what is a recession?
Defination of Recession in most simple words would be, "A decline in country's gross domestic product(GDP)growth for six months or longer".An economy generally expands for 6-10 years and tends to go into a recession for about six months to 2 years.Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.The organization that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research or NBER.The NBER defines an economic recession as:"a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income,employment,industrial production, and wholesale-retail sales.A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression.
U.S recession and its effects in India:
"When Wall Street sneezes,the rest of the world catches cold".very recently,ratings agency Standard and Poor's (S&P) downgraded US' long-term debt to AA+, causing a rout in world markets and bolstering widespread belief that another recession was setting in.Weakening of the American economy is bad news for the world including our country.America accounts for over 25% of the world GDP and any significant slowdown is bound to have reverberations elsewhere.Recession will seriously affect the portfolio and fixed investment flows.Corporates will suffer from volatility in foreign exchange rates.The export sector will have to devise new strategies to enhance productivity.IT sector would be the worst hit since they derive majority of their revenues from the U.S market.Owing to the slowdown if those american companies starts to slash their budgets this Indian firms would take a severe blow.Appreciating rupee along with poor performance of US companies (law firms, investment banks and media houses) will affect the bottom line of the oursourcing industry.Small BPOs, which are operating at a net margin of 7-8 per cent,will find it difficult to survive.Weakening dollar will benefit importers thereby putting pressures on domestic manufacturing.Textile companies will find it hard to grow because of less demand from foreign countries and consequently less revenue from exports.All this would mean layoff of employees by the affected firms.Unemployment is the greatest dread of any human.Though we are a lot more domestic consumption driven economy but a drop in exports would have implications in country's GDP growth.India's merchandise exports to the US in 2010-11 made up for 13% of its merchandise exports of USD 246 billion.Besides, 60% of the country's software exports of USD 59 billion during that period were destined to the US.We could loose a .2-1% of our GDP if our exports take a massive hit.To end up, it would be prudent to note that interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades.Thus, the effect may not be as drastic as would have been the case in the 1980s.
Stock markets & recession:We are living in a global village where everything is interrelated.A booming stock market reflects buoyancy of the economy similarly an ailing stock market speaks about the nervousness of the same.Stock market participants has got their 2008 memory afresh when the recession in U.S wiped out trillions of money from the Indian markets.Sensex nosedived over sixty percent to hit levels of less than 8000 from a level of 21000.Corporate performance of most of the companies remained subdued,and the impact of moderation in demand was visible in the substantial deceleration during that time.Corporate profitability exhibited negative growth,which led to the bearish trend in the stock market.Recession effected the investments made by Foreign Institutional Investors (FIIs) in the Indian Stock Market as FIIs started disinvesting to meet their commitments abroad.Valuable stocks became mere papers with no takers.Leveraged traders became bankrupt and retail investors went out for hibernation with huge portfolio erosion.However though this time it seems not that severe still the apprehension stays.It would be prudent to note that whether recession or not India still remains the favourite destinations for foreign institutional investors.Our country is among the top 10 countries in the world to have a trillion-dollar GDP and m-cap simultaneously.It is the 14th largest country globally in terms of m-cap and 12th largest economy in terms of GDP.It is also the fourth largest market in Asia (after Tokyo, Hong Kong and Shanghai), and India's GDP growth rate is the second-fastest globally. The country's per capita income has risen over 7-8% in the past 2-3 years.Often in this situation if one invests carefully with bit of careful research,huge money can be made in good times.India is the classical bottom-up market, where investors can find hundreds of stocks which can generate huge returns over the longer term.I am penning one such story which has a recession free business model and can really make you rich provided you stay put here for the longer run.
Stock Idea:-
Scripscan:Selan Explorations Technology Ltd
Cmp:300
Traded in:Nse-bse
Marketcap:520crs
Risk category:Low
Returns expected:30%CAGR for next 5 years.
Story:Selan Exploration is into exploration & production of oil & gas.It currently operates 5 small fields in Cambay onshore –Lohar, Bakrol, Indrora, Ognaj and Karjisan.These oil fields were awarded to the company in 1995 under a Production Sharing Contract (PSC) with 100% participating interest by the Government of India.Selan was subsequently awarded two more fields in Gujarat namely Ognaj Oilfield and Karjisan Gas field.In-place resource stands at 73 mmbbl & 7 mmbbl in Bakrol & Lohar respectively.Production level is currently at ~660 bpd.The company sells its crude output to Indian oil at a discount of 5% to Brent.Five points to qualify Selan exploration as a great medium to long term buy.
1)As of now, the company is producing oil from only 2 fields,Bakrol & Lohar.Management has indicated that Indrora Oilfield contain far larger quantities of recoverable oil than Bakrol.Let us conservatively assume 100 Million Barrels of Oil Reserves under Selan.At $ 70 per barrel, Selan’s reserve could be valued at Rs. 33,000 Cr.Very recently to monetize the full potential of the massive reserves,selan has appointed Mr. Andrew Wenk as President & CEO of the company.Mr.Wenk was earlier working as a General Manager - Petroleum Engineering Operations at Cairn Energy, and helped the company's efforts to produce first oil from Cairn's highly challenging Rajasthan oilfields.Prior to joining Cairn,he worked for RIL in the KG basin and played an important role in sourcing & applying the latest technologies that helped RIL to bring to surface vast quantities of commercially viable gas.
2)Previously, the technology recovery rate of exploration activities was
ranging from 10-20% from the total potential reserves in Gujarat.But with the latest technology implementation of 3D contour mapping this recovery rate has gone up to as high as 50-60% for the similar fields.Contour mapping is just like a magnetic resonance imaging(MRI) of a human body.Stunning management quality and they are committed to make huge amount of shareholders wealth in the coming years.It buybacks,it allots warrants,it generates huge amount of cash,it has got a wonderful under leveraged balance sheet.Selan is one sure shot winner for the longer run.
3)Selan started conducting exploratory activities in its fields during FY10 to establish additional reserves, and to maximize production. These activities are expected to be completed by august-september 2011.The company had completed data acquisition in these fields as of 31st March 2011.Numbers has been flattish so far over the last couple of years as it was consolidating its resources and investing a lot in its proven fields.Over the next few quarters the company would actually be in a position to ramp up production massively and deliver an EPS of 65-70(2012-13).Value it as per the sector and the valuation would be in 4 digits.Even if at the present juncture we see the valuation of selan;EV/reserves of 1.1,marketcap to sales of around 7 with a ronw of over 35%,its the cheapest oil exploration company in the bourses.
4)Selan’s production cost is $11 per barrel, which is reasonably low.Company pays $5 per barrel as Royalty to the government.The stock has delivered an annualized return of over 30% from 2000 to till date,much superior to the broader market.Hell,its even higher than what "Warren Buffet Sahab"s berkshire hathaway delivered in the same period.In my view creating and delivering shareholder value has been well handled by Selan. Selan is now all set to start the process of returning value to shareholders while they continue the value creation process.An EV of 5% of 2P Reserves could lead to market capitalization of Rs.1650 Cr which results in a value of over 1000 bucks.
5)Crude oil demand is projected to increase to about 1700 mn barrels per year by 2014. Rising global crude oil prices have triggered increased domestic exploration and production activity.Gas demand is expected to reach 400 mscmd by 2012.All this factors makes selan a big beneficary and helps one to have a lot of conviction on the stock.Selan posses robust fundamentals,amazing pedigree quality,mind boggling prospects,low business risk and which is poised to benefit from a strong macro-economic environment.Selan also has fat cash on books worth rs 70 per share.Selan is a stock which can be kept for lifetime.Make it a part of your core portfolio folks.
