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WELSPUN CORP.
Lower sales volume due to delay in shipment of HSAW pipes
�� Consolidated pipe sales lower at 164 KT; order book at 776 KT
Welspun Corp.’s (WLCO) consolidated Q3FY11 pipe production, at 212 KT, was
up 35.2% Y-o-Y, but was down 16.7% Q-o-Q. However, sales volumes at 164
KT, was down 21.7% Y-o-Y and 28.8% Q-o-Q due to inventory pile up of ~40-50
KT HSAW pipes during the quarter. Sales mix for Q3FY11 included 40 KT of
LSAW, 113 KT of HSAW (including 56KT of US sales) and 9 KT of ERW sales.
Plate sales were lower than estimates at 125 KT (-3.00% Q-o-Q, +10.8% Y-o-
Y). WLCO's closing order book in Q3FY11, of 776KT (283 KT of LSAW, 458 KT of
HSAW and 35 KT of ERW pipes), increased from 650 KT in Q2FY11. Plates order
book has dropped to 40 KT in Q3FY11 against 150 KT in Q2FY11. We expect
WLCO's sales to be better in Q4FY11 due to impact of shipment of the inventory
piled up in Q3FY11.
�� Pipes EBITDA at USD 245/MT; PAT lower at INR 1.46 bn
WLCO reported blended pipes EBITDA margin (HSAW, LSAW and ERW) at INR
11,000/MT, lower than INR 11,800/MT reported in Q2FY11. Plate EBITDA
margins were at INR 5,000/mt. Margins are in line with the management
guidance. WLCO’s consolidated EBITDA of INR 3,128 mn is inclusive of INR 60
mn from Welspun Projects (erstwhile MSK Projects). Consolidated PAT, at INR
1.46 bn, eased 17.7% Q-o-Q and 12.3% Y-o-Y (due to lower sales volume and
higher interest expenses). WLCO reported standalone PAT at INR 652 mn (up
29.6% Q-o-Q, but lower 49% Y-o-Y).
�� Outlook and valuations: Uncertainty remains; stock ‘UNDER REVIEW’
With crude prices nearing USD 100/bbl, we expect the oil & gas companies to
increase their FY12 capex budgets, leading to new order accretion for the pipe
industry. Also, WLCO is in a sweet spot in regards to international orders as it
has a decent record of serving the niche segment. The 270 KT pipe capacity in
Saudi Arabia is likely to start production in Q4FY11 and is, thereby, expected to
contribute to the company’s revenues. However, with the recent SEBI order, we
maintain our recommendation ‘Under Review’ till further clarity emerges. At
CMP of INR 162/share, WLCO is trading at P/E of 4.7x FY12E EPS and
EV/EBITDA of 3.0x FY12E.
�� Key highlights
• Expanded facility at Anjar to be operational by end of Q1FY12.
• WLCO continues to maintain its guidance of sales volume of 950-1,000 KT for FY11.
• Saudi Arabia facility to start production in Q4FY11.
• In terms of value, order book has jumped to INR 50 bn at the end of Q3FY11 (11%
higher Q-o-Q) due to announcement of new orders during Q3FY11. We believe
revenue-based order books are not indicative of the order situation, due to
fluctuation in global steel prices.
• Depreciation expenses, at INR 653 mn, increased 6.2% Q-o-Q and 27.7% Y-o-Y.
• Interest costs, at INR 454 mn, jumped 21.4% Q-o-Q and 6.1% Y-o-Y.
• Debt stood at INR 37.6 bn, whereas cash and cash equivalents accounted for INR
26.6 bn.
Company Description
Incorporated in 1995, WLCO manufactures SAW pipes (both spiral and longitudinal),
branch pipes (electric-resistant welded, ERW pipes), and coatings for pipes. The
company has plants at Dahej and Anjar in Gujarat (western India). Currently, it has total
pipe making capacity of 1.55 MTPA (HSAW—0.65 MTPA, LSAW—0.35 MTPA, and ERW—
0.2 MTPA; US – 0.35 MTPA). It announced plans to increase capacity to ~2.27 MTPA
through LSAW and HSAW capacity expansions. The company has put up a 0.35 MTPA
HSAW pipe mill, along with a coating plant in the US, to take advantage of the highmargin
US markets. WLCO has integrated backwards through a 1.5 MTPA Greenfield
steel plate mill and a coil mill, which has been commissioned in March 2008.
Investment Theme
WLCO gains from the experience and accreditation of global players like Kinder Morgan,
Chevron, and Exxon Mobil, which has enabled it to bag large international orders. The
company’s current order book is INR 57 bn (~0.8 MMT) which provides part revenue
visibility for FY11.
Moreover, the company has expanding its international footprint by setting up a 0.35
MTPA HSAW facility in the US; ramp up of which will help improve its utilization.
Additionally, its planned HSAW and LSAW capacity expansions (550,000 MT total) will
help cater to the improving global/domestic industry, going forward. While the volumes
are likely, margins for pipes may be maintained at ~INR 10,000-11,000/MT.
Key Risks
• Slower new order accretion due to higher competition
• Lower EBITDA margins
• Exchange rate volatility could lead to foreign exchange fluctuation losses.
• Volatility in prices of key inputs (steel, coal, iron ore) could adversely impact EBITDA
margins. Decline in plate prices can reduce the company’s advantage of lower plate
cost.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
WELSPUN CORP.
Lower sales volume due to delay in shipment of HSAW pipes
�� Consolidated pipe sales lower at 164 KT; order book at 776 KT
Welspun Corp.’s (WLCO) consolidated Q3FY11 pipe production, at 212 KT, was
up 35.2% Y-o-Y, but was down 16.7% Q-o-Q. However, sales volumes at 164
KT, was down 21.7% Y-o-Y and 28.8% Q-o-Q due to inventory pile up of ~40-50
KT HSAW pipes during the quarter. Sales mix for Q3FY11 included 40 KT of
LSAW, 113 KT of HSAW (including 56KT of US sales) and 9 KT of ERW sales.
Plate sales were lower than estimates at 125 KT (-3.00% Q-o-Q, +10.8% Y-o-
Y). WLCO's closing order book in Q3FY11, of 776KT (283 KT of LSAW, 458 KT of
HSAW and 35 KT of ERW pipes), increased from 650 KT in Q2FY11. Plates order
book has dropped to 40 KT in Q3FY11 against 150 KT in Q2FY11. We expect
WLCO's sales to be better in Q4FY11 due to impact of shipment of the inventory
piled up in Q3FY11.
�� Pipes EBITDA at USD 245/MT; PAT lower at INR 1.46 bn
WLCO reported blended pipes EBITDA margin (HSAW, LSAW and ERW) at INR
11,000/MT, lower than INR 11,800/MT reported in Q2FY11. Plate EBITDA
margins were at INR 5,000/mt. Margins are in line with the management
guidance. WLCO’s consolidated EBITDA of INR 3,128 mn is inclusive of INR 60
mn from Welspun Projects (erstwhile MSK Projects). Consolidated PAT, at INR
1.46 bn, eased 17.7% Q-o-Q and 12.3% Y-o-Y (due to lower sales volume and
higher interest expenses). WLCO reported standalone PAT at INR 652 mn (up
29.6% Q-o-Q, but lower 49% Y-o-Y).
�� Outlook and valuations: Uncertainty remains; stock ‘UNDER REVIEW’
With crude prices nearing USD 100/bbl, we expect the oil & gas companies to
increase their FY12 capex budgets, leading to new order accretion for the pipe
industry. Also, WLCO is in a sweet spot in regards to international orders as it
has a decent record of serving the niche segment. The 270 KT pipe capacity in
Saudi Arabia is likely to start production in Q4FY11 and is, thereby, expected to
contribute to the company’s revenues. However, with the recent SEBI order, we
maintain our recommendation ‘Under Review’ till further clarity emerges. At
CMP of INR 162/share, WLCO is trading at P/E of 4.7x FY12E EPS and
EV/EBITDA of 3.0x FY12E.
�� Key highlights
• Expanded facility at Anjar to be operational by end of Q1FY12.
• WLCO continues to maintain its guidance of sales volume of 950-1,000 KT for FY11.
• Saudi Arabia facility to start production in Q4FY11.
• In terms of value, order book has jumped to INR 50 bn at the end of Q3FY11 (11%
higher Q-o-Q) due to announcement of new orders during Q3FY11. We believe
revenue-based order books are not indicative of the order situation, due to
fluctuation in global steel prices.
• Depreciation expenses, at INR 653 mn, increased 6.2% Q-o-Q and 27.7% Y-o-Y.
• Interest costs, at INR 454 mn, jumped 21.4% Q-o-Q and 6.1% Y-o-Y.
• Debt stood at INR 37.6 bn, whereas cash and cash equivalents accounted for INR
26.6 bn.
Company Description
Incorporated in 1995, WLCO manufactures SAW pipes (both spiral and longitudinal),
branch pipes (electric-resistant welded, ERW pipes), and coatings for pipes. The
company has plants at Dahej and Anjar in Gujarat (western India). Currently, it has total
pipe making capacity of 1.55 MTPA (HSAW—0.65 MTPA, LSAW—0.35 MTPA, and ERW—
0.2 MTPA; US – 0.35 MTPA). It announced plans to increase capacity to ~2.27 MTPA
through LSAW and HSAW capacity expansions. The company has put up a 0.35 MTPA
HSAW pipe mill, along with a coating plant in the US, to take advantage of the highmargin
US markets. WLCO has integrated backwards through a 1.5 MTPA Greenfield
steel plate mill and a coil mill, which has been commissioned in March 2008.
Investment Theme
WLCO gains from the experience and accreditation of global players like Kinder Morgan,
Chevron, and Exxon Mobil, which has enabled it to bag large international orders. The
company’s current order book is INR 57 bn (~0.8 MMT) which provides part revenue
visibility for FY11.
Moreover, the company has expanding its international footprint by setting up a 0.35
MTPA HSAW facility in the US; ramp up of which will help improve its utilization.
Additionally, its planned HSAW and LSAW capacity expansions (550,000 MT total) will
help cater to the improving global/domestic industry, going forward. While the volumes
are likely, margins for pipes may be maintained at ~INR 10,000-11,000/MT.
Key Risks
• Slower new order accretion due to higher competition
• Lower EBITDA margins
• Exchange rate volatility could lead to foreign exchange fluctuation losses.
• Volatility in prices of key inputs (steel, coal, iron ore) could adversely impact EBITDA
margins. Decline in plate prices can reduce the company’s advantage of lower plate
cost.
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