Saturday, August 18, 2012


Recommendation: Buy (SHAREKHAN)
Price target: Rs360
Current market price: Rs265

Price target revised to Rs360
Result highlights
  • Performance remains flattish in absence of regulatory approvals: Selan Exploration (Selan) reported another quarter of a flattish growth in oil production in the absence of the regulatory approvals that are essential to take forward exploration and drilling activity and monetise the oil & gas assets (oil fields). The revenue growth of 15.2% year on year (YoY) was largely driven by the benefits of depreciation in the rupee and a marginal decline in the production volumes as part of the natural depletion of the resources in the existing wells. 
  • Lower interest burden due to repayment of debt: At the profit after tax (PAT) level, the growth was marginally down YoY and grew by 11.4% sequentially due to the rupee's depreciation and a lower interest cost. The company utilised part of the cash on hand to repay its foreign currency debt and consequently it is practically debt-free now. 
  • Looking at alternative means of utilising cash on hand: The upstream oil & gas companies in India have suffered due to the lack of regulatory approvals after the issues raised by the Comptroller and Auditor General of India (CAG) and the subsequent investigations by the law agencies. In the absence the approvals, the management indicated that it is actively looking at some proposals to acquire participatory interest in oil assets abroad. This would result in productive utilisation of the over Rs100 crore of cash left on the books after the repayment of its debt. We believe the management could also look at a buy-back in case it is not successful in carrying out an overseas acquisition. 
  • Lack of regulatory approvals raises risk of de-rating of valuation multiples: The company had commenced drilling operations in Q1FY2012 and had brought in a seasoned professional team to speed up the process of monetising of its oil fields in the Cambay Basin, Gujarat. However, the policy inertia in government departments has resulted in unexpected delays in the regulatory approvals, which are essential to take forward the exploration and drilling programme. Though the management remains hopeful of receiving the approvals (at least partially in some fields) and is contemplating alternative means to productively utililise the cash on hand (it generates Rs35-40 crore of free cash annually at the current production level), the continued delay in the approvals could result in the de-rating of the valuation multiples. We are reducing our production volume estimates for FY2013 and FY2014 to factor in the concerns. Accordingly we revise down our target multiple of 4x EV/EBITDA (FY2014E) and hence downgrade our price target to Rs360.