Welspun Corp :Compelling valuations:: Macquarie

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Welspun Corp
Compelling valuations
Event
 Welspun reported 2Q FY11 results. The company reported strong operational
performance and exceeded our expectations for both sales volumes as well
as blended margins.
 WLCO is trading at a 7.7x FY12E PER, which is a 50% discount to its
historical average PER. We maintain our Outperform rating and target price of
Rs325/share.
Impact
 New capacities ramp-up better than expected. HSAW sales out of the US
mill increased 53% YoY and exceeded our expectations. This mill operated at
~68% utilisation in the last quarter, which we think is commendable for a mill
less than two year. Welspun’s recently commissioned HSAW pipe mill in
Karnataka reached 45% utilisation in the first three months of operation.
Overall, pipe sales volume increased 10% YoY, as domestic pipe sales
volumes remained flat.
 Pipe margins remained robust. Welspun earned an average EBITDA
margin on pipes of Rs11,800/t and Rs5,500/t on plates. The company has
once again exceeded its margin guidance of Rs10,000/t as well as our
expectations. Pipe margins were up 7%YoY but declined 9% QoQ.
 Order book declined by 4%. Welspun started the September quarter with an
order book of 675k tonnes, which has shrunk to 650k tonnes at the end of
quarter. In addition, Welspun has external plate and coil orders of 250k tonne.
Welspun’s current order book gives sales visibility until June 2011. The
company is participating in several global bids and expects the order book
situation to improve materially over the next two quarters.
 New growth initiatives progressing well. MSK Projects, the company that
Welspun recently acquired, contributed Rs300m to consolidated sales and
Rs90m to EBITDA in 45 days under Welspun management. MSK has an
order backlog of over Rs3,500m. The company’s newly acquired 300k tpa
pipe mill in Saudi Arabia has started trial production and will be fully
operational by December 2010. LSAW expansion at Anjar will be completed
by June 2012.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs325.00 based on a PER methodology.
 Catalyst: 1) New orders and 2) timely commissioning of new plants.
Action and recommendation
 Attractive valuations. WLCO is trading at a 7.7x FY12E PER, which is a
50% discount to its historical average PER. Our target price of Rs325 implies
an FY3/12E PER of 10x.