Recommendation: Hold
CMP = Rs 158
Result highlights:
- For Q3FY2008, Selan Exploration Technology (Selan) has reported a growth of 44.4% in its revenues to Rs 7.8 crore. However, the revenues declined by 12.5% sequentially. The sequential growth was dented by a 21.9% drop in the volumes (barrel of crude oil) sold, which is lower than our expectations. This was partially mitigated by a 12.6% sequential improvement in the average realisation (per barrel) during the quarter. In Q3, the production volume was dented by seasonality factor. The third quarter has lower number of working days due to festive season. Moreover, some of the wells were partially shut down for testing and maintenance.
- The operating profit margin (OPM) at 62% in Q3FY2008 was lower than 64.1% reported in Q2FY2008. The OPM declined largely due to additional cost incurred on maintenance and higher overhead cost as percentage of sales. The operating profit grew by 77.9% yoy and declined 15.3% quarter on quarter to Rs 4.8 crore. However, the earnings grew at a healthy rate of 14.7% sequentially and 109.7% yoy to Rs 3.9 crore. The earning growth was boosted by the lower effective tax rate during the quarter.
- For the nine-month period ended December 2007, the revenues and the earnings have grown by 37.9% and 44.6% respectively. The OPM at 64% is higher than 61.4% reported in the corresponding period last fiscal.
- To factor in the lower than expected production volumes in Q3FY2008, we are revising downwards our earnings estimates by 2.6% for FY2008 and 4.5% for FY2009 respectively. I am factoring a volume growth of 25.3% CAGR over FY2007-09 (lower than the management guidance of 30-40% CAGR over the two-year period).
- At the current market price, the stock trades at 16.1x FY2008 and 11.8x FY2009 estimated earnings. I maintain Hold recommendation on the stock.
