

To enable the Company to realise the opportunities provided by its growing sector and the potential of its resident intellectual capital, Samara Capital, a private equity investment firm, acquired a majority stake in Asian Oilfield and assumed management control from 2010.

Now, the moment Samara Capital took the control of Asian Energy Services Ltd, the new management started bashing the original/founding promoters for their allegedly flawed business strategy and decision. The following comments from various annual reports would give a good idea to the investor.

FY2012 annual report, pages 7-11:

FROM A COUNTRY TO A CONTINENT: For nearly two decades, Asian Oilfield was largely focused on seismic exploration opportunities coming out of India. The new management restructured the company’s focus to capitalise on sectoral opportunities across Asia.

FROM ASSET-HEAVY TO ASSET-LIGHT: For nearly two decades, Asian Oilfield invested in its gross block in a technology-evolving business, making it vulnerable to changes beyond its control. The new management has embarked on a strategy to reduce the cost of asset engagement as its first step towards competitiveness

FROM THE SIMPLE TO THE CHALLENGING. For nearly two decades, Asian Oilfield focused on any assignments that came its way. The new management has embarked on a strategy to embrace challenging assignments with the objective to reinforce its positioning as a specialized solution provider

FROM TRADITION TO TECHNOLOGY. For nearly two decades, Asian Oilfield invested in prevailing technologies. The new management has embarked on a strategy to invest in cutting-edge technologies with the objective to emerge as an industry leader.

In the annual reports, the new management started highlighting that the strategies of the old management had many flaws, which the new management has now started to rectify and it has now started to guide the company in the right direction.

The new management under Samara Capital did an extensive rebranding of Asian Energy Services Ltd to highlight this change to everyone.

FY2012 annual report, page 13:

Re-branding: At Asian Oilfield, we have re-branded our identity — logo to websites — to communicate that whereas the name and business may be the same, there has been a change in management, intent and strategic direction. Our Company is now being positioned as an imaging organization as opposed to a conventional data acquisition function. Our Company is being positioned around an Asian personality with a global aspiration.

However, almost every year, the new CEO presented the shareholders with excuses to justify the weak performance of the company. In FY2013, when the company reported losses for the fourth consecutive year, then again, the CEO stressed that now is the turnaround time for the company.

FY2013 annual report, page 12:

During the last four years, our performance was unsatisfactory. Growth trends were negative with income dropping from ₹642 million in 2008-09 to ₹458 million in 2011-12. However, 2012-13 represented a watershed following the induction of the new management.

In FY2014, when the company reported losses for the fifth year in a row, the CEO acknowledged that the company is not able to make any significant progress in its business in India.

FY2014 annual report, page 13:

the Company could not make significant headway in the Indian markets

In FY2014, even after being in charge of Asian Energy Services Ltd for about 5-years and with losses in all those five years, the new management was still comparing itself with the original/founder promoters and portraying how they have reinvented the company.

FY2014 annual report, page 11:

Earlier: Focused on any assignments that came its way

• Now: Focus on high margin, challenging assignments to emerge as a specialized solutions provider

Earlier: Invested in prevailing technologies

• Now: Invests in cutting-edge technologies and embarked on an investment in wireless seismic technology

While observing the losses in the company year after year and reading about the obsession of the management in comparing itself with the original promoters even more than 5 years of being in charge of the company, an investor feels that the new management was overly obsessed with highlighting the change in management to the investors. The financial performance on the ground was lacking all throughout this period.

In FY2014, the continuous losses of the company for 5-years (FY2010-FY2014) forced Samsara Capital to put in additional money in the company to meet its expenses and investment requirements. Samsara Capital invested ₹15 cr by buying 7,000,000 shares at ₹21.50 per share.

FY2014 annual report, page 87:

Company allotted 7,000,000 equity shares of ₹10 each at premium of ₹11.50 each on November 7, 2013 to Samara Capital Partners Fund I Ltd.

An investor would notice the diminishing value of Asian Energy Services Ltd over the years.

• In FY2008, Samara Capital had invested money at ₹190 per share.
• In FY2010, Samara Capital had invested money at ₹61.2 per share and
• In FY2014, Samara Capital had invested money at ₹21.5 per share and

Therefore, over 7 years, including the 5 years (FY2010-FY2014) under the control of new management brought in by Samara Capital, the value of Asian Energy Services Ltd had declined by almost 90% from ₹190 per share to ₹21.5 per share.

In the next year, FY2015, the company again reported losses, its 6-year of losses in a row. In the annual report, when asked the reasons for another year with poor performance, the CEO again said that they are in a process of transformation.

FY2015 annual report, page 8:

As I had mentioned last year, we are in the process of transformation

An investor is left perplexed whether the new management would ever start making profits in the business.

When an investor analyses the remuneration taken by the management appointed by Samara Capital during this period, then notices that Asian Energy Services Ltd was paying a very high remuneration of ₹2.74 cr to its CEO and whole-time director (WTD). The auditor of the company had highlighted that the remuneration was higher than the legal limits. Moreover, the company had not taken the prior approval of the central govt. for high remuneration.

FY2015 annual report, page 134:

We draw attention to note 20 to the consolidated financial statements regarding managerial remuneration of Rs. 274.46 Lacs paid by the Company to their whole time director, which exceeds the limits as per the provisions of Schedule V of the Companies’ Act, 2013, without the approval of the Central Government, by Rs. 41.31 Lacs.

Advised reading: How to identify Promoters extracting Money via High Salaries

However, the payment of a high remuneration by Asian Energy Services Ltd to its managers did not make any difference in its business performance. Even in the next year, FY2016, the company reported losses, which was the seventh year of losses in a row under the control of new management put in by Samara Capital.

The following table shows the financial performance of Asian Energy Services Ltd over the years and highlights the performance under the management brought in by Samara Capital from FY2010-FY2016

Under the control of Samara Capital, an investor would appreciate that the company and the management acted like typical new-age startup companies where the management burns cash in order to grow without prioritizing the profits.

During FY2010-FY2015, an investor notices that the revenue of Asian Energy Services Ltd increased from ₹19 cr in FY2010 to ₹141 cr in FY2015. However, during the same period, the net losses of the company also increased from (₹1) cr in FY2010 to (₹27) cr in FY2015. Therefore, it became a case where higher revenues led to higher losses, which we see in private-equity-funded-new-age-technology startup companies.

Moreover, an investor notices that in the year FY2014 when the sales of the company had increased by about 150% from ₹50 cr in FY2013 to ₹122 cr in FY2014, which is a significant jump in the revenue. In the same year, the net losses of the company had also increased by 130% from (₹10) cr in FY 2013 to (₹23) cr in FY2014. Upon deeper analysis, an investor observes that during FY2014, Asian Energy Services Ltd had spent an exceptionally high amount on business promotions.

In FY2014, the company spent ₹7.4 cr on business promotions, which was more than 12 times increase from ₹0.6 cr spent on business promotions by the company in FY2013. Moreover, after high spending in FY2014, the spending on business promotions declined to ₹0.54 cr in FY2015. However, the sales growth also slowed down to 16% in FY2015.

Therefore, it seems that under Samara Capital, the approach of Asian Energy Services Ltd as well as the management was to spend more money on business promotions/advertising etc. with an assumption that the profitable business/orders would follow. However, continued losses, year-after-year indicate that this strategy did not work out in the oil exploration services business.

It seems that in FY2016, finally, after 7-years of consecutive losses, Samara Capital realized that managing Asian Energy Services Ltd is a difficult business. Despite putting in money and bringing in so-called professional management, the financial performance of the company under Samara Capital was very weak. As discussed above, in 2016, the company defaulted to its lenders and was rated “D” by CRISIL.

As a result, Samara Capital decided to exit Asian Energy Services Ltd. However, it seems that it was finding it very difficult to find a buyer for its stake in the company. As a result, an investor would remember from the earlier discussion that it had to first put in money in Oilmax Energy and only after getting money from Samara Capital; Oilmax Energy bought out its stake from Asian Energy Services Ltd.

Effectively, Samara Capital had to fund its own exit from Asian Energy Services Ltd.

The exit of Samara Capital from Asian Energy Services Ltd was at a huge loss. (Samara Capital exits Asian Oilfield Services at huge loss: Financial Express, May 24, 2016)

Overall, it had invested ₹68.5 cr in the equity shares of the company (= 28.5 + 24.8 + 15). However, it could get only ₹30 cr from Oilmax Energy for its stake, which is a loss of more than 50%. On top of it, when an investor factors in the loss by writing off inter-corporate deposits of about ₹20 cr given by Samara Capital to Asian Energy Services Ltd (discussed above), then the amount of loss suffered by Samara Capital increases further.

As a result, an investor would appreciate that the investment of Samara Capital in Asian Energy Services Ltd comes across as a case study where a private equity player entered the picture by putting in money and bringing in new professional management. However, the new management failed to report any profits throughout the entire period of their control. As a result, the experiment by the private equity player to run a public company seemed to have failed completely. Therefore, the private equity player had to take an exit from the company at a loss and that too by funding its own exit by giving money to the future buyer.

Advised reading: Are professionally managed companies safer for shareholders?

4) Project execution by Asian Energy Services Ltd:

From the above discussion on the business analysis of Asian Energy Services Ltd, an investor would remember the various risks that it faces while executing its projects like geopolitical risk, weather risk, terrain risk, and environmental risk etc. An investor would appreciate that in many such situations, the factors leading to the delays in project execution are outside the control of the company and therefore, they are covered under force majeure (an act of God). Most of the time, the company is not held responsible for delays in such cases.

However, while analysing the project execution by Asian Energy Services Ltd, an investor notices that at times, the delay in the project execution has been due to the shortcomings by the company and as a result, it had to pay a penalty to its customers.

For example, in FY2016, for one of the projects allotted to Asian Energy Services Ltd by ONGC, in Jorhat, ONGC claimed that Asian Energy Services Ltd delayed the mobilization of resources at the project site. Asian Energy Services Ltd had to complete the mobilization by October 1, 2015. However, it completed the mobilization by December 28, 2015, a delay of about 3-months. Because of the delay, ONGC terminated the contract, levied liquidating damages on the company and invoked the performance guarantee of ₹5.13 cr.

FY2016 annual report, page 149:

As per the terms of the contract the mobilization of the project should have been completed by October 1, 2015. The Company was however able to complete the mobilisation by December 28, 2015 owing to delay caused by acts and inactions on the part of ONGC. This delay led to liquidated damages of ₹33.3 million being levied by ONGC. ONGC vide its correspondence dated March 28, 2016 sent a show cause notice to the Company wanting to invoke the termination clause of the contract and bank guarantee of ₹51.29 million on grounds of non-satisfactory performance by the Company.

Asian Energy Services Ltd claimed that the delay was on the part of non-fulfilment of responsibilities by ONGC like providing security to its team. Therefore, the company initiated legal proceedings and arbitration against ONGC.

FY2016 annual report, page 149:

Company initiated legal proceedings and filed arbitration petition under Section 9 of the Arbitration and Conciliation Act, 1996 with District court, Jorhat on the ground that the Company was not provided with adequate security by ONGC.

However, after disputing the allegations of ONGC about non-satisfactory performance for 3 years, in FY2018, an Outside Expert Conciliation Committee determined that Asian Energy Services Ltd would have to pay ONGC an amount of ₹5.13 cr, which is equal to the performance bank guarantee provided by the company to ONGC.

FY2019 annual report, page 124:

The Group received recommendation dated March 7, 2018 from Outside Expert Conciliation Committee which has been accepted by both the parties and accordingly provision aggregating INR 512.98 Lacs has been made towards this matter.

Finally, in FY2020, Asian Energy Services Ltd paid ONGC a sum of ₹5.13 cr to settle the dispute.

FY2020 annual report, page 153:

Pursuant to settlement agreement dated 10 May 2019 entered with its customer, the Group has settled its obligation during the current year for which a provision of ₹ 512.98 Lacs was created in previous year.

From the above incident and the payment by Asian Energy Services Ltd to settle the claims of non-performance made by ONGC, an investor would appreciate that the delay in mobilization at the site and the resultant termination of the project by ONGC was due to deficiencies on part of Asian Energy Services Ltd.

While reading the February 2020 conference call, an investor gets to know of another project being executed by the company in Mizoram where the customer had invoked the performance bank guarantee of about ₹12.5 cr due to deficiencies on part of the company. The management of Asian Energy Services Ltd intimated to the investors that it would start arbitration in this regard.

February 2020 conference call, page 10:

Priyanka Singh: So as you had mentioned in your press release, one of your customers has encashed performance bank guarantee of somewhere around Rs. 12.5 Crore provided for Manipur seismic project. So how it is likely to impact our P&L going forward?

Ashutosh Kumar: Yes you are right that PBG has incurred. We are in dispute with that customer and we have documentation and reasons to believe that the customer has been unreasonable in this case. We are first trying to resolve with amicably. If not there is a dispute resolution mechanism in the contract. We are going to use that and take the dispute to arbitration and get the arbitration award.

As per the FY2020 annual report, the customers have withheld its payments for about ₹4.25 cr and invoked the bank guarantee for about ₹11.66 cr; thereby, a total amount of about ₹16 cr.

FY2020 annual report, page 172:

Trade receivables (current) and Other financial assets (non-current) as at March 31, 2020 of the Holding Company includes an amount of ₹ 424.79 Lacs and ₹ 1,166.07 Lacs, respectively, mainly representing amounts withheld by the customers towards certain projects and performance guarantee invoked by a customer towards alleged non-performance on a project awarded to the Holding Company.

An investor would appreciate that in case of any project execution, in case of delays, usually; first, there are numerous follow-ups on progress. It is only after the execution does not improve after follow-ups, then the customers resort to steps like the invocation of bank guarantee as it has the potential of spoiling the relationships between the parties.

It is advised that an investor may contact the company directly to understand why there have been such instances of invocation of performance bank guarantees by its customers. It might be a case that in the mentioned cases, the performance of the company was very deficient and the customer was losing hope of any possibility of any catch to the project schedules.

An investor may do her own due diligence and seek clarifications from the company about its project execution.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

5) Almost all overseas projects/investments by Asian Energy Services Ltd failed:

While analysing the history of Asian Energy Services Ltd, an investor notices that each of three managements who controlled it, original promoters until 2010, Samara Capital from 2010-2016 and Oilmax Energy from 2016-until date, have attempted to diversify in foreign markets. However, an investor realizes that almost all of the decisions of each of these different managements resulted in failure.

5.1) Investment in Ensearch Petroleum Ltd, Singapore under original promoters:

In 2008, Asian Energy Services Ltd invested $4.99 million (about ₹30 cr) in Ensearch Petroleum Ltd, Singapore, which, in turn, had part holdings in 10 oil & gas exploration blocks in different countries including one in India.

FY2008 annual report, page 19:

Company has invested USD 4.99 million in August 2008 through its wholly owned subsidiary AOSL Petroleum Pte. Limited into Ensearch Petroleum Limited, Singapore. Ensearch Petroleum Limited is into oil and gas exploration and production, having participating interest in portfolio of 10 assets with net combined acreage of around 40,000 sq. km and has operating offices in India, Nigeria and Jordan with corporate offices in India and Singapore.

The original promoters, Mr Krishna Kant and Mr Avinash Manchanda, were very happy by making this investment and considered it a very good step for the business growth of the company. They believed that this investment served multiple purposes. It took the company to international markets, helped the company to diversify into the downstream segment of the oil & gas industry and it provided the company with an assured customer for its seismic data collection business.

FY2008 annual report, page 10-11:

Ensearch did two things for us in one shot – extended us into the larger downstream play and took us international simultaneously.

we considered it important to extend ourselves forward, creating a ‘captive’ customer.

This will provide Asian Oilfield with assured seismic business opportunities across international geographies.

However, the investment in Ensearch did not produce any benefits to the company and after a few years, in FY2011, Asian Energy Services Ltd had to exit from Ensearch by taking a loss of about ₹7 cr on its investment.

FY2011 annual report, page 14:

Company also recovered INR 22 Cr. from its investments made in FY2007. Though this resulted in onetime loss of ~7Cr. for the year

An investor would appreciate that when such overseas investment decisions go wrong, then the loss is not limited to only the shortfall in the recovery. To recover their money, companies have to hire legal experts in India as well as foreign locations, which is an added expense that ideally, should be added to the loss suffered by the company to arrive at the total loss for shareholders.

For example, in the case of Asian Energy Services Ltd, in FY2011, the legal and professional charges witnessed a very sharp increase over FY2010 and after FY2011, these charges reduced substantially in FY2012.

• FY2010: legal and professional charges: ₹0.95 cr
• FY2011: legal and professional charges:₹4.86 cr
• FY2012: legal and professional charges: ₹1.71 cr

Therefore, an investor would appreciate that the overall loss suffered by Asian Energy Services Ltd on its investment in Ensearch may not be limited to a shortfall of ₹7 cr in its recovery. The total loss may be ₹11 cr when one also considers the additional legal and professional charges of ₹4 cr incurred by the company.

Advised reading: How to Identify if Management is Misallocating Capital

5.2) Project undertaken by Asian Energy Services Ltd under Samara Capital in Kurdistan, Iraq:

In FY2013, under Samara Capital, the company accepted a seismic data collection project from Gazprom in Kurdistan, Iraq.

FY2013 annual report, page 9:

During 2012-13, the company secured two overseas contracts – in Indonesia and Iraqi Kurdistan from GSPCL and Gazprom respectively.

From the above discussion, in the business analysis section, an investor would remember that Asian Energy Services Ltd suffered large losses in this project; first, because of increased operating costs due to geopolitical issues and second, because of write-off of equipment used in this area due to high import costs.

The credit rating agency, CRISIL, highlighted the operating losses of the company in FY2015 due to geopolitical issues of the Kurdistan project in its report in August 2015.

The losses during 2014-15 were mainly on account of significant increase in operating cost due to emergence of geopolitical issues in the Kurdistan region where AOSL had its largest order and the company chose to complete the project even in spite of a force majeure event.

Again, in FY2017, the company had to write off all the equipment it had used in Kurdistan, Iraq because transporting them back to India proved economically unviable.

FY2017 annual report, page 137:

IMPAIRMENT LOSS: The Group recorded an impairment loss of ₹ 27,098,563 (under the head “other expenses” in its consolidated financial statements) relating to its fixed assets… The fixed assets were in Iraq where the subsidiary Company no longer has any presence and considering the high transportation cost of importing these fixed assets, same were impaired.

As a result, an investor would appreciate that Asian Energy Services Ltd suffered losses on undertaking the overseas project under Samara Capital.

5.3) Overseas projects in Nigeria under Oilmax Energy:

After Oilmax Energy took over the management of Asian Energy Services Ltd, then it highlighted operations & maintenance (O&M) as one of the focus areas for the company. It mentioned that O&M business provides better cash flows prospects.

FY2017 annual report, page 7:

Diversifying into O&M activities to add additional avenue of growth. O&M business also gives better cash flow visibility to the Company

Therefore, under the control of Oilmax Energy, Asian Energy Services Ltd started looking for O&M projects in foreign locations and it won two projects in Nigeria.

5.3.1) O&M project from Koral Energy in Nigeria:

The company won an O&M contract from Koral Energy in Nigeria. However, the very next year, in FY2018, the contract was terminated by the customer. As a result, the company had to move out of the project. (Asian Oilfield tanks 20% as unit gets termination notice from Koral Energy: Business Standard, May 10, 2018)

FY2018 annual report, page 5:

The Company’s subsidiary Asian Oilfield & Energy Services DMCC, Dubai O&M contract in Nigeria has been terminated by the client in May 2018. Necessary steps are being taken to protect the Company’s interests as per the contract. The Company has successfully de-mobilised from operations post-termination.

On further analysis, the investor gets to know that the client has not made payments for the work done by Asian Energy Services Ltd and now the companies are fighting it out by arbitration.

FY2019 annual report, page

ADMCC had filed for arbitration in ‘The London Court of International Arbitration’ on 19 June 2018 against early termination of ‘Service Contract for Operations and Maintenance of Floating Production Unit’ by its customer… On 5 February 2019, ADMCC had demanded payment of second installment of US$ 1,759,564 (INR 1,217.11 Lacs) where the last day expired on 19 February 2019 and the customer did not settle the payment. ADMCC’s management has re-initiated arbitration proceedings against the customer

As per the FY2020 annual report, the company and the customer were looking to explore an out-of-court settlement of the dispute.

FY2020 annual report, 119:

Both the parties had agreed on suspension of arbitration proceedings and evaluating an out-of-court settlement…both the parties have mutually agreed to a further extension of the current stay of the arbitration proceedings up to and including June 30, 2020

An investor may contact the company directly to understand whether the dispute with Koral Energy is currently, settled and whether Asian Energy Services Ltd has received its dues of about $2 million. Moreover, an investor should get a clarification from the company that in case, it is not able to realize $2 million, then whether it made any profits on this project or it ended up losing money by working on this project.

An investor should focus that Asian Energy Services Ltd has already recognized the entire money to be received from Koral Energy in its sales and profits in the P&L.

February 2020 conference call, page 6:

Ganpat Mehta: But if you receive this $ 2 million it is income for that quarter?

Sumit Maheshwari: No, that will not be an income for that quarter that will be realization of receivables, which are in dispute.

Ganpat Mehta: Okay it is already shown in the receivables?

Sumit Maheshwari: Yes this will be a recovery of the receivables. It will not have any impact to the P&L. And as I explained earlier all the income and expenditures and liabilities related to these projects have already been accounted for, when we were doing this project.

Therefore, an investor should note that in case, the company is not able to recover its dues from Koral Energy, then the sales, profits and the net worth of the company declared in the past may prove to be inflated to this extent.

Advised reading: How Companies Inflate their Profits

On a side note, it seems that in June 2020, Asian Energy Services Ltd sold a subsidiary in Nigeria, Ivorene Oil Services Nigeria Limited, which it had bought in February 2017, for a sum of $45,000 (₹34 lac).

FY2021 annual report, page 152:

The Group had disposed off its entire equity holding of 99.99% in ‘Ivorene Oil Services Nigeria Limited’ for a consideration of USD 45,000 (₹ 34.04 Lacs).

An investor may seek clarification from the company about this sale and whether it was the subsidiary, through which it executed the project for Koral Energy.

Let us now see what happened in the case of another project won by Asian Energy Services Ltd under the management of Oilmax Energy in Nigeria from Amni International.

5.3.2) O&M cum EPC project from Amni International in Nigeria:

In the presentation to investors in July 2020, Asian Energy Services Ltd highlighted to its investors that it is executing a construction cum O&M project for Amni International in Nigeria.

Production Facility Construction and O&M

Client: Amni International (Nigeria)

Order worth: ~ US $56 Million. Have booked US $36 Million in revenue in FY20 and balance will be booked in FY21

An investor should focus that the total scope of this project was worth $56 million out of which Asian Energy Services Ltd had already booked $36 million (about ₹270 cr @₹75/$) in FY2020.

When an investor notices that in FY2020, the total consolidated operating income of Asian Energy Services Ltd was ₹273 cr, then she appreciates that in the entire financial year (FY2020), this project from Amni International, Nigeria was the only project where Asian Energy Services Ltd worked. She may conclude that in the entire FY2020, Asian Energy Services Ltd did not have any seismic project to work on where it could recognize any revenue.

This project from Amni International, Nigeria was the key reason for the increase in operating profit margin (OPM) of Asian Energy Services Ltd in FY2020 to 24% from 17% in FY2019.

The credit rating agency, India Ratings, highlighted this in its report for the company in October 2021.

AESL Group’s EBITDA margins expanded to 24% in FY20 (FY19: 17%) due to an increase in the high-margin engineering, procurement and construction (EPC) orders executed.

However, the moment an investor starts to feel happy that finally, after a gloomy period of almost 10 years since the company started reporting losses in FY2010, now the company has found a business where is making good profits; she gets a setback.

The auditor of the company in its FY2021 report qualified its opinion by stating that an amount of $8.5 million (about ₹63.75 cr @₹75/$) is pending from Amni International, which is unconfirmed and on top, Amni International has cancelled the contract.

FY2021 annual report, page 105:

Accounts receivable amounting to USD 8,499,254/- remain unconfirmed as at reporting date from one customer M/s Amni International Petroleum Development OML 52 Company Limited, who has issued a notice of suspension of the contract.

While reading the Q1-FY2022 results, an investor gets to know that Asian Energy Services Ltd is still in dispute with Amni International and it has not yet received the amount of about ₹64 cr, which remain unconfirmed.

Q1-FY2022 results, page 6:

USD 8,499,254/- & USD 76,161/- respectively remain unconfirmed as at reporting date from one customer M/s Amni International Petroleum Development OML 52 Company Limited, who had issued a notice of suspension of the contract on November 16, 2020… Company’s receivables & amount due from customer for contract work are subject to impairment testing and the net profit, account receivable & amount due from customer for contract work and net worth would be overstated to the extent of impairment, if any.

An investor would appreciate that if Asian Energy Services Ltd is not able to recover its money from Amni International, then almost all the work done by it in FY2020 may amount to nil and instead of reported consolidated net profit of ₹29 cr in FY2020; it might have actually made losses in the year.

In addition, in the Q1-FY2022 results, the investor also gets to know that Asian Energy Services Ltd is yet to pay $5 million (about ₹37 cr) to its suppliers for the work done for Amni International.

Q1-FY2022 results, page 6:

There are certain trade payables amounting to INR 3,718.02 lakhs (USD 5,000,997) directly linked to the project executed with AMNI, which are subject to confirmation. As the underlying project is on standby due to notice of suspension of work effective 16 November 2020, the scope of work of these vendors has also been held in abeyance.

From the above disclosure, it seems that for the work done by Asian Energy Services Ltd for Amni International, it is yet to receive ₹64 cr and at the same time, Asian Energy Services Ltd has withheld payments of about ₹37 cr to the suppliers/vendors who supplied goods/services to the company for its work on the project.

An investor would appreciate that a supplier may not wait endlessly even if Asian Energy Services Ltd is not able to recover money from Amni International. After some time, a situation may arise when the suppliers would start legal proceedings against Asian Energy Services Ltd to recover their dues.

An investor should be cautious while assessing the future cash flow position of Asian Energy Services Ltd in the light of these dues of ₹37 cr to the suppliers because, on March 31, 2021, the company has a cash & investment balance of ₹24 cr only.

Nevertheless, an investor would appreciate that initially, it looked that in FY2020, Asian Energy Services Ltd has hit a jackpot where it could work on a very profitable project. However, now in FY2022, it turns out that the company is in trouble with its customer refusing to pay ₹64 cr and its suppliers asking for payments of ₹37 cr from it.

Therefore, from the above discussion, an investor would appreciate that whenever Asian Energy Services Ltd attempted to venture out into overseas markets whether by way of investments, or seismic data collection projects, or O&M projects, or construction projects, it faced issues and it lost money. This has been true irrespective of the entity controlling and managing Asian Energy Services Ltd. The company lost money in overseas markets whether the original promoters (Mr Krishna Kant and Mr Avinash Manchanda), Samsara Capital, or Oilmax Energy decided to venture overseas.

Therefore, going ahead, whenever Asian Energy Services Ltd attempt to venture into foreign markets, then the investor should be very cautious and increase her due diligence on the customers of Asian Energy Services Ltd to check whether they have a history of cancelling contracts with their vendors.

In addition, an investor should continuously monitor the developments around arbitrations of Asian Energy Services Ltd with its customers and the status of receipt of money from them.

Further advised reading: Steps to Assess Management Quality before Buying Stocks

6) Weakness in internal controls and processes of Asian Energy Services Ltd:

While analysing the company, an investor comes across many instances, which indicate that the internal controls and processes at Asian Energy Services Ltd leave room for improvement. An investor finds such instances in the company under all the three managements i.e. original promoters until 2010, Samara Capital 2010-2016 and Oilmax Energy 2016-until date.

6.1) Weakness in verification and valuation of assets:

An investor comes across many instances where there were issues in the valuation/verification of assets like fixed assets or inventory.

In FY2016, the company expensed about ₹0.9 cr as overvaluation of inventory as a prior period item, which indicates weakness in the processes for inventory valuation.

FY2016 annual report, page 149:

Over-valuation of opening stock 9,359,512

In FY2013, the auditor of the company qualified its opinion stating that inventory for ₹0.9 cr could not be verified by an auditor.

FY2013 annual report, page 73:

Basis for Qualified Opinion: The Group’s inventories are carried in the Balance Sheet at ₹591.03 lacs, of which the counting of inventories of ₹93.15 lacs at one of the subsidiary could not be observed by the other auditors and they were unable to independently satisfy themselves of the inventory quantities as at Balance Sheet date.

In FY2015, the auditor of the company highlighted that the fixed assets of about ₹87 cr of the company lying in Kurdistan, Iraq could not be verified by an auditor. Instead, the auditors relied on a letter from a law firm for the presence of these fixed assets.

FY2015 annual report, page 134:

Physical verification of property, plant and equipment amounting to Rs. 8,736.37 Lacs and Rs. 9.85 Lacs could not be carried out by the auditors of Asian Oilfield & Energy Services DMCC as these were lying in the warehouse at project site office at Gas Qalaga Factory street, Old Kalar, Sulaymaniyah, Kurdistan, Republic of Iraq and guest house at Bahrain city, Sulaymaniyah, Kurdistan, Republic of Iraq respectively. The other auditors of Asian Oilfield & Energy Services DMCC have relied upon a letter of confirmation received from an independent law firm, M/s. Alwakeel regarding physical existence and valuation of said assets.

From the earlier discussion, an investor would remember that later on, Asian Energy Services Ltd had to write off assets in Kurdistan because the company found it economically unviable to import the assets from there. As a result, the shareholders of the company had to accept a loss of these assets.

In FY2013, the auditor of the company also highlighted that the process of the company for verification of fixed assets needs to be streamlined.

FY2013 annual report, page 46:

According to the information and explanation provided to us, the fixed assets were physically verified during the period by the Management, however the process needs to be streamlined.

Even under the management of Oilmax Energy, in FY2018, FY2019 and FY2020, the auditor of the company did not do a physical verification or valuation of the assets of the company. Instead, the auditor relied on a certificate produced by the management.

FY2019 annual report, page 107:

We have relied on certificate of physical verification of assets received from an independent audit firm which has conducted physical verification of the property, plant & equipment lying at various project locations in India and who has also certified carrying amount.

An investor would appreciate that when there are questions being raised about the verification of assets of the company by the auditors or the assets are lying at places where the auditors are not able to independently verify their existence, then the risk for the investors of the company increases. This is because, later on, the company may say that the assets, which were until now shown on the balance sheet do not exist or are non-recoverable.

Moreover, in the case of Asian Energy Services Ltd, in FY2015, the auditors of the company could not confirm and verify the tax liability arising due to the overseas operations of its subsidiary.

FY2015 annual report, page 134:

Tax liability of Asian Oilfield & Energy Services DMCC on profits generated on projects in Iraq has been considered on the basis of tax certificate from tax consultant in Iraq, M/s Razan Samaan Touza Auditing and Consultancy and the auditors of Asian Oilfield & Energy Services DMCC could not provide any assurance on the adequacy or otherwise of such tax liability.

Read: Understanding the Annual Report of a Company

Such situations increase the margin of error while an investor assesses the financial position of any company. Therefore, an investor needs to increase her due diligence for companies where there are instances of weaknesses in the verification and valuation of assets.

6.2) Non-compliance with statutory requirements:

In October 2014, SEBI penalized Samara Capital for a delay of more than 400 days in the disclosure of its shareholding in Asian Energy Services Ltd to the stock exchanges. (Sebi slaps Rs 20lakh fine on Asian Oilfield Services’ promoter: Business Standard, October 10, 2014)

As per the SEBI order, Samara Capital responded to SEBI stating that it missed the disclosure due to unfamiliarity with the regulatory/compliance requirements. (Source: SEBI)

SEBI order, Oct. 2014, page 3:

As regards the required disclosures in AOSL, Samara missed out the annual disclosures due to sheer lack of internal familiarity with the compliance requirements for a listed entity.

The open offer document filed by Samara Capital for acquiring shares of Asian Energy Services Ltd in December 2013 highlighted another instance where the company had made a delay of 190 days in complying with SEBI regulations (Source: SEBI).

December 2013, open offer document, page 19:

there was a delay of 190 days in complying with Regulation 8(3) of the SEBI (SAST) Regulations, 1997 for the year 2006. SEBI may initiate appropriate action against the Target Company for this violation

In FY2016, the secretarial auditor of the company highlighted that the company has not appointed a chief financial officer (CFO) within 6-months of the resignation of the prior CFO, as required by the Companies Act, 2013.

FY2016 annual report, pages 29 and 151:

The Company did not appoint Chief Financial Officer (CFO) in place of earlier CFO who resigned from the Company, within a prescribed period of 6 Months as required in terms of Section 203(4) of the Companies Act, 2013, thereby not complied with the said provision;

Company did not have a CFO from January 16, 2015 to May 20, 2015. From September 18, 2015, the Company does not have any Chief Financial Officer.

An investor would appreciate that non-compliance with various legal requirements indicates that the internal control and processes of the company leave room for improvement. Simultaneously, they indicate that an investor should increase her level of due diligence while doing the analysis of the company.

6.3) Delay in depositing undisputed dues to govt. authorities:

When an investor analyses whether Asian Energy Services Ltd has deposited its legal dues on time to govt. authorities, then she realized that the company had done delays under all the three managements (original promoters, Samara Capital and Oilmax Energy).

Under the original promoters, in FY2009, the auditor of the company highlighted that the company has not deposited undisputed statutory dues on time.

FY2009 annual report, page 28:

The Company has been generally regular in depositing with appropriate authorities undisputed statutory dues including provident fund,…and other material statutory dues applicable to it though there has been slight delay in few cases.

Under Samsara Capital (2010-2016), the auditors of the company highlighted in FY2013, FY2014, FY2015 and FY2016 reports that the company had done delays in depositing undisputed statutory dues to govt. authorities.

FY2013 annual report, page 46:

The Company has been generally regular in depositing undisputed dues, including provident fund…and other material statutory dues applicable to it with the appropriate authorities, except for some delays which have been paid along with interest.

In FY2016, the auditor highlighted that there have been significant delays in a large number of cases of depositing undisputed dues to govt. authorities.

FY2016 annual report, page 58:

Undisputed statutory dues including provident fund,…and other material statutory dues, as applicable, have not been regularly deposited to the appropriate authorities and there have been significant delays in a large number of cases.

Under the current management, Oilmax Energy (2016-until date), as well, Asian Energy Services Ltd has done continuous delays almost every year, in depositing undisputed dues to govt. authorities.

FY2017 annual report, page 52:

Undisputed statutory dues including provident fund,…and other material statutory dues, as applicable, have not been regularly deposited to the appropriate authorities and there have been significant delays in a large number of cases.

FY2021 annual report, page 58:

Undisputed statutory dues including provident fund,…and other material statutory dues, as applicable, have generally been regularly deposited to the appropriate authorities, though there has been a slight delay in a few cases.

Therefore, an investor would notice that the internal controls and processes at Asian Energy Services Ltd have shown weaknesses under all three different managements. The presence of private equity players as owners or professional managers did not seem to make any difference in the processes and controls at the company.

An investor should note that in companies where internal controls and processes are weak, there is a high probability of coming across frauds conducted by employees or other stakeholders like suppliers, customers etc.

An investor may read an example in the case of National Peroxide Ltd, a Wadia Group company, where the managing director of the company attempted to take advantage of the weaknesses in the internal processes and controls and did fraud on the company: Analysis: National Peroxide Ltd

Therefore, wherever during her analysis, an investor comes across companies showing signs of weakness in controls and processes, then she should increase the depth of her due diligence.

7) Curious case of joint venture Optimum Oil & Gas Private Limited:

In FY2018, Asian Energy Services Ltd formed a joint venture (JV), Optimum Oil & Gas Private Limited (OOGPL) with certain entities. At the end of the year, the company had a 23% stake in the JV. However, when an investor analyses it further, then she notices that originally, the company has bought a 49% stake in the JV for ₹0.49 lac (i.e. at ₹1,000 per 1% stake in the company) and then sold a 26% stake in the JV for ₹0.26 lac. Therefore, a 23% stake of the JV at a cost of ₹0.23 lac stayed with the company at the end of FY2018.

FY2018 annual report, page 117:

On November 13, 2017, the Group acquired 49% of the equity shares of Optimum Oil & Gas Private Limited, a India based Company engaged in the exploring the opportunity as Oil and gas service provider. The total consideration for the said acquisitions was ₹ 0.49 Lacs. On January 24, 2018, the Group disposed 26% of the aforesaid equity stake in Optimum Oil & Gas Private Limited for an aggregate consideration of ₹ 0.26 Lacs

In FY2020, the company bought an additional 51% stake in the OOGPL JV and increased its stake in the JV to 74%. As a result, OOGPL became a subsidiary of Asian Energy Services Ltd.

FY2020 annual report, page 145:

The Holding Company has acquired an additional equity stake of 51% in Optimum Oil & Gas Private Limited (OOGPL). Accordingly OOGPL has been treated as subsidiary with effect from 30 November 2019, which was treated as joint venture till 29 November 2019.

However, when an investor reads further to understand the money paid by the company to buy an additional stake in OOGPL, then she comes across the following information in the FY2020 annual report, at page 146, in the section on the business details of OOGPL.

The Holding Company has recognised goodwill for an equivalent amount of ₹ 26.47 Lacs and has impaired the same considering limited operations of acquiree.

From the above information, an investor can derive the following inferences:

• Asian Energy Services Ltd bought a stake in a company, which currently does not have any meaningful operations. The fact that the goodwill is impaired immediately indicates that there is little hope for any recovery for the money paid for the acquisition.
• Goodwill of ₹26.47 lac indicates that the company paid this money for the purchase of a 51% stake, which was over and above the book value of 51% in the balance sheet of OOGPL.
• From the information provided in the FY2018 annual report, the value of the stake in OOGPL was ₹1,000 per 1% stake. Moreover, OOGPL does not have any operations; therefore, the value of the company would go down without any income but having to incur minimum expenses on meeting regulatory compliances. Therefore, a 51% stake in OOGPL should not cost more than ₹0.51 lac.
• However, goodwill of ₹26.47 lac means that Asian Energy Services Ltd paid at least ₹26.47 lac for the 51% stake in OOGPL.
• Immediate impairment of the goodwill means that this money is now almost dead/a probable loss.

In such a situation, a few questions come to an investor’s mind:

• What was the need to put in money for buying a 51% stake in OOGPL?
• Why Asian Energy Services Ltd decided to pay at least ₹26.47 lac for buying the stake when it paid only ₹1,000 per 1% stake in FY2018?
• What benefit does this transaction bring to the public shareholders of Asian Energy Services Ltd?

It may look like a case where Asian Energy Services Ltd decided to give an exit to the shareholders of OOGPL by buying out their stake. However, it may seem that the cost of such an exit is being borne by the public shareholders of Asian Energy Services Ltd.

An investor may contact the company directly to understand the reasons behind such decisions of Asian Energy Services Ltd to first buy 49%, then sell 26%, then buy an additional 51% stake in OOGPL and then immediately impair the goodwill. She may ask the company how this transaction benefits the company and its minority shareholders.

Advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

8) Error in the annual report of Asian Energy Services Ltd:

While reading the FY2016 annual report of the company, an investor notices that the data of the debt at the start of the year, change in the year and at the end of the year do not reconcile.

An investor notices that the company has stated its debt as ₹30 cr at the start of the year and has mentioned that during the year, the debt increased by about ₹8.36 cr. Therefore, at the end of the year, the amount of total debt should be about ₹38.36 cr (=30 + 8.36). However, Asian Energy Services Ltd has disclosed the total debt at the end of the year as ₹40.37 cr.

FY2016 annual report, page 38:

An investor may contact the company directly to seek clarifications whether it is a typographical error or the data of the debt presented in the annual report needs some change.

The Margin of Safety in the market price of Asian Energy Services Ltd:

Currently (October 6, 2021), Asian Energy Services Ltd is available at a price to earnings (PE) ratio of about 12.4 based on consolidated earnings of the last 12-months (July 2020-June 2021).

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, which takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Asian Energy Services Ltd seems a company, which has grown its sales at a growth rate of 20% year on year for the last 10 years. However, this growth journey has been very eventful for the company. Over the years, the company has witnessed a change of three owners/managements, seen a continuous stretch of losses for 7-years, and when it returned to profits, then the customers cancelled its contracts and it is now trying hard to recover payments from them.

The business of Asian Energy Services Ltd is cyclical and is dependent on crude oil prices, stage of general economic cycle and availability of budget with oil exploration companies. The business opportunity available with third party seismic data collectors is limited; therefore, there is intense competition in the industry. The business becomes more difficult due to the tough terrain of project sites, geo-political tensions and environmental challenges like monsoons. Asian Energy Services Ltd has faced challenges in completing a few projects and had to pay penalties to customers for project delays.

All the three managements of Asian Energy Services Ltd, the original promoters (1992-2010), Samara Capital (2010-2016) and Oilmax Energy (2016-until date) have managed the business with completely different strategies. Original promoters preferred to buy their own equipment and invested in overseas companies; however, soon the strategy failed and the company lost money. Thereafter, Samara Capital brought in professional management, which did a U-turn on prior decisions, spent more money buying equipment despite claiming to follow an asset-light strategy, spent money on business promotions, undertook overseas projects; however, the company reported losses in all the 7-years under Samara Capital (FY2010-FY2016).

Oilmax Energy decided to undertake overseas operations and maintenance contracts. However, in each case, the customers cancelled the contract after Asian Energy Services Ltd had worked a lot. Now, the company is working hard to recover its payments.

The company always has a lot of receivables stuck with customers where disputes are very common. Over the years, Asian Energy Services Ltd had lost a lot of money, about ₹85 cr in the last 5 years, due to refusal by customers, suppliers etc. to pay. Its credit risk assessment practices need serious rethinking.

The company’s business cash flows have never proved sufficient for meeting operating expenses and its investment needs. The company has to always rely on a large amount of equity infusion to survive and grow. At times, it even defaulted to lenders and reached the stage of near-bankruptcy. No wonder, it has changed hands quite often.

At times, the owners of the company have found it difficult to find buyers when they wanted to exit the company. Samara Capital had to invest about ₹100 cr in Oilmax Energy for convincing it to buy the stake of Samara Capital in the company, that too at a loss of about 50%. Samara Capital had to exit because despite its best efforts, infusion of money, hiring very qualified managers, the company continuously made losses for 7-years (FY2010-FY2016).

The project execution by Asian Energy Services Ltd has left a lot to be desired where it has not bid for projects at remunerative prices and therefore, suffered operating losses. It delayed mobilization and project execution; therefore, customers have withheld their payments and invoked bank guarantees. Almost all the overseas projects whether seismic data collection or operations & maintenance undertaken by the company seem to have lost money.

An investor notices many instances of weakness in internal controls and processes in the company. In numerous instances, the auditors could not verify its assets, inventory, and tax liabilities etc. At times, it did not comply with regulatory requirements and on numerous occasions, it did not pay its dues to govt. authorities on time.

On one occasion, Asian Energy Services Ltd invested in a joint venture and immediately impaired its investment. An investor is left wondering what benefit this investment decision brought to the minority shareholders.

There are many areas where an investor may contact the company directly for seeking clarifications.

Going ahead, an investor should put a strong focus on the customers with whom it is dealing with. If she comes across such names, which have previously cancelled contracts of their suppliers, then she should be very cautious. She should monitor whether the company is able to recover its payments for the work done by it in Nigeria. She should keep a close watch on the receivables position of the company. She should monitor whether the company is able to generate a free surplus for investors or continues to survive on the regular equity infusion by the shareholders.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Asian Energy Services Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.