Result Update

August 5, 2010
Rating matrix
Rating : Buy Welspun Corp (WELGUJ)
Target : Rs 295
Target Period : 12 months Rs 250
Potential Upside : 18%
WHAT’S CHANGED…
Key Financials
PRICE TARGET ............................................................. Changed from Rs 325 to Rs 295
(Rs Crore)* FY09 FY10 FY11E FY12E
Net Sales 5739.5 7350.2 7975.8 9148.6 EPS (FY11E) ............................................................... Changed from Rs 27.7 to Rs 30.5
EBITDA 634.8 1318.6 1327.9 1416.3 EPS (FY12E) .................................................................................Introducing at Rs 32.4
Net Profit 213.5 610.4 623.6 660.2 RATING....................................................................... Changed from Strong Buy to Buy
* Not including MSK financials
Volumes to grow, margins to contract…
Valuation summary
Welspun Corp reported robust numbers for Q1FY11 on improved sales
FY09 FY10 FY11E FY12E with execution of high margin pipe orders. Revenues jumped 24.8% YoY
PE (x) 22.3 8.4 8.2 7.7 and 51.6% QoQ to Rs 2421 crore much higher than our estimates at Rs
Target PE (x) 26.4 9.9 9.7 9.1 1675.7 crore. This can be attributed to higher pipe volumes added by US
EV/EBITDA (x) 9.8 5.2 4.8 4.4
mill and improved domestic plate and coil sales. Consolidated pipe
sales volumes rose 7% YoY and 20% QoQ while for plates it rose by
P/BV (x) 3.0 2.0 1.6 1.4
65% YoY and 4% QoQ. The EBITDA margin remained flat YoY while it
RoNW (%) 13.7 29.4 21.6 19.1 fell 360 bps QoQ. Blended EBITDA/tonne came at Rs 10971 for Q1FY11.
RoCE (%) 12.5 23.7 20.3 19.6 Good show on the realisation and volume front led to a robust PAT (up
70% YoY and 15% QOQ) at Rs 191 crore against our expectation of Rs
Stock data 143 crore. We maintain our positive outlook on the company due to its
Market Capitalisation Rs 5100.8 Crore strong volume growth pipeline, foray into infrastructure projects, better
Debt (FY10) Rs 1843 Crore margin and multiple country strategy. We are revising our target to Rs
Cash & Invst (FY10) Rs 800 Crore 295/share and assigning BUY rating to the stock.
EV Rs 6143.8 Crore
ƒ Order book remains firm till date
52 week H/L 296/190
Equity capital Rs 102.16 Crore The quarter began with a total outstanding order book (pipe and
Face value Rs 5 plate) of Rs 6400 crore. Further, in Q1FY11, the company added
DII Holding (%) 19.05
orders worth Rs 900 crore from domestic and international oil and
FII Holding (%) 16.6
gas majors. After executing orders in Q1FY11, as on June 30, 2010,
the current order book (pipe and plate) stands at Rs 5000 crore.
Price movement ƒ EBITDA/tonne to sustain at ~Rs 10,500/tonne
310 In the pipe segment, the company has seen a blended
5250 290
EBITDA/tonne of ~Rs 10971 during Q1FY11 backed by higher
270
contribution from the pipe segment. The company has guided for Rs
4875 250
(In Units)

10500-11000 EBITDA/tonne on a sustainable basis.

(In Rs)

230
4500
210 Valuation
4125 190
At the CMP of Rs 250, the stock is trading at FY12E P/E of 7.7x and FY12E
170
3750 150
EV/EBITDA of 4.4x. Though we are optimistic about its future growth,
which is likely to come from its multi-country operations, we prefer to
Oct-09
Jun-09

Feb-10

Jun-10

remain cautious on the recent market situation. We have valued the stock
at 5x FY12E EV/EBITDA and revised our target price to Rs 295. We have
Wel Corp (R.H.S) Nifty (L.H.S)
assigned a BUY rating to the stock.
Exhibit 1: Performance Highlights
Analyst’s name (Rs Crore) Q1FY11 Q1FY11E Q1FY10 Q4FY10 YoY (Chg %) QoQ (Chg %)
Pankaj Pandey Net Sales 2421.8 1675.7 1939.9 1597.4 24.8 51.6
pankaj.pandey@icicisecurities.com EBITDA 378.1 311.4 301.1 306.0 25.6 23.6
Goutam Chakraborty EBITDA Margin (%) 15.6 18.6 15.5 19.2 + 10 bps - 360 bps
goutam.chakraborty@icicisecurities.com Depreciation 54.1 54.4 49.2 52.0 9.9 4.1
Neeraj Lodha Interest 21.8 40.3 75.1 28.2 -71.0 -22.8
neeraj.lodha@icicisecurities.com Reported PAT 190.6 143.0 112.0 166.5 70.2 14.5
Basic EPS (Rs) 9.3 7.0 6.0 8.1 55.4 14.5
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

 Welspun Corp (WELGUJ)

Result Analysis
The company reported robust numbers for Q1FY11 on account of higher
volume growth by the US mill and improved plate and coil sales. Blended
EBITDA/tonne was also maintained at Rs 10971/tonne for Q1FY11 due to
execution of higher margin orders. PAT shot up by 70% YoY at Rs 190.6
crore further boosted by lower interest outgo due to repayment of high
cost term loans in the previous year.

The consolidated sales volume of pipes rose by 20% QoQ Exhibit 2: Pipes sales volumes
and 7% YoY to reach ~2.46 lakh tonne with the US mill 1200000
contributing ~0.5 lakh tonne Pipe volume growth of
20% in Q1FY11
1000000
sequentially.

800000
(In tonne)

600000

400000

200000

0
FY09 Q2FY10 Q3FY10 Q4FY10 Q1FY11 FY10 FY11E

From Indian plants From U.S plant

Source: Company, ICICIdirect.com Research

Sales volumes in plates remained robust with external Exhibit 3: Plates sales volumes
plate sales of ~98,000 tonne in Q1FY11 (up by 18%
500000
sequentially)
450000
400000 Total plates volume grew
350000 by 5% in Q1FY11
sequentially
(In tonne)

300000
250000
200000
150000
100000
50000
0
FY09 Q2FY10 Q3FY10 Q4FY10 Q1FY11 FY10 FY11E

Plates External Plates Internal

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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Welspun Corp (WELGUJ)

Conference call highlights

• The quarter began with a total outstanding order book (pipe and
plate) of Rs 6400 crore. Further in this quarter, the company
added orders worth Rs 900 crore from domestic and international
oil & gas majors. After executing orders in Q1FY11, as on June 30,
2010, the current order book (pipe and plate) stands at Rs 5000
crore
• The capacity of the pipes division is being increased to 2.2 mtpa
along with LSAW expansion of 350 ktpa at the Anjar facility by
Q1FY12. Also, the 100 ktpa HSAW plant at Karnataka got
commissioned this fiscal
• The company plans to make a foray in the infrastructure segment.
During this quarter, Welspun Infratech Ltd, a subsidiary of
Welspun Corp, infused Rs 2,11.3 crore (@ Rs 123 / share) in MSK
Projects India Ltd, equivalent to 43% of the fully diluted equity.
The holding of Welspun Infratech Ltd in MSK is likely to reach
approximately 56% after the completion of other buyouts
• The company also plans to extend its manufacturing presence in
the Middle East by having a 270 ktpa spiral pipe and coating
facility in Saudi Arabia. This would help the company’s global
reach not just in terms of supply but also for production facilities
• The company expects orders from the North American segment
in the oil and gas space due to the ongoing recovery. Also, going
forward, shale gas projects in the northern region can lead to
additional orders in the piping segment. On the domestic front,
with the oil and gas sector being a low margin segment, the
company has low focus with major orders expected in the
accretive water pipeline projects
• The consolidated gross debt of the company stood at ~Rs 2060
crore as compared to Rs 2550 crore (QoQ) on account of
repayment of high cost term loans in the previous year
• The company’s blended EBITDA/tonne remained at ~Rs
10971/tonne during Q1FY11 on the back of a strong performance
in pipes division. The management has guided for a sustainable
EBITDA/tonne of Rs 10500-11000/tonne, going forward
• The outlook for the pipes industry has started to improve with
recovery having started in the global markets and crude oil prices
hovering around US$80 per barrel leading to revival of several
shelved projects in the oil and gas space
• On the capacity utilisation front, due to ramp up in the US
operations, the utilisation levels, according to the management,
would improve going further from the present 55% to 60% by the
end of this fiscal. Also, due to the ongoing operational
maintenance at the Saudi facility, commercial production would
start from December onwards, thus adding to the consolidated
numbers in this fiscal

ICICIdirect.com | Equity Research

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Welspun Corp (WELGUJ)

Outlook & earnings revision

The company has been growing its base smoothly in different
geographies in the world with a focus on maintaining its margin. The
domestic focus is less due to high competition and lower margins. In the
coming year, with further expansion of HSAW and LSAW, we expect the
company to see decent volume growth. The company has guided for 1.3-
1.4 MT volume during the coming year out of a total capacity of 2.4 MT.
To expand in the high growth market of the Middle East, the company
has acquired ~51% stake in Aziz Pipe, which has a capacity of 270 ktpa.
However, we have not factored in that benefit into our estimates.
Welspun’s foray into the infrastructure segment through acquisition of
MSK project is also likely to help the company to improve and integrate
its pipe business. At this point, however, we would like to wait for more
clarity on that. We have revised up our estimates for FY11E and
introduced our FY12E numbers.

Exhibit 4: Revised financials

(Rs Crore) FY11E* FY12E*
Current Previous % Change Introducing
Net Sales 7975.8 6702.7 19.0 9148.6
EBITDA 1327.9 1245.7 6.6 1416.3
EBITDA Margin (%) 16.6 18.6 -200 bps 15.5
PAT 623.6 565.7 10.2 660.2
EPS (Rs) 30.5 27.7 10.2 32.4
* Not including MSK financials
Source: Company, ICICIdirect.com Research

Valuations
At the CMP of Rs 250, the stock is trading at FY12E P/E of 7.7x and FY12E
EV/EBITDA of 4.4x. Though we are optimistic about its future growth,
which is likely to come from its multi-country operations, we prefer to
remain cautious on the recent market situation and possible margin
contraction. We have valued the stock at 5x FY12E EV/EBITDA and
revised our target price to Rs 295. We have assigned a BUY rating to the
stock.

Exhibit 5: Valuation Table

Sales (Rs EV/EBIDTA
Crore) EPS (Rs) PE (x) (x) P/ BV (x) RoNW (%) RoCE (%)
FY09 5739.5 11.2 22.3 9.8 3.0 13.7 12.5
FY10 7350.2 29.9 8.4 5.2 2.0 29.4 23.7
FY11E 7975.8 30.5 8.2 4.8 1.6 21.6 20.3
FY12E 9148.6 32.4 7.7 4.4 1.4 19.1 19.6
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Welspun Corp (WELGUJ)

ICICIdirect.com coverage universe (Metals & Mining)

Jindal SAW Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code SAWPIP CMP 201.4 CY08 5009.1 13.1 15.3 9.3 15.4 15.6
Target 228.0 FY10* 6791.6 26.7 7.5 4.4 19.1 21.6
FY11E 4920.0 19.6 10.3 4.8 12.6 15.2
MCap 5508.9 Upside (%) 13.2 FY12E 5772.7 21.7 9.3 3.9 12.4 16.5
*FY10 respresents 15 months data
Maharashtra
Seamless Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code MAHSEA CMP 405.9 FY09 2038.9 36.8 11.0 7.1 21.6 25.1
Target 412.0 FY10E 1591.2 40.2 10.1 5.0 19.1 25.7
FY11E 1664.3 45.6 8.9 5.0 17.5 20.3
MCap 1431.3 Upside (%) 1.5 FY12E 2083.4 51.4 7.9 4.0 16.7 21.6

Man
Industries Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code MANIN CMP 83.6 FY09 1883.4 3.8 21.8 5.1 5.4 14.3
Target 76.0 FY10E 1524.3 12.5 6.7 3.5 15.7 17.1
MCap 447.6 Upside (%) -9.1 FY11E 1420.0 13.3 6.3 3.5 14.3 17.8

PSL Limited Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code PSLHOL CMP 137.7 FY09 3559.9 19.8 6.9 4.7 18.3 14.5
Target 186.0 FY10E 3941.1 22.3 6.2 4.9 15.1 14.5
FY11E 3207.1 23.0 6.0 5.4 15.1 13.4
MCap 734.1 Upside (%) 35.1 FY12E 3287.2 20.1 6.9 4.2 10.2 11.9
Welspun
Corp* Sales(Rs Cr.) EPS (Rs) PE (x) EV/EBITDA (x) RoNW (%) RoCE (%)
Idirect Code WELGUJ CMP 249.7 FY09 5739.5 11.2 22.3 9.8 13.7 12.5
Target 295.0 FY10 7350.2 29.9 8.4 5.2 29.4 23.7
FY11E 7975.8 30.5 8.2 4.8 21.6 20.3
MCap 5100.8 Upside (%) 18.2 FY12E 9148.6 32.4 7.7 4.4 19.1 19.6
* Financials not in consolidation with MSK projects
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 Welspun Corp (WELGUJ)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;

Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
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research@icicidirect.com

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