Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Welspun Corp
Leighton India stake acquisition
Event: Welspun Corp acquires stake in Leighton India
Welspun Infra Projects (WIPPL) is to acquire 35% shareholding in Leighton
Contractors (India) (Leighton Holding’s Indian operations) for Rs. 4.70 bn.
Welspun Corp’s (WCL, listed pipes entity) 100% subsidiary Welspun Infratech
owns a 60% stake in WIPPL and the rest 40% is held by Welspun Infra Developers
Pvt Ltd. (a closely held company). However, post subsidiary restructuring, WCL
will hold 65% in Welspun Infratech and the rest by the controlling shareholders.
Impact: Unrelated diversification; infra could be avenue for growth
Stake acquisition in infra business is an unrelated diversification, but also an
avenue for growth, in our view (huge infra opportunity in India). Despite our
positive industry outlook, pipes business growth may not be sharp, as WCL has c7-
8% of the global capacity and c5-8% of global production. WCL’s balance-sheet
size, favourable free cash flow generation, and execution/scale-up ability will help,
in our view. EPS sensitivity should be positive at Rs2-2.5/share (5-7%) in FY12.
Action: Maintain estimates and price target
The acquisition is subject to regulatory approvals. Hence, we maintain our
estimates and price target of Rs250. The impact of infra arm will depend on project
bidding, selection and is a long-term opportunity for growth. Our outlook on the
pipes sector is positive and in Q4FY11, shipments could improve significantly
QoQ.
Valuation: Maintain Buy on fundamentals and PT of Rs 250/share
WCL continues to deliver reasonable operational performance. We maintain our
Buy rating and UBS-VCAM based TP of Rs 250. We await more clarity on SEBI
enquiry.
Welspun Group acquires 35% in Leighton Contractors
(India); group restructuring at subsidiary level
Welspun Group through its group company, Welspun Infra Projects Pvt Ltd
(WIPPL) is to complete the acquisition of a 35% shareholding in Leighton
Contractors (India) (Leighton Holding’s Indian operations) for Rs. 4.70 bn.
Welspun Corp (WCL, listed pipes entity) has a 100% subsidiary called Welspun
Infratech, which owns a 60% stake in WIPPL, and the rest 40% is held by
Welspun Infra Developers Pvt Ltd. (a closely held company). However, the
board of directors of WCL and Welspun Infratech, have decided to merge the
latter with Welspun Infra Developers. Post this, WCL will hold 65% in Welspun
Infratech and the rest will be held by the controlling shareholders.
Overall, WCL will contribute Rs1.5bn, controlling shareholders to share Rs1bn
and the remaining Rs2.2bn will be debt at the Welspun Infra Projects level. Note
that Welspun Infra Projects also has a 61% stake in MSK Projects (now called
Welspun Projects) and post restructuring, controlling shareholders will also get a
stake in Welspun Projects. Management highlighted that the swap ratio and
merger has been based on the book value. Current share capital of Welspun
Infratech will be Rs2.8bn.
This acquisition is subject to regulatory and high court approvals.
Details on Leighton India – order book, financials
The Leighton India MD Mr Russell and Mr Parvez (MD, CEO of Welspun
Infratech) highlighted that Leighton has been in the Indian market for the last 12
years.
Order book: Its current order book is Rs40 bn, executable over 1-3 years. 60%
of its order book is in the transport sector – roads, ports, railways; 33% in
offshore oil and gas; and the remaining 8-10% in residential building EPC (3
projects for Tata Realty in Chennai and Noida). While, its current order book is
weighted towards transport because of one large RS20bn Chenani Nashri tunnel
project; historically oil and gas was a significant portion (higher profits). Given
its global strength in EPC for mining projects, it also plans to tap projects in the
broader infra space, such as power, mining, etc.
Financials: It had a topline of Rs20bn, EBITDA of Rs2.5bn and PBT of
Rs1.9bn in 2010. It is currently a debt-free company. Though Leighton Holdings
will hold a majority stake of 65% in Leighton Contractors (India), this will be
treated as a joint venture (line by line consolidation) and WCL will participate at
the management and board level. Going forward, revenue for FY12 could be
Rs30bn and the business should be able to post 20% growth. EBITDA margins,
as per management, are estimated at 10% going forward.
While the EPC projects will largely be taken at Leighton or MSK level, PPP or
developer projects are likely to be taken at Welspun Infratech level. This will
depend on opportunities, as they come along.
Leighton acquisition impact on WCL balance-sheet
WCL’s contribution of Rs1.5bn is a stake sale and will go to Leighton
International. However, WCL will hold a 65% in the equity share capital of
Rs2.8bn. WCL’s net debt currently is cRs11bn and incremental Rs2.2bn debt
may be added due to the consolidation. Given the expected strong free cash flow
generation due to the forecast pipes sales, WCL could be a net-cash company by
the end of FY13. However, WCL may look to leverage this balance-sheet
strength to explore opportunities in the developer/PPP space. Hence, its balancesheet
positioning will significantly depend on a scaling up of its Infra business
and selection of projects.
Why is Leighton India selling the stake?
Leighton India indicated that given the significant infrastructure opportunity in
India, and potential PPP and BOOT, having an Indian partner would help to bid
for new projects. We believe that WCL’s balance sheet strength, free cash flow
generation and execution ability will help. We also understand that stake sales
are required at the Leighton Holdings level to keep the gearing down, after
the major profit warning in early April 2011.
What is happening with Leighton Holdings, Australia?
Leighton International is a leading contractor and project developer in Asia and
internationally. Leighton International is a subsidiary of Australia’s largest
project development and contracting group, the Leighton Group (Leighton
Holdings).
UBS analyst Jon Freedman highlighted the Leighton Holdings (LEI) profit
warning and capital increase. On 14 April 2011, LEI unveiled a major profit
warning and has taken a further negative $907m revision to its FY11 statutory
forecasts, taking the statutory guidance to a $427m loss. UBS forecasts an
operating loss of $291m ($429m statutory in line with guidance). LEI raised
$757m at $22.50 (1-for-9 renounceable entitlement) at a 22.3% discount to last
close and a 20.5% discount to TERP, with Hochtief taking its full 54%
entitlement. Our analyst Jon Freedman indicated that asset sales are still required
in FY12 as capital raised is put into problem jobs and gearing rises again. LEI
provided FY12 NPAT guidance of $600-650m (UBSe $615m) reflecting EPS of
$1.78-$1.93 (UBSe $1.84).
LEI’s self-imposed gearing target of 35-45% (and generally aiming for less than
40%) ensures a substantial buffer to covenants, given the cyclical nature of its
businesses. While management stated that covenants would not have been
breached without a raising, it noted that gearing would have been c60% and the
EBITDA/Debt covenant would have been too close for comfort. Given that the
problem jobs will consume the majority of the capital raised, asset sales should
still be required to keep gearing down going forward (we assume $250m in
FY12 and $50m pa in FY13-15). Potential assets that could be sold include
Aviation Aircraft Maintenance, Broad Construction, telecommunications assets
and/or listed stakes in MAH, SDM and DVN (which are worth $270m prior to
any exit discount). Post raising, pro forma (i.e. 31 December) gearing is 25%
and we estimate gearing of around 33% by 30 June, with the trend subsequently
improving.
UBS view on the stake acquisition
The Leighton stake acquisition is certainly an unrelated diversification into the
Indian Infrastructure space from its traditional leadership in the oil and
gas/water pipes manufacturing business. However, we believe that WCL
probably has 7-8% of the global capacity and c5-8% of global production. Given
its large scale of operations and reach in every country, with a high sales base of
1 mn MT, it may be difficult for WCL to continue its sharp growth trajectory
(through FY05-10E). Given the huge infrastructure opportunity in India, WCL’s
balance-sheet size, favourable free cash flow generation, and execution/scale-up
ability, could provide an avenue of high growth for the company. Also, Leighton
has significant expertise in the infrastructure project execution space and WCL
could leverage on that experience. However, this is a long-term opportunity. The
investment in Leighton is significantly small compared to WCL’s market cap.
Leighton India contribution sensitivity is Rs2-2.5/share to WCL’s earnings
in FY12. Our current estimates do not include this and we may incorporate it
post the completion of acquisition and approvals.
Pipes order book at Rs61.5bn; 0.7 year visibility
WCL’s current order book is Rs61.5bn, ensuring 7-8 months order book
visibility. This includes 932,000 tonnes of pipes (LSAW at 315,000 tonnes,
HSAW at 578,000 tonnes and ERW at 39,000 tonnes) and 40,000 tonnes of
external plate orders. WCL order traction needs to be maintained at Rs2.0-2.5bn
per quarter, to maintain the Rs91.6bn revenue run rate for FY12.
Management guidance on pipes business
Management guidance for pipes in FY11 was 900-1000kMT and 1.1-1.2 mn MT
in FY12. Plate sales guidance was 500 kMT and 700 kMT in FY11 and FY12,
respectively. While the plate mill may take some time to stabilise, pipe margins
are guided at Rs10,000/MT.
Outlook on the pipes sector continues to improve
We continue to maintain our positive view on the pipes sector, given that high
crude prices will likely support spending on oil and gas pipelines globally. This
has been evidenced is the reasonable order flow for Welspun. However, the
political environment in MENA region could delay order flow from this
geography.
In its last Q3FY11 conference call, the WCL marketing team highlighted the
global opportunities in the pipes sector. WCL indicated a strong industry in the
next year on the basis of: 1) US replacement demand, shale gas; 2) Latin
America – Colombia, Peru, Venezuela projects; 3) Europe – niche, quality
conscious market an opportunity, WCL invited to bid; 4) Africa – opportunities;
5) Asia – Transcountry/gas pipelines – WCL prequalified with EPC contractors;
5) Middle East – water and O&G projects; local capacity strategic.
What is happening with the SEBI enquiry?
There is still no clarity on the outcome of the SEBI enquiry or details of WCL
pursuing a resolution of this with the regulatory agency. We believe it could take
a few months at least for more clarity. It incrementally seems that the
investigation or SEBI order could have a limited impact on WCL and has more
to do with Welspun promoter related entities. We await more details on the same.
The stock had sharply corrected to a low-single-digit P/E valuation post the
news of the ex-parte order. The stock has gained ~25-30% since then.
Welspun Corp
Welspun Corp is the flagship company of Welspun Group. It is one of the
largest pipe manufacturing companies in the world. Incorporated in 1995, the
company offers a complete range of high grade pipes, ranging from half an inch
to the 100 inches used to transport oil and gas. In addition to pipe manufacturing
it offers coating, bending and double jointing facilities to its customers. The
company's subsidiaries include Welspun Pipes, Welspun Natural Resources,
Welspun Pipes, Welspun Trading and Welspun Infratech.
Statement of Risk
FX fluctuations, sharp steel price volatility (70% of the cost of pipe
manufacturing), unrelated diversification, higher competition and a slowdown in
global pipeline capex are the main risks to pipe companies and our estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Welspun Corp
Leighton India stake acquisition
Event: Welspun Corp acquires stake in Leighton India
Welspun Infra Projects (WIPPL) is to acquire 35% shareholding in Leighton
Contractors (India) (Leighton Holding’s Indian operations) for Rs. 4.70 bn.
Welspun Corp’s (WCL, listed pipes entity) 100% subsidiary Welspun Infratech
owns a 60% stake in WIPPL and the rest 40% is held by Welspun Infra Developers
Pvt Ltd. (a closely held company). However, post subsidiary restructuring, WCL
will hold 65% in Welspun Infratech and the rest by the controlling shareholders.
Impact: Unrelated diversification; infra could be avenue for growth
Stake acquisition in infra business is an unrelated diversification, but also an
avenue for growth, in our view (huge infra opportunity in India). Despite our
positive industry outlook, pipes business growth may not be sharp, as WCL has c7-
8% of the global capacity and c5-8% of global production. WCL’s balance-sheet
size, favourable free cash flow generation, and execution/scale-up ability will help,
in our view. EPS sensitivity should be positive at Rs2-2.5/share (5-7%) in FY12.
Action: Maintain estimates and price target
The acquisition is subject to regulatory approvals. Hence, we maintain our
estimates and price target of Rs250. The impact of infra arm will depend on project
bidding, selection and is a long-term opportunity for growth. Our outlook on the
pipes sector is positive and in Q4FY11, shipments could improve significantly
QoQ.
Valuation: Maintain Buy on fundamentals and PT of Rs 250/share
WCL continues to deliver reasonable operational performance. We maintain our
Buy rating and UBS-VCAM based TP of Rs 250. We await more clarity on SEBI
enquiry.
Welspun Group acquires 35% in Leighton Contractors
(India); group restructuring at subsidiary level
Welspun Group through its group company, Welspun Infra Projects Pvt Ltd
(WIPPL) is to complete the acquisition of a 35% shareholding in Leighton
Contractors (India) (Leighton Holding’s Indian operations) for Rs. 4.70 bn.
Welspun Corp (WCL, listed pipes entity) has a 100% subsidiary called Welspun
Infratech, which owns a 60% stake in WIPPL, and the rest 40% is held by
Welspun Infra Developers Pvt Ltd. (a closely held company). However, the
board of directors of WCL and Welspun Infratech, have decided to merge the
latter with Welspun Infra Developers. Post this, WCL will hold 65% in Welspun
Infratech and the rest will be held by the controlling shareholders.
Overall, WCL will contribute Rs1.5bn, controlling shareholders to share Rs1bn
and the remaining Rs2.2bn will be debt at the Welspun Infra Projects level. Note
that Welspun Infra Projects also has a 61% stake in MSK Projects (now called
Welspun Projects) and post restructuring, controlling shareholders will also get a
stake in Welspun Projects. Management highlighted that the swap ratio and
merger has been based on the book value. Current share capital of Welspun
Infratech will be Rs2.8bn.
This acquisition is subject to regulatory and high court approvals.
Details on Leighton India – order book, financials
The Leighton India MD Mr Russell and Mr Parvez (MD, CEO of Welspun
Infratech) highlighted that Leighton has been in the Indian market for the last 12
years.
Order book: Its current order book is Rs40 bn, executable over 1-3 years. 60%
of its order book is in the transport sector – roads, ports, railways; 33% in
offshore oil and gas; and the remaining 8-10% in residential building EPC (3
projects for Tata Realty in Chennai and Noida). While, its current order book is
weighted towards transport because of one large RS20bn Chenani Nashri tunnel
project; historically oil and gas was a significant portion (higher profits). Given
its global strength in EPC for mining projects, it also plans to tap projects in the
broader infra space, such as power, mining, etc.
Financials: It had a topline of Rs20bn, EBITDA of Rs2.5bn and PBT of
Rs1.9bn in 2010. It is currently a debt-free company. Though Leighton Holdings
will hold a majority stake of 65% in Leighton Contractors (India), this will be
treated as a joint venture (line by line consolidation) and WCL will participate at
the management and board level. Going forward, revenue for FY12 could be
Rs30bn and the business should be able to post 20% growth. EBITDA margins,
as per management, are estimated at 10% going forward.
While the EPC projects will largely be taken at Leighton or MSK level, PPP or
developer projects are likely to be taken at Welspun Infratech level. This will
depend on opportunities, as they come along.
Leighton acquisition impact on WCL balance-sheet
WCL’s contribution of Rs1.5bn is a stake sale and will go to Leighton
International. However, WCL will hold a 65% in the equity share capital of
Rs2.8bn. WCL’s net debt currently is cRs11bn and incremental Rs2.2bn debt
may be added due to the consolidation. Given the expected strong free cash flow
generation due to the forecast pipes sales, WCL could be a net-cash company by
the end of FY13. However, WCL may look to leverage this balance-sheet
strength to explore opportunities in the developer/PPP space. Hence, its balancesheet
positioning will significantly depend on a scaling up of its Infra business
and selection of projects.
Why is Leighton India selling the stake?
Leighton India indicated that given the significant infrastructure opportunity in
India, and potential PPP and BOOT, having an Indian partner would help to bid
for new projects. We believe that WCL’s balance sheet strength, free cash flow
generation and execution ability will help. We also understand that stake sales
are required at the Leighton Holdings level to keep the gearing down, after
the major profit warning in early April 2011.
What is happening with Leighton Holdings, Australia?
Leighton International is a leading contractor and project developer in Asia and
internationally. Leighton International is a subsidiary of Australia’s largest
project development and contracting group, the Leighton Group (Leighton
Holdings).
UBS analyst Jon Freedman highlighted the Leighton Holdings (LEI) profit
warning and capital increase. On 14 April 2011, LEI unveiled a major profit
warning and has taken a further negative $907m revision to its FY11 statutory
forecasts, taking the statutory guidance to a $427m loss. UBS forecasts an
operating loss of $291m ($429m statutory in line with guidance). LEI raised
$757m at $22.50 (1-for-9 renounceable entitlement) at a 22.3% discount to last
close and a 20.5% discount to TERP, with Hochtief taking its full 54%
entitlement. Our analyst Jon Freedman indicated that asset sales are still required
in FY12 as capital raised is put into problem jobs and gearing rises again. LEI
provided FY12 NPAT guidance of $600-650m (UBSe $615m) reflecting EPS of
$1.78-$1.93 (UBSe $1.84).
LEI’s self-imposed gearing target of 35-45% (and generally aiming for less than
40%) ensures a substantial buffer to covenants, given the cyclical nature of its
businesses. While management stated that covenants would not have been
breached without a raising, it noted that gearing would have been c60% and the
EBITDA/Debt covenant would have been too close for comfort. Given that the
problem jobs will consume the majority of the capital raised, asset sales should
still be required to keep gearing down going forward (we assume $250m in
FY12 and $50m pa in FY13-15). Potential assets that could be sold include
Aviation Aircraft Maintenance, Broad Construction, telecommunications assets
and/or listed stakes in MAH, SDM and DVN (which are worth $270m prior to
any exit discount). Post raising, pro forma (i.e. 31 December) gearing is 25%
and we estimate gearing of around 33% by 30 June, with the trend subsequently
improving.
UBS view on the stake acquisition
The Leighton stake acquisition is certainly an unrelated diversification into the
Indian Infrastructure space from its traditional leadership in the oil and
gas/water pipes manufacturing business. However, we believe that WCL
probably has 7-8% of the global capacity and c5-8% of global production. Given
its large scale of operations and reach in every country, with a high sales base of
1 mn MT, it may be difficult for WCL to continue its sharp growth trajectory
(through FY05-10E). Given the huge infrastructure opportunity in India, WCL’s
balance-sheet size, favourable free cash flow generation, and execution/scale-up
ability, could provide an avenue of high growth for the company. Also, Leighton
has significant expertise in the infrastructure project execution space and WCL
could leverage on that experience. However, this is a long-term opportunity. The
investment in Leighton is significantly small compared to WCL’s market cap.
Leighton India contribution sensitivity is Rs2-2.5/share to WCL’s earnings
in FY12. Our current estimates do not include this and we may incorporate it
post the completion of acquisition and approvals.
Pipes order book at Rs61.5bn; 0.7 year visibility
WCL’s current order book is Rs61.5bn, ensuring 7-8 months order book
visibility. This includes 932,000 tonnes of pipes (LSAW at 315,000 tonnes,
HSAW at 578,000 tonnes and ERW at 39,000 tonnes) and 40,000 tonnes of
external plate orders. WCL order traction needs to be maintained at Rs2.0-2.5bn
per quarter, to maintain the Rs91.6bn revenue run rate for FY12.
Management guidance on pipes business
Management guidance for pipes in FY11 was 900-1000kMT and 1.1-1.2 mn MT
in FY12. Plate sales guidance was 500 kMT and 700 kMT in FY11 and FY12,
respectively. While the plate mill may take some time to stabilise, pipe margins
are guided at Rs10,000/MT.
Outlook on the pipes sector continues to improve
We continue to maintain our positive view on the pipes sector, given that high
crude prices will likely support spending on oil and gas pipelines globally. This
has been evidenced is the reasonable order flow for Welspun. However, the
political environment in MENA region could delay order flow from this
geography.
In its last Q3FY11 conference call, the WCL marketing team highlighted the
global opportunities in the pipes sector. WCL indicated a strong industry in the
next year on the basis of: 1) US replacement demand, shale gas; 2) Latin
America – Colombia, Peru, Venezuela projects; 3) Europe – niche, quality
conscious market an opportunity, WCL invited to bid; 4) Africa – opportunities;
5) Asia – Transcountry/gas pipelines – WCL prequalified with EPC contractors;
5) Middle East – water and O&G projects; local capacity strategic.
What is happening with the SEBI enquiry?
There is still no clarity on the outcome of the SEBI enquiry or details of WCL
pursuing a resolution of this with the regulatory agency. We believe it could take
a few months at least for more clarity. It incrementally seems that the
investigation or SEBI order could have a limited impact on WCL and has more
to do with Welspun promoter related entities. We await more details on the same.
The stock had sharply corrected to a low-single-digit P/E valuation post the
news of the ex-parte order. The stock has gained ~25-30% since then.
Welspun Corp
Welspun Corp is the flagship company of Welspun Group. It is one of the
largest pipe manufacturing companies in the world. Incorporated in 1995, the
company offers a complete range of high grade pipes, ranging from half an inch
to the 100 inches used to transport oil and gas. In addition to pipe manufacturing
it offers coating, bending and double jointing facilities to its customers. The
company's subsidiaries include Welspun Pipes, Welspun Natural Resources,
Welspun Pipes, Welspun Trading and Welspun Infratech.
Statement of Risk
FX fluctuations, sharp steel price volatility (70% of the cost of pipe
manufacturing), unrelated diversification, higher competition and a slowdown in
global pipeline capex are the main risks to pipe companies and our estimates
No comments:
Post a Comment