Tushar's Stock Tips: Sharekhan Investor's Eye dated October 01, 2007

Tuesday, October 2, 2007

Sharekhan Investor's Eye dated October 01, 2007

PULSE TRACK

Strong invisibles help stabilise CAD
Export growth maintained in dollar terms

STOCK UPDATE

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs155
Current market price: Rs154

Downgraded to hold

Key points

Selan Exploration Technology Ltd's (SETL) efforts to develop and monitise its oil fields have resulted in a 36.7% growth in its production volumes to 100,963 barrels of oil in FY2007. Encouraged by the results, SETL's management plans to undertake the second phase of development activity and expects to show a similar growth in production volumes in FY2008. However, the huge expenditure on the development of its fields has not only consumed all the cash generated by the company from its operations but has also added to the overall debt on its books.
The company has made an adhoc payment of Rs1.6 crore to the government towards the claim for profit petroleum in its oil field at Lohar. The provision for the same has not been made in the financial results as the company has filed an arbitration case against the claim. If the company losses the arbitration case, it could result in a significant hit on its earnings.
SETL has successfully scaled up the production volumes in FY2007, and it can potentially double the production volumes by FY2009 (assuming a favourable scenario resulting in an equally encouraging outcome of its forthcoming development efforts). However the recent steep appreciation in the share price already factors in the positives, with the stock trading at 15.3x FY2008 and 11.1x FY2009 earnings.
There are triggers that could result in a further re-rating of the stock as the management intends to undertake appraisal and valuation of its oil fields from one of the globally reputed agencies. The idea is to induct a strategic partner that would fund the company's ambitious plans in future. Consequently, given the fact that the stock appears to be fully valued but has re-rating triggers, we are downgrading our recommendation to hold on the stock and not to book out (in spite of the appreciation of 167% since our recommendation in March 2006).

SECTOR UPDATE

Automobiles

Last year's high base affects performance
September data shows that sales in the automobile sector have started picking up on a month-on-month basis, in keeping with the past trend. Every year, sales of automobiles take a dip during the monsoon season but pick up with the end of the monsoons and the onset of the festive season. On a year-on-year basis, there has not been much improvement though, partly due the high base of last year. Last September had seen higher sales as the festival season had commenced in October last year. This year the festival season has been delayed—it sets in from mid October with Diwali falling in November. We believe the recovery in sales would take some time to get reflected in year-on-year terms. The beginning of Shradh Paksh also impacted sales. Meanwhile, the major gainers during the month were Hero Honda Motors (Hero Honda) and Maruti Suzuki (Maruti).

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