Stock Review: Welspun Corp

 

 

Welspun Corp may benefit from its improved focus on exports, affinity to key markets and backward integration. Long-term investors can bet on this stock

 

WELSPUN Corp, a flagship company of Welspun Group, is one of the largest line-pipe manufacturers in the world. The company is set to benefit from various factors such as its focus on exports, affinity to key markets and backward integration. The company's stock, however, does not seem to have priced in these developments leaving room for an upside.

BUSINESS:

Welspun Corp provides one stop solution for all kind of transportation pipes. It manufactures SAW and ERW pipes. It also has a coating facility at its plant located in Gujarat. It features among the preferred suppliers in the world for entire range of the products. The company is backwardly integrated with 1.5 million tonne per annum plate cum coil mill at Anjar in Gujarat.

GROWTH DRIVERS:

Welspun's export focus and strong clientele base insure good order. It commissioned 350k tonne per annum HSAW mill in 2009 which is helping the company to reduce lead times and other valueadded work. The company generates more than 75% of its sales from overseas clients. With growing expenditure in oil exploration, the company is poised to benefit from this demand, as it is a leading supplier of pipes to oil industry.

   Welspun Corp, through its subsidiary, has announced to acquire a majority stake in pipe coating facility of Aziz European Pipe Factory for $ 58 million. The total capacity is expected to increase from 1.5 million tonne to 1.8 million tonne after this acquisition. The acquisition will help the company tap markets in the Middle East. The company has an order book of over 6,500 crore and is expected to grow. Raw material is the major cost component in steel pipe manufacturing, accounting for about 70% of the total cost of production. To reduce this cost, the company has taken several backward integration initiatives. Welspun Corp commissioned plate mill in FY09 and is gradually ramping up production of plates from 387k tonne per annum (TPA) in FY10 to 600k TPA in FY11.

   With recent acquisition of controlling stake in MSK projects for about 400 crore, Welspun Corp has forayed into infrastructure space. The company intends to capture attractive returns in this space while ensuring that orders for pipes that originate from these projects flow back to the company giving more visibility to its order book.

FINANCIALS:

In the quarter ended June 30, 2010, the company reported net sales of 2,475 crore, up 23 %, while net profit surged 70% on year-on-year basis. Although the company is betting on inorganic growth, it has been successful to reduce debt on its books. Debt-to-equity ratio stands at 1.17 compared to 2.32 in 2007. A lower interest payment has helped the company increase in net profit margin by 210 basis points.

VALUATIONS:

The scripts of most of the steel pipe manufacturers have seen a significant run up over the past one year. Welspun Corp, on the other hand, has underperformed the Sensex. At the current price of 263, the stock is trading nine times its trailing 12-month earning per share. It is relatively in line to most of its peers such as PSL Industries and Oil Country. At the current price levels, Welspun Corp can be a good long-term investment given the increased visibility of its sales volumes.