View point -Welspun Corp (CMP Rs 116): Strong growth in pipeline

  • Global leadership in pipes, de-risks from domestic slowdown: Welspun Corp Ltd (WCL) is a leading global manufacturer of the large diameter steel pipes with around 10% market share. It has the largest capacity of 2.4 million metric tonne (MT) per annum, strategically located across the USA, Saudi Arabia and India. It is also a preferred vendor to over 50 major oil and gas companies like Shell, Saudi Aramco, TOTAL, Chevron, Exxon Mobile and TransCanada, as very few players qualify for the large global tenders. The company was able to survive the low domestic investment regime in the oil and gas pipeline over the past few years as it expanded successfully into overseas market while some players like PSL Ltd had to trim or shut down their operations over the same period.
  • Robust revenue visibility from overseas: After the recent order win, its order book now stands at Rs6,400 crore/1,040 KMT (0.76x its FY2015 pipe revenue) to be executable over the next eight to nine months. Robust bids, which are in pipeline of 3,600KMT are likely to provide further boost to the order book in coming quarters. By FY2017, global bidding opportunities for about 12,000KMT pipeline are likely to float mainly in the USA, Mexico, Europe and Saudi Arabia (where WCL is one of the strong contenders). Overall, global pipeline investment is likely to generate $422-billion opportunity over the next four to five years as the fall in prices of crude oil and metals lead to preference for steel pipeline over railways as the preferred mode of transport.
  • Deleveraging balance sheet to lead healthier ratios: After the demerger of the non-pipe business in Welspun Enterprises in FY2013, WCL has become a pure and quality play on the global pipes sector. The company has been generating robust cash flows from which it has systematically repaid debt worth Rs2,555 crore over FY2013-15 and further it is expected to annually repay debt of at least Rs200 crore for the next few years. Accordingly, its debt-equity ratio is likely to come down to 0.7x in FY2018 from 1.3x in FY2014. The operating profit margin is also expected to be stable at 10-11% as; (1) its future revenue traction is heavily tilted towards North America (54% of the current order book versus 16% in FY2014) which enjoys better margin; (2) increasing contribution of its capex-heavy plates facility to revenue would help in better utilisation of capital employed. Further, return ratios will also improve led by improved profitability and lower interest cost.
  • Turnaround story at reasonable valuation: Given its diversified clientele portfolio, strong manufacturing capabilities and robust bids in pipeline, WCL is our preferred pick among the Indian pipes manufacturers. Backed by high-margin, North American revenue visibility and lower interest cost, we are expecting it to report a growth rate of 15% CAGR in revenues and 80% CAGR in earnings (on a low base of FY2015 earnings) in the three-year period of FY2015-2018. The company has reported very robust numbers in H1FY2016 with a PAT of Rs117 crore versus a loss of Rs92crore in H1FY2015. Based on valuation, the company is trading attractively at 10.9x its FY2017 earnings per share which is 20-25% lower than its post-demerger average price earnings (PE) multiple. Hence, we see a potential upside of 20-25% in the stock price from the current level.
  • Key risks: (1) Slowdown in capex cycle of pipeline network both in domestic and overseas markets; (2) Unfavourable movement in foreign currency exchange rates, metal and crude oil.

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