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Welspun Corp (WGSR.BO)
1Q12: Production Disappoints, but Demand Outlook Strengthens
1Q marginally below estimates — WLCO’s 1Q PAT came in at Rs1.2bn (+1% qoq, -
38% yoy) and was marginally below estimates. This was largely due to 1) lower pipe
sales in the quarter due to lower pipe production (maintenance + upgrade shutdowns in
India) and delay in pipe shipments (30KT), 2) higher-than-expected depreciation
expenses (Leighton and Saudi Arabia mill), 3) higher tax rate of 37.4% (due to higher
inter-company transactions), and 4) yoy normalization of pipe+plate blended EBITDA
margins to Rs9,100/MT from one-off highs of Rs11,000/MT seen in 1QFY11 (though
marginally higher than our estimates of Rs9,000/MT).
Full-year production guidance maintained at 1.1 MMT — While 1Q production and
sales were impacted due to maintenance shutdowns at the India plants (impacting
expected overall production by ~25%), mgmt has maintained its total pipe production
guidance of ~1.1 MMT (+20% yoy) for FY12. In the coming quarters, production should
reach a quarterly run-rate of 250-300KT (vs. 180 KT in 1Q) boosted by 1) production
ramp-up at the Saudi Arabia plant (utilization of 12% in 1Q), and 2) commissioning of
the 0.35 MMT LSAW plant at Anjar in 2Q12.
Strengthening demand outlook, expect new order wins — WLCO believes that with
offshore activity picking up in the US, offshore pipe demand should go up, coupled with
continued strong onshore demand. Middle-East demand remains robust on the back of
strong crude prices and fresh investments in oil & gas activities, with WLCO’s Saudi
plant fully booked for the next ~9 months. Mgmt remains confident of announcing new
orders in the next 1-2 quarters, which should be a key positive.
Near-term momentum could remain clouded by the WMSL acquisition — While
we remain positive on WLCO’s core pipe business, we believe the stock could remain
range-bound in the near term with concerns on: 1) dilution post the Apollo deal (we
await clarity on WMSL’s financials as well as the timing of the transaction before
estimating the EPS impact of the deal), and 2) WMSL’s capex plans of cUS$700mUS$1bn over the next three years, which could strain the consolidated balance sheet.
Takeaways from 1QFY12 earnings call
Following are key takeaways from WLCO’s 1QFY12 earnings call:
Product demand outlook
US – Seeing an increase in E&P activities, particularly in the offshore E&P space,
as operations in the GoM resume post the BP incident. In addition, onshore
activities continue to be robust given healthy investments in midstream capex,
led by development of new shale gas projects. Given strong US demand,
WLCO’s US HSAW mill continues to operate at a healthy utilization of 60%+.
Middle-east – Continues to be very strong given strong oil prices and continued
investments in oil & gas projects. Saudi Arabia (led by Saudi Aramco) and UAE
are the key demand centers in the region. Besides, the company’s Saudi Arabia
pipe mill is seeing good interest and is now booked for the next nine months.
India – Indian market continues to remain over-supplied, with demand remaining
stagnant and interest rate hikes, which could dampen the investment outlook.
Other markets – WLCO is also trying to enter into new markets such as Latin
America (where E&P activity is increasing on the back of some recent oil+gas
finds and where WLCO has already put in bids for new projects), as well as
South East Asia.
Order book status and overall pipe demand – WLCO’s current order book
stands at Rs45bn, and comprises of 640 KT of pipe orders and 82 KT of plate
orders. The company has already bid for a significant quantum of projects, and
expects to announce new orders in the coming 1-2 quarters. Overall, mgmt is
confident of increasing its current order-book to optimally utilize its new
capacities. The company’s margin guidance for the pipe business remains at
Rs10,000-11,000/MT.
Plate demand – The plate market has continued to remain challenging due to
strong slab prices and weak European demand. The company believes that while
margins on plates have bottomed, markets could remain weak over the next
quarter as well, with a possible recovery in 2HFY12.
Infrastructure Business
WLCO in 1QFY12 announced financials consolidated with those of Leighton
(where it holds 35% effective stake). Overall, Leighton registered an EBITDA of
Rs180m (~6% of overall WLCO EBITDA).
Besides, Leighton is bidding for cRs60bn of new orders, results of which would
be announced in the current financial year.
Apollo transaction and acquisition of WMSL
The transaction with Apollo and the consequent acquisition of the stake in WMSL
will take place in Aug/Sep’11, depending on regulatory approvals.
WMSL currently has a capacity of 0.85 MMT of DR-iron, which is expected to go
up to c1.7 MMT. While most environmental approvals for the transaction are in
place, the company is awaiting some further clearances to commence this
expansion project.
WMSL also plans to set-up a slab-manufacturing plant with a capacity of c1.5
MMTPA; equity contribution from WLCO for this would be spaced out over the
next three years.
Welspun Corp
Company description
Welspun Corp (WLCO) is a line-pipe manufacturer with an installed pipe capacity of
1.9 MMTPA, set to go up to 2.25 MMTPA. The company produces three types of
pipes: HSAW, LSAW and ERW, primarily used in the oil & gas industry. It has also
expanded its operations by backward integrating its pipe business with the
manufacture of steel coils and plates. Its domestic operations are based out of Anjar
and Dahej (in Gujarat) and Mandeya (in Karnataka), while it also has pipe mills in
the US and Saudi Arabia. Currently, WLCO has an order book of US$1.2bn, a
significant proportion of which are export orders.
Investment strategy
We have a Buy / High Risk (1H) rating on Welspun shares. After a significant stock
under-performance in the past 12 months on sector, we believe a re-rating is due for
WLCO, given its high-quality product offerings, accreditations with key customers,
and expanding capacities at a time when crude prices are high and global pipe
demand is rising. WLCO's leverage to higher-margin international markets (exports
are ~82% of its $1.2bn order book) is a key positive. WLCO has capacities in the
US, where demand should remain strong (+150% yoy growth), and the Middle East,
where pipeline capex is rising despite political concerns. New order wins should be
a positive catalyst for the stock, driving capacity utilizations and earnings going
forward.
Valuation
Our target price for WLCO of Rs236/share is based on a Sep-12E P/E of 7.5x. We
set our target multiple at a slight discount to the 5-year normalized average P/E of
8x, to be conservative given lingering market concerns related to sector and
company issues. Our fair-value P/E, which is at the midpoint of a historical one-year
forward normalized P/E range of 5x-10x, looks undemanding in light of WLCO's
reasonable growth profile (EPS CAGR of 14% over FY11-14E). We believe a P/E
methodology is appropriate given that WLCO operates in a cyclical industry.
Risks
We rate WLCO High Risk, as opposed to Medium Risk suggested by our
quantitative risk-rating system, given that the resolution of the corporategovernance issue could take time. We see the main downside risks which could
prevent the shares from reaching our target price as being:
Decline in crude prices - A sharp decline in crude prices would negatively affect
exploration activities, delaying investments in fresh pipe infrastructure.
Economic downturn - Development of new pipeline infrastructure is contingent on
sustained economic growth. Slower growth and/or a global downturn would impact
new order wins and growth prospects for WLCO.
Execution delays - WLCO has undertaken new projects to expand its capacity; any
execution delays would be a negative for the company.
Sourcing of raw material - WLCO is dependent to a large extent on external
suppliers for the sourcing of raw materials for its pipe and plate mills. While it
manages to lock-in raw material prices once it wins an order, any sharp volatility in
steel prices could pose a risk.
Exchange rate fluctuation - Even though there exists a natural hedge between
WLCO's revenues and expenses, a sharp currency fluctuation could adversely hit
the company.
Reputational risk - Most of WLCO's key clients are in quality-conscious markets
such as the US and Canada. Any quality issues arising from products supplied by
Welspun could hamper its reputation in the global markets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Welspun Corp (WGSR.BO)
1Q12: Production Disappoints, but Demand Outlook Strengthens
1Q marginally below estimates — WLCO’s 1Q PAT came in at Rs1.2bn (+1% qoq, -
38% yoy) and was marginally below estimates. This was largely due to 1) lower pipe
sales in the quarter due to lower pipe production (maintenance + upgrade shutdowns in
India) and delay in pipe shipments (30KT), 2) higher-than-expected depreciation
expenses (Leighton and Saudi Arabia mill), 3) higher tax rate of 37.4% (due to higher
inter-company transactions), and 4) yoy normalization of pipe+plate blended EBITDA
margins to Rs9,100/MT from one-off highs of Rs11,000/MT seen in 1QFY11 (though
marginally higher than our estimates of Rs9,000/MT).
Full-year production guidance maintained at 1.1 MMT — While 1Q production and
sales were impacted due to maintenance shutdowns at the India plants (impacting
expected overall production by ~25%), mgmt has maintained its total pipe production
guidance of ~1.1 MMT (+20% yoy) for FY12. In the coming quarters, production should
reach a quarterly run-rate of 250-300KT (vs. 180 KT in 1Q) boosted by 1) production
ramp-up at the Saudi Arabia plant (utilization of 12% in 1Q), and 2) commissioning of
the 0.35 MMT LSAW plant at Anjar in 2Q12.
Strengthening demand outlook, expect new order wins — WLCO believes that with
offshore activity picking up in the US, offshore pipe demand should go up, coupled with
continued strong onshore demand. Middle-East demand remains robust on the back of
strong crude prices and fresh investments in oil & gas activities, with WLCO’s Saudi
plant fully booked for the next ~9 months. Mgmt remains confident of announcing new
orders in the next 1-2 quarters, which should be a key positive.
Near-term momentum could remain clouded by the WMSL acquisition — While
we remain positive on WLCO’s core pipe business, we believe the stock could remain
range-bound in the near term with concerns on: 1) dilution post the Apollo deal (we
await clarity on WMSL’s financials as well as the timing of the transaction before
estimating the EPS impact of the deal), and 2) WMSL’s capex plans of cUS$700mUS$1bn over the next three years, which could strain the consolidated balance sheet.
Takeaways from 1QFY12 earnings call
Following are key takeaways from WLCO’s 1QFY12 earnings call:
Product demand outlook
US – Seeing an increase in E&P activities, particularly in the offshore E&P space,
as operations in the GoM resume post the BP incident. In addition, onshore
activities continue to be robust given healthy investments in midstream capex,
led by development of new shale gas projects. Given strong US demand,
WLCO’s US HSAW mill continues to operate at a healthy utilization of 60%+.
Middle-east – Continues to be very strong given strong oil prices and continued
investments in oil & gas projects. Saudi Arabia (led by Saudi Aramco) and UAE
are the key demand centers in the region. Besides, the company’s Saudi Arabia
pipe mill is seeing good interest and is now booked for the next nine months.
India – Indian market continues to remain over-supplied, with demand remaining
stagnant and interest rate hikes, which could dampen the investment outlook.
Other markets – WLCO is also trying to enter into new markets such as Latin
America (where E&P activity is increasing on the back of some recent oil+gas
finds and where WLCO has already put in bids for new projects), as well as
South East Asia.
Order book status and overall pipe demand – WLCO’s current order book
stands at Rs45bn, and comprises of 640 KT of pipe orders and 82 KT of plate
orders. The company has already bid for a significant quantum of projects, and
expects to announce new orders in the coming 1-2 quarters. Overall, mgmt is
confident of increasing its current order-book to optimally utilize its new
capacities. The company’s margin guidance for the pipe business remains at
Rs10,000-11,000/MT.
Plate demand – The plate market has continued to remain challenging due to
strong slab prices and weak European demand. The company believes that while
margins on plates have bottomed, markets could remain weak over the next
quarter as well, with a possible recovery in 2HFY12.
Infrastructure Business
WLCO in 1QFY12 announced financials consolidated with those of Leighton
(where it holds 35% effective stake). Overall, Leighton registered an EBITDA of
Rs180m (~6% of overall WLCO EBITDA).
Besides, Leighton is bidding for cRs60bn of new orders, results of which would
be announced in the current financial year.
Apollo transaction and acquisition of WMSL
The transaction with Apollo and the consequent acquisition of the stake in WMSL
will take place in Aug/Sep’11, depending on regulatory approvals.
WMSL currently has a capacity of 0.85 MMT of DR-iron, which is expected to go
up to c1.7 MMT. While most environmental approvals for the transaction are in
place, the company is awaiting some further clearances to commence this
expansion project.
WMSL also plans to set-up a slab-manufacturing plant with a capacity of c1.5
MMTPA; equity contribution from WLCO for this would be spaced out over the
next three years.
Welspun Corp
Company description
Welspun Corp (WLCO) is a line-pipe manufacturer with an installed pipe capacity of
1.9 MMTPA, set to go up to 2.25 MMTPA. The company produces three types of
pipes: HSAW, LSAW and ERW, primarily used in the oil & gas industry. It has also
expanded its operations by backward integrating its pipe business with the
manufacture of steel coils and plates. Its domestic operations are based out of Anjar
and Dahej (in Gujarat) and Mandeya (in Karnataka), while it also has pipe mills in
the US and Saudi Arabia. Currently, WLCO has an order book of US$1.2bn, a
significant proportion of which are export orders.
Investment strategy
We have a Buy / High Risk (1H) rating on Welspun shares. After a significant stock
under-performance in the past 12 months on sector, we believe a re-rating is due for
WLCO, given its high-quality product offerings, accreditations with key customers,
and expanding capacities at a time when crude prices are high and global pipe
demand is rising. WLCO's leverage to higher-margin international markets (exports
are ~82% of its $1.2bn order book) is a key positive. WLCO has capacities in the
US, where demand should remain strong (+150% yoy growth), and the Middle East,
where pipeline capex is rising despite political concerns. New order wins should be
a positive catalyst for the stock, driving capacity utilizations and earnings going
forward.
Valuation
Our target price for WLCO of Rs236/share is based on a Sep-12E P/E of 7.5x. We
set our target multiple at a slight discount to the 5-year normalized average P/E of
8x, to be conservative given lingering market concerns related to sector and
company issues. Our fair-value P/E, which is at the midpoint of a historical one-year
forward normalized P/E range of 5x-10x, looks undemanding in light of WLCO's
reasonable growth profile (EPS CAGR of 14% over FY11-14E). We believe a P/E
methodology is appropriate given that WLCO operates in a cyclical industry.
Risks
We rate WLCO High Risk, as opposed to Medium Risk suggested by our
quantitative risk-rating system, given that the resolution of the corporategovernance issue could take time. We see the main downside risks which could
prevent the shares from reaching our target price as being:
Decline in crude prices - A sharp decline in crude prices would negatively affect
exploration activities, delaying investments in fresh pipe infrastructure.
Economic downturn - Development of new pipeline infrastructure is contingent on
sustained economic growth. Slower growth and/or a global downturn would impact
new order wins and growth prospects for WLCO.
Execution delays - WLCO has undertaken new projects to expand its capacity; any
execution delays would be a negative for the company.
Sourcing of raw material - WLCO is dependent to a large extent on external
suppliers for the sourcing of raw materials for its pipe and plate mills. While it
manages to lock-in raw material prices once it wins an order, any sharp volatility in
steel prices could pose a risk.
Exchange rate fluctuation - Even though there exists a natural hedge between
WLCO's revenues and expenses, a sharp currency fluctuation could adversely hit
the company.
Reputational risk - Most of WLCO's key clients are in quality-conscious markets
such as the US and Canada. Any quality issues arising from products supplied by
Welspun could hamper its reputation in the global markets.
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