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Company Description:
Incorporated in 1995, Welspun Corp Ltd (WCL), flagship Company of Welspun Conglomerate, is the second largest integrated pipe major in the world with current pipe capacity of 2.0 million tpa at Dahej, Anjar in Gujarat. WCL also has 1.5 million tpa plate-cum-coil mill as part of its backward integration. WCL offers a complete range of high grade line pipes ranging from ½ inch to 100 inch used primarily for transmission of oil & gas and is accredited supplier to more than 50 oil & gas majors across the globe. Exports constitute over 75 per cent of sales.
Investment Rationale: In 2009, WCL commissioned 350, 000 tpa HSAW mill along with double coating and jointing facility at Little Rock, Arkansas, USA. WPL’s new 350,000 tpa LSAW facility in Anjar is scheduled to be completed by Q1-Q2FY12.
WCL has acquired 51% stake in 3-lakh tpa spiral pipe manufacturer Aziz Pipe in the Middle East, which makes its manufacturing presence now in three countries, Middle East, US & India. The revenues from Aziz Pipe are expected to be generated in the January-March quarter. Suadi market is about 1 million tonne/year. It will cater to oil & gas and water segment.
On account of strong capabilities, WCL has become accredited supplier of over 50 major oils & gas companies across the world. Over the years, it has developed capabilities to produce wide variety of pipes ranging from ½ inch to 100 inches in outer diameter; it is among the few manufacturers of high grade pipe of X 80 and was also the first company to manufacture the largest diameter pipe, 56 inches for both LSAW as well as LSAW in X 70 grade. WCL had also supplied pipes for “The Independence Trail” project- world’s deepest pipeline, laid below 8000 ft of water.
Through acquisition of controlling 61.1% stake in MSK projects, WCL is targeting to provide end-to-end piping solution as well as capturing the lucrative infrastructure opportunity. As MSK is currently operating 142 km Dewas water supply project on BOT basis, WCL can leverage MSK’s strength into the water management business and generate business for its water focused pipe mill (1 lakh tpa HSAW mill which was commissioned in Bangalore in 1QFY11 and one more I lakh tpa HSAW plant coming up in Central India).
March’10 Simdex data suggests that based on existing pipeline projects, global pipeline requirement is expected to be ~65 million tonnes over the next 5 years, roughly equivalent to US$ 78 billion worth of business potential. Asia, North America and Middle East will generate nearly 64% of the total demand.
Currently India has very poor pipeline infrastructure, with total gas pipeline length of only 11,000 km, which compares grimly with 56,400 km in Pakistan and 18.3 lakh km in USA. India has also one of the lowest pipelines spread per sq km of land at 0.003 km/sq km of land, compared with 1.08 for UK and 0.19 for US. This can primarily be attributed to lower share of natural gas in the primary energy mix of the country at 9% vs 21% for world and 24% for OECD countries.
More than 1 million miles of the total 1.5 million miles of USA pipelines were laid during the 1960's and 1970's. Since most of the pipelines have an economic life of ~ 30 years, there is a pressing need to replace them in order to avoid systematic failure and supply disruptions. Considering that the annual production of pipes have been over 16 - 17 million tonnes, the replacement of even half of 1 million miles of pipelines would take at least 10-12 years to complete.
WCL has clarified that the recent SEBI order not to deal buy, sell or deal in WCL shares till further notice has no bearing on any of its business/financials. Promoters have also indicated that they are taking legal advice and believe they are in full compliance with all applicable laws.
WPL’s global scale operations, consistent excellence in new business ventures, capturing the value chain from manufacturing to pipe laying, sustained innovation & technology, expanding capacities, low pipeline penetration in India, higher capacity utilization, better operating efficiencies, Capex plans by most of its overseas clients, Increasing global energy consumption and strong order book of `6, 150 crore give strong visibility to revenue & profitability going forward. At the CMP of `152, the share is trading at a P/E of 4.9x on FY11E and 4.7x on FY12E. We recommend BUY with a target of `200 in the medium term.
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