Stock Review: Welspun Corp

BUSINESS:

Welspun Corp, formerly known as Welspun Gujarat Stahl Rohren, produces high-grade SAW pipes and electric resistance welded pipes (ERW). The main raw materials for these products are hot rolled coils and steel plates. Welspun owns plate and coil facilities and is hence less susceptible to fluctuations in steel prices.Currently, the company operates a capacity of 1.6 million tonnes, of which 350,000 tonnes are from overseas operations. It plans to increase its capacity to 2.2 MT by the end of this fiscal. Key user industries for such pipes include oil and gas and water transportation companies. Some of Welspun's major clients include Saudi Aramco, Texas Gas and Exxon Mobil. A large proportion of the company's operations are in the US, hence the recovery in the US economy is crucial for it. The company had an order book backlog of about 5,000 crore in the December 2010 quarter.

GROWTH PLANS:

The company acquired a pipe and coating facility in Saudi Arabia seven months ago. The production is expected to begin in the current quarter. Expansion at it LSAW plant in Anjar, Gujarat, is on track and is expected to commission by June 2011.

FINANCIALS:

On the basis of compounded annual growth (CAGR), Welspun's sales grew 78% while net profit rose 70% over the past three years. In the December 2010 quarter, the company posted a 14% decline in net profit on the back of a 3% drop in sales due to logistical problems, lower pipe volumes and lower realisations. Higher input costs, which have impacted the entire metals sector, lead to a 200 basis points decline in its Ebitda margin to 20%.

VALUATION:

The stock has fallen 44% in the past one year,
underperforming the Sensex. It generated 24% return on capital and 27% on equity in FY10. At 159, it trades at 6.3 times its trailing 12-month PE and an EV/EBITDA of 5.7 times.

CONCERNS:

Despite compelling valuations and expected growth in the global and Indian pipes industry, corporate governance issues pertaining to the stock price manipulation by the promoters could keep the stock price at current lows. The stock has lost over 30% following the reports of an enquiry by Securities and Exchange Board of India (Sebi) early December and has not recovered since then. It may slide further if Sebi passes a final order against its promoters. Further, there is a slight possibility of the recent geopolitical tensions in Egypt spreading to other Arab countries as well. Since Welspun has operations in Saudi Arabia, this does not bode well for the stock. The company gets over 80% of its orders from overseas markets and hence, it is more prone to currency fluctuations.