Thursday, May 31, 2012


Realisation driven growth; volume ramp up awaited  

Realisation drives growth; production volume flat: In Q4FY2012, Selan Exploration Technology (Selan)’s net revenues (adjusted for the petroleum profit) grew by 23.2% year on year (YoY), backed by a 28% year-on-year (Y-o-Y) improvement in the realisation. The blended realisation was boosted by a combination of higher crude oil price and depreciation of the rupee. However, the oil production volume remained flat Y-o-Y at 42,484 barrels during the quarter. The operating profit grew at a relatively lower rate of 20% due to margin contraction on the back of higher overhead expenses as a percentage of sales. The reported profit after tax (PAT) grew by 49% YoY but by 9% QoQ, which includes a foreign exchange (forex) gain of Rs1.9 crore in Q4FY2012 and a forex loss of Rs2.4 crore in Q3FY2012.

Annual performance – driven primarily by higher realisation: Even on an annual basis, the growth in net sales of 34% was largely driven by a higher blended realisation as the production volumes declined by 12% to 1,68,041 bbl as compared to FY2011. However, despite lower production volumes, the operating profit margin (OPM) expanded by 270 basis points on the back of a jump in blended realisation (52% growth in realisation), which is a combination of increase in the price of crude (by 41%) and appreciation of the dollar against the rupee (by 10%). Consequently, the operating profit per barrel of production also jumped by 54% YoY to Rs3,568/bbl in FY2012. Hence, its reported PAT grew by 38% YoY to Rs44 crore, translating into an earnings per share (EPS) of Rs25.9 for FY2012.

Healthy balance sheet position: We like the strong balance sheet and impressive cash generating ability of the company. Currently it has net cash of Rs57/ share, that is 21% of the current market price of the share. Further, the company is generating significant cash flow from operations to support its future growth plans. Hence, we believe that the low leverage position is likely to be sustained.

Fine-tune estimates; awaiting regulatory approvals for next round of production ramp up; reiterate Buy: Post the declining production volume trend since FY2009, Selan was expected to begin the next phase of development of its fields and show a ramp-up in production volumes from FY2012. The same has been postponed due to delay in regulatory approvals. However, the management is quite confident of commencing its next phase of growth and has guided for an annual production volume of 5,00,000-7,00,000 bbl in the next two years. Our volume assumption at 4,47,000 bbl for FY2014 is much lower than the management’s guidance. Hence, we remain positive on the stock and continue to rate it as Buy with a target price of Rs500.