Monday, April 6, 2009

Welspun Gujarat - Buy

Investors with a high-risk appetite can consider accumulating the stock of Welspun Gujarat Stahl Rohren, a leading manufacturer of steel pipes. At the current market price of Rs 80, the stock trades at about five times its estimated FY10 per-share earnings. Besides attractive valuations, the company’s buoyant order book and well-entrenched relationship with global oil and gas players also makes it a good investment. New business opportunities, in terms of setting up of pipe infrastructure network, driven by the commencement of the KG Basin gas supply by Reliance Industries and city gas distribution initiatives of the Government, also brighten prospects. Given the recent surge in the markets, phased accumulation is recommended for the stock. Over the last few months, falling crude oil prices had sent the stock price of Welspun Gujarat into a downward spiral on concerns that this would eventually lead to a drastic decline in oil and gas capital expenditure. But despite the downturn, the company has managed to add significantly to its order book, which currently stands at about Rs 9,300 crore (2.4 times FY08 revenues). Not only does that reflect well on the company’s ability to procure business during tough times, it also provides revenue visibility that is higher than that enjoyed by peers. As the bulk of these orders are with established global players, the risk of cancellations and postponements for its orders are lower. The company has also completed the commissioning of its helical pipe manufacturing facility in the US. Endowed with a capacity to produce 3 lakh tonnes of HSAW pipes, this facility has also received API accreditation. News of order wins by both the domestic and the new site in the US may be the key triggers for the stock price in future. For the quarter ended December 2008, even as the company managed to grow its revenues by over 40 per cent, it disappointed on both the margin and profits front. Led by writedown of inventories (Rs 38.5 crore) and forex losses (Rs 41.9 crore) due to re-alignment of creditors and ECBs, Welspun suffered a contraction in both operating and net profit margins. While operating profit margins dropped seven percentage points to 10.2 per cent, its earnings nearly halved as compared with the corresponding quarter last year. Had it not been for these provisions, the company would have seen a mild increase in profits. In this context, the recent relaxation of mark-to-market norms may boost the reported numbers. The risk to realisations and to the outstanding loan amounts due to rupee fluctuations, however, remain. Srividhya Sivakumar businessline 06-04-09