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Welspun Corp
Orderbook growth ahead; maintain Buy
Profits beat estimates. Welspun reported 2QFY11 PAT of `17.8bn
(up 7% qoq and 8% yoy), beating Street expectations on higher
volumes and lower interest expenses. The company sold 230kilo tons
(kt) of pipes (up 10% yoy) and 128kt of plates (up 13% yoy). Sales
dropped 15% yoy due to lower realizations, but EBITDA margin
increased 1.9% yoy to 18.6% on lower raw-material costs.
Expect orderbook to strengthen. Welspun’s orderbook stood at
`45bn at end-2QFY11, down from ~`50bn at end-1QFY11.
However, in volume terms, decline in orderbook was much lower due
to lower realizations on pipes. Management expects orderbook to
grow during 2HFY11. With crude prices stabilising at US$75-80/bbl,
the huge capex in the oil & gas sector would lead to rise in orders.
Capacity ramp-up, backward integration to boost earnings.
Welspun is increasing pipe capacity, from 1.5mtpa at present to
2mtpa by FY12e. It has already commissioned its100ktpa spiral pipe
mill project in Karnataka, while its 300ktpa plant in Saudi Arabia is
likely to come on-stream by end-3QFY11. Welspun’s 350ktpa LSAW
pipe mill project at Anjar, India, would be completed in 1QFY12.
Earnings. We marginally trim our FY11-12e EPS as we factor in
actuals for FY10 and introduce FY13e earning; we expect EPS
CAGR of 10% over FY10-13e.
Valuation and risks. We maintain our target price of `395, based on
12x one-year forward earnings. This is at ~10% discount to its fouryear
average PE of 13x. We reiterate Buy. Risks: Lower global pipe
demand, delay in capacity ramp-up, lower operating margins.
