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Positive margin surprise
Volume growth in plates disappoint
Consolidated volumes grew 11% YoY to 358,046 tonnes led by 10% YoY growth in pipes at
229,688 tonnes (USA: 58,000 tonnes) and 13% YoY growth in plates at 128,358 tonnes
(external sales: 62,000 tonnes). The volume growth in plates was relatively lower (against our
expectations of 25% YoY) led by the company’s focus on value-added products. The blended
realisation declined 23% YoY to `51,737/tonne against `67,364/tonne.
The EBIDTA for pipes was `11,800/tonne (up 7% YoY but down 9% QoQ) and for plates at
`5,500/tonne (flat on YoY and QoQ).
Order book of `45bn
The order book stood at `45bn equivalent to 850,000 tonnes (Pipes - 650,000 tonnes and
plates -150,000 tonnes). In terms of volumes, HSAW accounts for 435,000 tonnes followed
by LSAW and ERW at 175,000 tonnes and 40,000 tonnes, respectively. In plates, external
orders constitute 50,000 tonnes.
Update on MSK projects
Welspun acquired management control of MSK projects (MSK) with effect from 16 August
2010 and currently holds 61% stake in the company. MSK reported revenues of `300mn and
EBIDTA of `90mn in the quarter.
Capex, debt and expansion plans
The company plans to incur capex of `10bn in FY11E (LSAW expansion: `6bn, HSAW
expansion: `1bn and MSK projects: `3bn). Of these, it already spent `6bn until date and is
expected to incur remaining capex of `4bn mainly for LSAW expansion in 2HFY11E.
The net debt as of 30 September 2010 was `15bn (MSK Projects: `4.5bn) with an average
cost of debt at 7%.
During the quarter, the company began commercial production from its new spiral plant in
Karnataka. It also commenced trial runs at its 300,000 tonnes spiral plant in Saudi Arabia
(with expected commercial production from 3QFY11). The 350,000 tonnes LSAW expansion
at Anjar is expected to get completed in1QFY12.
Valuations
We upgrade the stock to a Strong Buy considering a good revenue visibility, healthy order
pipeline, improving utilisation in plate business and attractive valuations. With the revival in
order inflows, the company is the best bet in pipe sector with a strong pre-qualification
background and well-diversified geographical presence.
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