Did Porinju Veliyath Commit A Tactical Error In Aggressively Buying Selan Even Though Dolly Khanna & Kenneth Andrade Sold Out?

Basant Maheshwari, our friendly neighbourhood stock wizard, has always been opposed to the idea of investing in commodity stocks. His point is that the commodities are so vulnerable to cues from the global economy and their prices are so unpredictable that it is impossible to be confident about of the prospects of these companies. Basant once mocked investors in commodity stocks by stating that if they are so confident about the trend of commodity prices, they should trade on the London Metal Exchange and rake in millions of dollars instead of eking out a living by buying commodity stocks.

However, other ace investors believe that if you can catch commodity stocks at the bottom of the cycle, you can comfortably ride the up-cycle and make a fortune from these stocks.

The difficulty arises in being able to correctly predict when the down-cycle ends and when the up-cycle begins. If you get the timing wrong, you are doomed.

Selan Exploration is a textbook example of a commodity stock. Its fortunes are directly dependant on crude oil prices. Higher crude oil prices spell more profits for Selan and vice versa.

In it’s hey days, when crude oil prices were surging, Selan attracted the attention of a number of savvy investors like Dolly Khanna, Kenneth Andrade of IDFC MF, Parag Parikh of PPFAS Mutual Fund and Ashish Chugh of Hidden Gems. Ashish Chugh was in fact responsible for drawing our attention to Selan when he made a public recommendation about it.

Porinju Veliyath has always been fascinated with Selan. In a newsletter to the investors of his PMS dated 16th February 2012, Porinju extolled the virtues of Selan in eloquent terms. He said “Any major break out of unrest in MENA could result in higher crude oil price, which is bad for India – so let us add more Selan Exploration, one of our largest holding in Portfolio. Selan is priced at Rs.500 Cr today, against its estimated Oil reserves of over Rs.70,000 Cr in 5 proven oil fields spread across 200 Sq Kms in Gujarat! This debt-free, cash rich company has initiated an aggressive drilling program and is likely to grow at CAGR 50% for next many years. I find the management honest and very professional. Whatever happens in MENA or Europe, Selan should give us fabulous return in the future.”

However, when crude prices started sliding and it became clear that a long-term bearish trend was forming, the ace investors began to slowly and steadily jettison Selan.

Dolly Khanna was, as usual, among the first to react. In June 2014, she held a treasure trove of 307,969 shares. She has been steadily paring her holding. By 01.04.2015, the holding was reduced to 182,773 shares. By 30.06.2015, Dolly’s name has disappeared from the list of major shareholders, suggesting that she has either totally got rid of the stock or reduced it to a negligible figure.

The same is true for Kenneth Andrade’s IDFC Equity Opportunities Fund. As of 01.04.2014, the Fund held 162,000 shares of Selan. This was totally sold out as of 01.04.2015.

A few other major investors like Prem Nath Anand and Yodhan Sachdev also pared their holdings.

The surprising aspect is that even Asha Mahajan, one of the promoters, dumped her holding. Her shareholding reduced from 964,146 shares as of 01.04.2014 to 636,336 as of 31.03.2015. As of 30.06.2015, Asha Mahajan’s holding stands at 581,790 shares.

Porinju has chosen to go the opposite path. He has been aggressively buying the stock in the belief that crude oil prices have bottomed out. As of 30.06.2015, Porinju’s PMS, Equity Intelligence India Pvt Ltd, holds 831,758 shares, constituting 5.07% of the total equity. The holding is worth Rs. 18.21 crore at the CMP of Rs. 219.

Now, the big cause for concern is that Goldman Sachs has made the prediction that oil prices are likely to slump to a low of $20 per barrel. Goldman Sach’s theory is that the glut in production coupled with a fall in demand means that the prices have to be headed southwards.

While a fall in crude prices is good news for the Indian economy because India is an importer of crude oil and inflation will cool down, it spells doom for oil producers like Selan Exploration.

As expected, Porinju reacted angrily. He sought to discredit Goldman Sachs by calling their earlier wrong prediction of $200 a “shameful forecast”.

Goldman Sachs predicts Crude @ $20, after the shameful forecast of $200 in 2008 at the peak around $140: http://t.co/N3a1qK56Lt

— Porinju Veliyath (@porinju) September 11, 2015

Now, the all-important question is what, if anything, we should do. As novice investors, we are obviously in no position to question the wisdom of either Goldman Sachs or of Porinju or to express any view on which way crude oil prices are headed. The best thing for us is to heed Basant’s advice and stay away from commodity stocks and instead invest only in secular growth Pharma, IT and FMCG stocks. This way, we will be able to save our skin even though we may occasionally miss out on a bonanza!