Welspun : Expect strong order flow in 2HFY11 - HSBC

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Welspun (WLCO)
OW(V): Expect strong order flow in 2HFY11
􀀗 Order book at INR45bn (0.75m tonnes); management guides
strong order flow in 2HFY11
􀀗 2QFY11 earnings better than expected due to higher than
estimated EBITDA margin and low interest cost
􀀗 Reiterate OW(V) with target price of INR335; lower than
estimated EBITDA margin is key risk





Order book at INR45bn (0.75m tonnes): Welspun’s order book at the end of 2QFY11
was at INR45bn, comprising 0.65m tonnes of pipe orders and 0.1m tonnes of plate orders,
which gives revenue visibility for the next three quarters. Importantly, despite a decline in
average sale price, management has guided that the EBITDA margin (EBITDA/tonne) is
likely to be maintained at INR10,500-11,000/tonne for pipes and INR5,500 for plates,
which is a positive.
New order flows would be a trigger: Management indicated in its 2QFY11 results call
that the company is L1 (lowest bidder) in a number of international projects which are
likely to be awarded in 2HFY11. New orders would be a potential trigger.
2QFY11 earnings higher than consensus and HSBC expectations: Welspun’s 2QFY11
net profit grew by 7% y-o-y to INR1.8bn, which was significantly above HSBC (by 21%)
and consensus estimates (by 8%). This was attributed to the high EBITDA margin from
US operations (EBITDA/tonne of c11,000 for pipes) and low interest costs (benefit from
repayment of high-cost loans).
Reiterate Overweight (V) with target price of INR335: We are positive on the stock, as
the company has a strong order book – the largest among peers – and a sound customer
base with committed capex plans, and given the rise in crude prices, which has improved
the new order book outlook. Based on our target PE of 13.5x and March 2012e earnings,
we have a target price of INR335.