Last Updated : Jan 07, 2013 03:25 PM IST | Source: CNBC-TV18

Why Ashish Chugh is betting on Selan Exploration, Swelect

Investment Analyst and author of Hidden Gems Ashish Chugh is bullish on Selan Exploration and Swelect Energy Systems. He sees both the stocks having the potential to fetch better returns in times to come.

Investment Analyst and author of Hidden Gems Ashish Chugh is bullish on Selan Exploration and Swelect Energy Systems. He sees both the stocks having the potential to fetch better returns in times to come.

Below is the edited transcript of Ashish Chugh’s interview with CNBC-TV18

Q: Why do you think there is a lot of upside to that name?

A: Selan Exploration has been extremely range bound for the past two years. The stock has moved in a very narrow band. It has not fallen too much, at the same time the upside has not been substantial.

Selan Exploration has five oil blocks in the Cambay Basin and were allotted between 1993 and 2000. The company is doing most of its production from a block called Bakrol, which is about 36 sq kilometer block. As of today, the total production is about two lakh barrels.

The stock has been suffering mainly on account of one major issue - the company not getting approvals from Director General of Hydrocarbons for drilling new wells. In the past three years, between 2009 and 2011, the company spent about Rs 80 to Rs 90 crore in exploratory and 3D seismic studies in all its oil fields.

While analysing Selan, I am taking two scenarios. One, is current scenario where the company is not able to do any fresh scale up in operations and the production remains stagnant at two lakh barrels. Second is an optimistic scenario where it gets approvals from Director General of Hydrocarbons and is able to ramp up production. In the first scenario, the company is making revenues of about Rs 100 crore on two lakh barrels and its profit after tax is about Rs 50 crore. Their market cap is about Rs 525 crore.

The stock currently trades at about Rs 315. As of March 31, 2012 it had cash and cash equivalent of about Rs 125 crore, which means their enterprise value is about Rs 400 crore. If one sees the financials closely, it is amortising an amount of about Rs 15 crore on Rs 80-Rs 90 crore spent on seismic surveys. The actual cash flows is about Rs 65 crore, enterprise value of about Rs 400 crore on cash flows of about Rs 65 crore which means one is getting this company at about 6 years of cash flows.

This is a pessimistic scenario. As of today I am not over paying for the company if I am buying the stock. In the second scenario, where the company gets approvals from Director General of Hydrocarbons then in the next two-three years it can reach a production level of about four to five lakh barrels, which can lead to a cash flow of about Rs 150 crore.

In each of these scenarios, negatives are getting factored in the current market price of the stock. The other good thing is that this company is totally debt free. It has got very low operating cost. It has got operating margins of between 80 to 85 percent. It is a champion in buyback of its stock. In the last ten years, it has done about six buybacks and has been regularly paying dividend to the shareholders.

The good part is that most of its fields are still virgin. There is a lot of potential in those fields. Over a longer period of time, the ramp up in the capacity can be significant from the current levels. As of today the negatives are getting factored in, in the current market price of the stock.

We are now hearing about Cairn and Reliance also getting approvals from Director General of Hydrocarbons, it seems that it is only a matter of time and the company can also get approvals, which means that the probability of the second scenario is much higher than even before. I believe at the current price of Rs 300-Rs 325 one does not have too much to lose from these levels. This is a stock which one can just buy and forget for few years. The rise can be significant from the current levels.

Disclosure: Ashish Chugh and his family have investments in both the companies.


Q: What about Swelect Energy Systems?

A: This company was earlier known as Numeric Power. It sold its uninterruptible power supply (UPS) business to a French company called Legrand for a total consideration of about Rs 837 crore. This happened in the month of May 2012. UPS business contributed roughly 85 percent to the total revenues of the company.

After the sale of UPS business it is now left with businesses which currently do revenue of about Rs 80-100 crore. While analyzing Swelect, I am looking management’s capability to scale up businesses, their attitude towards minority shareholders, risk concerns in the stock and valuation.

Talking about business which it is left with and the future focus areas for the company, this company has got businesses which do a revenue of Rs 80-100 crore, these are the residual businesses and they are profit making. It has got plans to venture into a solar business and LED business.

They also have plans to significantly scale up both of these businesses. In the past, this company has managed to make Numeric into largest UPS company and have managed to sell that business to Legrand at a very good valuation, which talks about scale up capability of the promoters. On that count, I would be positive on the company.

In many cases when companies sell significant part of their businesses the shareholders get in return is very small amount as dividend and many of these companies choose not to distribute dividend on one pretext or the other. In case of Numeric, they have chosen to give 1200 percent dividend, which is Rs 120 per share along with 30 percent regular dividend which they have been giving.

So, the total payout to shareholders including dividend distribution tax is close to Rs 145 crore, which is roughly 20 percent of realizations they got from Legrand after payment of tax. So, the company has chosen to maintain a balance between deployment of money and also payout to minority shareholders.

If one sees the dividend track record of the company, since 1996, from the time of their initial public offering (IPO) it has been a regular payer of dividend and they have got a track record of uninterrupted dividend payments. So, the attitude towards the minority share is extremely balanced.

My main concern is whether Rs 500 crore, which is lying in the balance sheet or the bank account of the company will be effectively and properly utilized. The other concerns are related to whether they will be able to scale up businesses the way they have done in the past. So, there are execution concerns.

This company is almost debt free now. At the current price of Rs 140, the market cap is about Rs140 crore. It has got equity of about Rs 10 crore. After payment of dividend and taxes, it is left with cash and cash equivalent of close to Rs 500 crore. The market cap is just about 30 percent of the total cash lying in the books.

The stock provides margin of safety. The valuations are extremely reasonable and they take into account some negatives which I was talking about. In the short-term, I don’t see too much of downside from the current levels of about Rs 135-140. But over a longer term if the management is able to show their capabilities and are able to scale the business to a certain level, the stock can give good returns to the investor.

First Published on Jan 7, 2013 12:00 pm
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