Visit http://indiaer.blogspot.com/ for complete details �� ��
Welspun Corp Ltd
Slowing down
Maintain Underperform on slowing volume & orderbook
Welspun reported a net profit of Rs1.78bn in Q2FY11, a growth of 8% y-o-y and
decline of 7% q-o-q. Reported profit was 15% higher than our estimate owing to
stronger margin while volume growth of 11% was in line with our expectation.
EBITDA margin of steel pipe for the quarter at Rs11,800/t is owing to execution of
a particularly lucrative order. The company has kept its guidance of full-year
EBITDA margin intact at around Rs10,500/t. Order backlog has also fallen 10% qo-
q. We maintain our Underperform on cyclical demand and earnings slowdown.
Current high margin from US pipe sales unsustainable
We estimate that US market contributed to 75% of its EBITDA and 60% of pipe
volume in Q2FY11. EBITDA margin on pipe sold in US market at around
US$320/t is substantially higher than average EBITDA of US$180/t on pipe sold in
rest of the market. Rising supply of pipe capacity within USA is likely to drive
down the current high margin.
Sharp capacity expansion unlikely to pay off till FY13e
Welspun is expanding its pipe capacity to 2.2mtpa by Jun 2011 compared to
1.45mtpa at end of FY10. We estimate that capacity utilization will fall off to 52%
from 56% in FY10. We also expect the product mix to worsen as new water pipes
and HSAW pipe for Indian gas market have significantly lower margin.
Risk - Management view of cyclical upturn in six month
Welspun is currently trading at 9.6x FY12e EPS. Our EPS estimate is 20% below
consensus. We are negative about the steel pipe sector owing to subdued
demand amidst weak natural gas price US, the key consumer of steel pipe. We
are also apprehensive about rising competition owing to the recent jump in US
capacity. However, management expects the market to recover as enquiries are
rising.
No comments:
Post a Comment