Buy Welspun - Volumes miss, margins surprise; Target Rs 250, Macquarie Research,

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Welspun Corp
Volumes miss, margins surprise
Event
 Welspun reported 3Q’FY11 results. The company reported net sales of
Rs15.9bn, a 3% YoY drop due to 4% volume decline in Pipes. Net profit
declined 12% YoY to Rs1.5bn. The company reported an EBITDA margin of
~20% in 3Q’FY11.
 We cut our target price to Rs250 from Rs325 on regulatory overhang. We
maintain our Outperform recommendation.

Impact
 Sales volume impacted by shipment delay. The company has reported
pipe sales volume of 164k tonnes (4% YoY decline) on account of shipment
delay of a 50k tonne order. The delayed shipment will be booked in 4Q’FY11
sales. Excepting the delayed shipment of 50k tonnes, pipes volume was inline with our estimates. On the other hand, Welspun reported plates and coils
sales volume of 125k tonnes.  
 Order book increased by 18%. Welspun started the December quarter with
an order book of 650k tonnes, which had grown to 776k tonnes at the end of
quarter. In addition, Welspun also has external plate orders of 40k tonnes.
Welspun’s current order book of ~Rs50bn gives sales visibility for the next
three quarters. The company is participating in several global bids and
expects the order book to improve significantly in coming quarters.
 Pipe margins remained robust. Welspun earned an average EBITDA
margin on pipes of Rs12,000/tonne and Rs5,000/tonne on plates. Blended
EBITDA was Rs10,960/tonne, which was 13% lower YoY, as the share of
plates in the total sales mix increased significantly.
 Capacity addition on track. The company has commenced trial production
in the Saudi plant and expects production ramp-up from the facility by
1Q’FY12. The HSAW plant at Mandya in Karnataka is also ramping up fast
and has achieved capacity utilization level of over 50%. On the other hand,
the LSAW plant at Anjar is on track, which is likely to start operation by 2Q’
FY12.
Earnings and target price revision
 We change our TP to Rs250 from Rs325 as we reduce the valuation multiple
by 25% due to regulatory overhang on the Welspun group.
Price catalyst
 12-month price target: Rs250.00 based on a PER methodology.
 Catalyst: 1) Resolution of regulatory overhang
Action and recommendation
 Outperform maintained. WLCO is currently trading at 5x FY12E PER, which
is at significant discount to its historical average forward PER of 12x. Our
target price of Rs250 implies a FY3/12E PER of 7.5x.