Stock Review: WELSPUN

Investors of Welspun have not been rewarded in the past three months. Not only has the share price gone down almost 20%, the last three quarters have been marked by a declining trend in the earnings per share.

At the beginning of the year, growth prospects looked promising for the company as the entire pipes industry was betting big on renewed order flows as a result of anticipated growth in the oil and gas industry in the west. But this has failed to take shape so far. As a result, Welspun, which derives 80% of its orders from overseas markets, continues to suffer, as reflected in the numbers of the recent quarters.

During the fourth quarter, Welspun reported 34% sales growth on account of higher-than-expected volumes as a result of the commencement of operations at its Saudi Arabia plant. However, the 63% increase in raw material expenses cost the company an 800 points decline in its operating profit margin to 11%. Raw materials account for 73% of the company's total revenue. Net profit was lower by 30% to . 118.06 crore, which lowered the EPS to . 5.8 from . 8.2 in the same quarter of the previous year — a declining trend witnessed over the past three quarters.

The company recently announced that it has won new orders worth . 788 crore, which would take its order book up to . 6,941 crore. But, despite that, execution delays remain. Another concern is the fact that the promoters have still not received a clean chit from Sebi regarding certain corporate governance issues.

Welspun's net debt as on March 2011 stood at . 1,600 crore, which is 0.45 times its equity. With an interest coverage ratio of seven, the company is in a comfortable position to pay off its debt. At . 159, the stock trades at 5.1 times its trailing 12-month earnings per share. Though valuations are compelling, timely execution of orders and high input costs are likely to keep the stock under pressure.