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Research
Buy Selan Exploration - Sharekhan
Posted On : 2011-11-20 01:47:44( TIMEZONE : IST )
- Selan Exploration Technology
- Cluster: Ugly Duckling
- Recommendation: Buy
- Price target: Rs500
- Current market price: Rs261
One more realisation-driven quarter though volume surprised negatively: In Q2FY2012, the net revenues (adjusted for the petroleum profit) of Selan Exploration Technology (Selan) grew by 16% as a stupendous growth (of 75%) in the realisation overshadowed the fall of 34% in the production volume. However, sequentially, the average realisation growth of 7% could not cover up the 22% fall in the production and subsequently the sales declined by 17% quarter on quarter (QoQ). The production volume was around 36,748 barrels in this quarter. The management indicates that the production volume would continue to witness some fluctuation during the next several quarters, as field development activities are gradually implemented. However, it indicated the production ramp-up programme is on track.
Healthy OPM maintained: The operating profit margin (OPM) expanded by 400 basis points year on year (YoY) but contracted by 316 basis points QoQ to 70.4% in Q2FY2012. The operating profit grew by 15% YoY and was almost in line with the sales growth. Sequentially, the operating profit declined by 22%, following the sales trend. However, the OPM broadly remained around the 70% range. In Q2FY2012, on account of an extraordinary item worth Rs2.6 crore, the profit after tax (PAT) reported a flat growth on a year-on-year (Y-o-Y) basis despite a 21% growth at the profit before tax (PBT) level. Excluding the extraordinary item, the adjusted PAT should exhibit a 29% growth YoY. Sequentially, the PAT benefited by a lower tax and the adjusted PAT (excluding the extraordinary item) declined by 11% (the PBT fell by 19%) while the reported PAT fell by 31%.
View and valuation: Given the company's aggressive drilling programme, we expect Selan's net revenues and earnings to grow at a compounded annual growth rate (CAGR) of 40% and 42% respectively over FY2011-13, driven largely by volume growth with an assumption of flattish realisation. We believe the operating performance of the company and outlook have not deteriorated in the recent past; nevertheless the stock price has corrected by 13% in the last one quarter. Moreover, currently the stock is attractively priced at 4x FY2012E and 2.4x FY2013E of enterprise value (EV)/EBITDA multiple. We maintain our Buy recommendation on Selan with a price target of Rs500 (based on EV/EBITDA FY2013E multiple of 5.5x).
