ICICIdirect_WelspunGujarat_Q1FY11

8/8/2019 ICICIdirect_WelspunGujarat_Q1FY11

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August 5, 2010

ICICIdirect.com | Equity Research

Result Update

WHAT’S CHANGED…

PRICE TARGET ............................................................. Changed from Rs 325 to Rs 295

EPS (FY11E) ............................................................... Changed from Rs 27.7 to Rs 30.5

EPS (FY12E) .................................................................................Introducing at Rs 32.4

RATING....................................................................... Changed from Strong Buy to Buy

Volumes to grow, margins to contract…Welspun Corp reported robust numbers for Q1FY11 on improved saleswith execution of high margin pipe orders. Revenues jumped 24.8% YoYand 51.6% QoQ to Rs 2421 crore much higher than our estimates at Rs

1675.7 crore. This can be attributed to higher pipe volumes added by USmill and improved domestic plate and coil sales. Consolidated pipe

sales volumes rose 7% YoY and 20% QoQ while for plates it rose by65% YoY and 4% QoQ. The EBITDA margin remained flat YoY while itfell 360 bps QoQ. Blended EBITDA/tonne came at Rs 10971 for Q1FY11.Good show on the realisation and volume front led to a robust PAT (up70% YoY and 15% QOQ) at Rs 191 crore against our expectation of Rs143 crore. We maintain our positive outlook on the company due to itsstrong volume growth pipeline, foray into infrastructure projects, bettermargin and multiple country strategy. We are revising our target to Rs295/share and assigning BUY rating to the stock.

Order book remains firm till date

The quarter began with a total outstanding order book (pipe andplate) of Rs 6400 crore. Further, in Q1FY11, the company addedorders worth Rs 900 crore from domestic and international oil andgas majors. After executing orders in Q1FY11, as on June 30, 2010,the current order book (pipe and plate) stands at Rs 5000 crore.

EBITDA/tonne to sustain at ~Rs 10,500/tonne

In the pipe segment, the company has seen a blendedEBITDA/tonne of ~Rs 10971 during Q1FY11 backed by highercontribution from the pipe segment. The company has guided for Rs10500-11000 EBITDA/tonne on a sustainable basis.

Valuation

At the CMP of Rs 250, the stock is trading at FY12E P/E of 7.7x and FY12EEV/EBITDA of 4.4x. Though we are optimistic about its future growth,which is likely to come from its multi-country operations, we prefer toremain cautious on the recent market situation. We have valued the stockat 5x FY12E EV/EBITDA and revised our target price to Rs 295. We haveassigned a BUY rating to the stock.Exhibit 1: Performance Highlights

(Rs Crore) Q1FY11 Q1FY11E Q1FY10 Q4FY10 YoY (Chg %) QoQ (Chg %)

Net Sales 2421.8 1675.7 1939.9 1597.4 24.8 51.6

EBITDA 378.1 311.4 301.1 306.0 25.6 23.6

EBITDA Margin (%) 15.6 18.6 15.5 19.2 + 10 bps - 360 bps

Depreciation 54.1 54.4 49.2 52.0 9.9 4.1

Interest 21.8 40.3 75.1 28.2 -71.0 -22.8

Reported PAT 190.6 143.0 112.0 166.5 70.2 14.5

Basic EPS (Rs) 9.3 7.0 6.0 8.1 55.4 14.5 Source: Company, ICICIdirect.com Research

Welspun Corp (WELGUJ)

Rs 250

ting matrix

ing : Buy

get : Rs 295

get Period : 12 months

ential Upside : 18%

y Financials

s Crore)* FY09 FY10 FY11E FY12E

t Sales 5739.5 7350.2 7975.8 9148.6

ITDA 634.8 1318.6 1327.9 1416.3

t Profit 213.5 610.4 623.6 660.2

Not including MSK financials

luation summary

FY09 FY10 FY11E FY12E

(x) 22.3 8.4 8.2 7.7

rget PE (x) 26.4 9.9 9.7 9.1/EBITDA (x) 9.8 5.2 4.8 4.4

BV (x) 3.0 2.0 1.6 1.4

NW (%) 13.7 29.4 21.6 19.1

CE (%) 12.5 23.7 20.3 19.6

ock data

arket Capitalisation Rs 5100.8 Crore

bt (FY10) Rs 1843 Crore

sh & Invst (FY10) Rs 800 Crore

Rs 6143.8 Crore

week H/L 296/190

uity capital Rs 102.16 Crore

ce value Rs 5

Holding (%) 19.05

Holding (%) 16.6

ce movement

150

170

190

210

230

250

270

290

310

J u n - 1 0

F e b - 1 0

O c t - 0 9

J u n - 0 9

( I n

R s )

3750

4125

4500

4875

5250

( I n

U n i t s )

Wel Corp (R.H.S) Nifty (L.H.S)

alyst’s name

ankaj Pandey

[email protected]

outam Chakraborty

[email protected]

eeraj Lodha

[email protected]




ICICIdirect.com | Equity Research Page 2

Result Analysis

The company reported robust numbers for Q1FY11 on account of highervolume growth by the US mill and improved plate and coil sales. BlendedEBITDA/tonne was also maintained at Rs 10971/tonne for Q1FY11 due toexecution of higher margin orders. PAT shot up by 70% YoY at Rs 190.6crore further boosted by lower interest outgo due to repayment of highcost term loans in the previous year.

Exhibit 2: Pipes sales volumes

0

200000

400000

600000

800000

1000000

1200000

FY09 Q2FY10 Q3FY10 Q4FY10 Q1FY11 FY10 FY11E

( I n

t o n n e )

From Indian plants From U.S plant

Pipe volume growth of

0% in Q1FY11

sequentially.

Source: Company, ICICIdirect.com Research

Exhibit 3: Plates sales volumes

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

FY09 Q2FY10 Q3FY10 Q4FY10 Q1FY11 FY10 FY11E

( I n

t o n n e )

Plates External Plates Internal

Total plates volume grew

by 5% in Q1FY11

se uentiall


The consolidated sales volume of pipes rose by 20% QoQ

and 7% YoY to reach ~2.46 lakh tonne with the US mill

contributing ~0.5 lakh tonne

Sales volumes in plates remained robust with external

plate sales of ~98,000 tonne in Q1FY11 (up by 18%

sequentially)





Conference call highlights

• The quarter began with a total outstanding order book (pipe andplate) of Rs 6400 crore. Further in this quarter, the companyadded orders worth Rs 900 crore from domestic and internationaloil & gas majors. After executing orders in Q1FY11, as on June 30,2010, the current order book (pipe and plate) stands at Rs 5000

crore• The capacity of the pipes division is being increased to 2.2 mtpa

along with LSAW expansion of 350 ktpa at the Anjar facility byQ1FY12. Also, the 100 ktpa HSAW plant at Karnataka gotcommissioned this fiscal

• The company plans to make a foray in the infrastructure segment.During this quarter, Welspun Infratech Ltd, a subsidiary ofWelspun Corp, infused Rs 2,11.3 crore (@ Rs 123 / share) in MSKProjects India Ltd, equivalent to 43% of the fully diluted equity.The holding of Welspun Infratech Ltd in MSK is likely to reachapproximately 56% after the completion of other buyouts

• The company also plans to extend its manufacturing presence in

the Middle East by having a 270 ktpa spiral pipe and coating facility in Saudi Arabia. This would help the company’s globalreach not just in terms of supply but also for production facilities

• The company expects orders from the North American segmentin the oil and gas space due to the ongoing recovery. Also, going forward, shale gas projects in the northern region can lead toadditional orders in the piping segment. On the domestic front,with the oil and gas sector being a low margin segment, thecompany has low focus with major orders expected in theaccretive water pipeline projects

• The consolidated gross debt of the company stood at ~Rs 2060crore as compared to Rs 2550 crore (QoQ) on account ofrepayment of high cost term loans in the previous year

• The company’s blended EBITDA/tonne remained at ~Rs10971/tonne during Q1FY11 on the back of a strong performancein pipes division. The management has guided for a sustainableEBITDA/tonne of Rs 10500-11000/tonne, going forward

• The outlook for the pipes industry has started to improve withrecovery having started in the global markets and crude oil priceshovering around US$80 per barrel leading to revival of severalshelved projects in the oil and gas space

• On the capacity utilisation front, due to ramp up in the USoperations, the utilisation levels, according to the management,would improve going further from the present 55% to 60% by theend of this fiscal. Also, due to the ongoing operational

maintenance at the Saudi facility, commercial production wouldstart from December onwards, thus adding to the consolidatednumbers in this fiscal





Outlook & earnings revision

The company has been growing its base smoothly in differentgeographies in the world with a focus on maintaining its margin. Thedomestic focus is less due to high competition and lower margins. In thecoming year, with further expansion of HSAW and LSAW, we expect thecompany to see decent volume growth. The company has guided for 1.3-1.4 MT volume during the coming year out of a total capacity of 2.4 MT.To expand in the high growth market of the Middle East, the companyhas acquired ~51% stake in Aziz Pipe, which has a capacity of 270 ktpa.However, we have not factored in that benefit into our estimates.Welspun’s foray into the infrastructure segment through acquisition ofMSK project is also likely to help the company to improve and integrateits pipe business. At this point, however, we would like to wait for moreclarity on that. We have revised up our estimates for FY11E andintroduced our FY12E numbers.

Exhibit 4: Revised financials

(Rs Crore) FY12E*

Current Previous % Change IntroducingNet Sales 7975.8 6702.7 19.0 9148.6

EBITDA 1327.9 1245.7 6.6 1416.3

EBITDA Margin (%) 16.6 18.6 -200 bps 15.5

PAT 623.6 565.7 10.2 660.2

EPS (Rs) 30.5 27.7 10.2 32.4

* Not including MSK financials

FY11E*


Valuations

At the CMP of Rs 250, the stock is trading at FY12E P/E of 7.7x and FY12EEV/EBITDA of 4.4x. Though we are optimistic about its future growth,

which is likely to come from its multi-country operations, we prefer toremain cautious on the recent market situation and possible margincontraction. We have valued the stock at 5x FY12E EV/EBITDA andrevised our target price to Rs 295. We have assigned a BUY rating to thestock.

Exhibit 5: Valuation Table

Sales (Rs

Crore) EPS (Rs) PE (x)

EV/EBIDTA

(x) P/ BV (x) RoNW (%) RoCE (%)

FY09 5739.5 11.2 22.3 9.8 3.0 13.7 12.5

FY10 7350.2 29.9 8.4 5.2 2.0 29.4 23.7

FY11E 7975.8 30.5 8.2 4.8 1.6 21.6 20.3

FY12E 9148.6 32.4 7.7 4.4 1.4 19.1 19.6






ICICIdirect.com coverage universe (Metals & Mining)

Jindal SAW Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)

Idirect Code SAWPIP CMP 201.4 CY08 5009.1 13.1 15.3 9.3 15.4 15.6

Target 228.0 FY10* 6791.6 26.7 7.5 4.4 19.1 21.6

FY11E 4920.0 19.6 10.3 4.8 12.6 15.2

MCap 5508.9 Upside (%) 13.2 FY12E 5772.7 21.7 9.3 3.9 12.4 16.5

Maharashtra

Seamless Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)

Idirect Code MAHSEA CMP 405.9 FY09 2038.9 36.8 11.0 7.1 21.6 25.1

Target 412.0 FY10E 1591.2 40.2 10.1 5.0 19.1 25.7

FY11E 1664.3 45.6 8.9 5.0 17.5 20.3

MCap 1431.3 Upside (%) 1.5 FY12E 2083.4 51.4 7.9 4.0 16.7 21.6

Man

Industries Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)

Idirect Code MANIN CMP 83.6 FY09 1883.4 3.8 21.8 5.1 5.4 14.3

Target 76.0 FY10E 1524.3 12.5 6.7 3.5 15.7 17.1MCap 447.6 Upside (%) -9.1 FY11E 1420.0 13.3 6.3 3.5 14.3 17.8

PSL Limited Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)

Idirect Code PSLHOL CMP 137.7 FY09 3559.9 19.8 6.9 4.7 18.3 14.5

Target 186.0 FY10E 3941.1 22.3 6.2 4.9 15.1 14.5

FY11E 3207.1 23.0 6.0 5.4 15.1 13.4

MCap 734.1 Upside (%) 35.1 FY12E 3287.2 20.1 6.9 4.2 10.2 11.9

Welspun

Corp* Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)

Idirect Code WELGUJ CMP 249.7 FY09 5739.5 11.2 22.3 9.8 13.7 12.5

Target 295.0 FY10 7350.2 29.9 8.4 5.2 29.4 23.7

FY11E 7975.8 30.5 8.2 4.8 21.6 20.3

MCap 5100.8 Upside (%) 18.2 FY12E 9148.6 32.4 7.7 4.4 19.1 19.6

* Financials not in consolidation with MSK projects

*FY10 respresents 15 months data






RATING RATIONALE

CICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assignsratings to its stocks according to their notional target price vs. current market price and then categorises themas Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the

notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;Buy: Between 10% and 20%;Add: Up to 10%;Reduce: Up to -10%Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,

7th Floor, Akruti Centre Point,MIDC Main Road, Marol Naka,Andheri (East)Mumbai – 400 093

[email protected]

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ndirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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Documents

ICICIdirect_WelspunGujarat_Q1FY11