Why Are Ashish Chugh, Parag Parikh & Sharekhan Buying Selan Exploration Stock?

Parag Parikh of PPFAS Mutual Fund is true to his reputation as a “value” investor. He hates leaving money on the table and he hates buying overvalued stocks. So, when he buys a stock, you can be sure that it is quoting at a bargain basement price and that its fundamentals are in place. Now, this approach to buying stocks of Parag Parikh has held him and PPFAS in good stead because even if they haven’t made tons of money, they haven’t lost much either, when the going gets bad.

Ashish Chugh and Sharekhan, on the other hand, are opportunistic investors happy to make a quick buck when the opportunity presents itself. When they see money lying on the table, they jump in, take the money, and make a quick exit.

Now, Ashish Chugh was the first to spot the potential in Selan Exploration in January 2013 when the stock was quoting at Rs. 300. Ashish made a brilliant analysis on how investors who bought the stock on his recommendation had little to lose and much to gain.

Parag Parikh was next in line. He sensed that some good things were happening in Selan and so he got PPFAS to buy a chunk of 1,68,012 shares in October 2013.

Sharekhan was not going to be left behind. Though their Model Portfolio was crammed with top-quality stocks, they jettisoned someone and gave Selan pride of place in the Portfolio.

Selan has lived up to everyone’s expectations, giving gains of 43% in 3 months. In fact, Sharekhan’s timing was perfect because the bulk of the gains came after they recommended the stock.

Now, the question is what does the future hold for Selan and is they any more money left on the table for us to feast on?

For this, you have to turn to Ashish Chugh again for his brilliant analysis of the stock in ET.

Ashish Chugh’s advice can be distilled to three points:

(i) Selan Exploration is engaged in a recession-free industry (production of crude oil) with infinite demand (crude oil is presently being imported). There is no competition (ONGC & OIL India’s production is not sufficient for the Country’s requirements). There are no marketing expenses involved;

(ii) Selan’s potential to scale up production is very high. Hitherto, the problem was that the approvals from the Director General of Hydrocarbons was not coming through. Now, that problem appears to have got resolved;

(iii) Selan presently has identified reservoirs capable of giving between 1 and 1.5 lakh barrels of oil per well, per year. The current production is about 1.7 lakh barrels. This year, in FY14, they should complete drilling of about eight new wells. On a conservative estimate, if Selan produces about 25000 barrels per well of new oil, their production will increase to 3.7 lakh barrels from 1.7 lakh barrels. Next year again, if it is assumed that it will produce from just about eight new wells, the production will be between 5.5 and 6 lakh barrels per annum. With 1.7 lakh barrels per annum, Selan does a top line of about Rs 100 crore, profit after tax close to Rs 50 crore and a cash flow of about Rs 65 crore. With production which may roughly be 3.5 times after, say, two years, Selan should manage a top line of between Rs 300 and Rs 350 crore with a profit after tax of about Rs 150 crore. However, if one goes by the management’s indications, and it is assumed that even, say, one out of the eight wells gives a production of about 1 lakh barrels, the profit can see a substantial jump even from the current levels.

So, it does look like that there is a lot of money on the table left for patient investors. Ashish Chugh cautioned that because the stock price had surged so much in such a short while, he was expecting a correction. He advised that the best way to capitalize on this sort of a long-term opportunity is to wait for a dip and then to grab the stock and give it pride of place in the portfolio.