Welspun Corp (Q1 FY11) – BUY (Target Rs346, Upside 35%)

CMP Rs255, Target Rs346, Upside 35%

• Standalone revenue jumped 47.2% qoq to Rs20.4bn led by a surge in sales volume and higher realisations. Standalone sales volume for pipes increased by 24.4% qoq to 200,563 tons and that for plates increased 17.8% qoq to 98,000 tons. Pipe realisations also remained high on a qoq basis as the company executed high end orders during the quarter. Proportion of LSAW too increased on a qoq basis, boosting realisations.

• Standalone operating profit increased 31.3% qoq to Rs3.3bn on account of higher margins on pipes and increase in volumes. EBIDTA/ton for pipes increased from Rs11,200 in Q4 FY10 to Rs13,000 in Q1 FY11 and that of plates declined marginally from Rs5,700 to Rs5,500. The jump in EBIDTA/ton on pipes was higher than market expectations and the company’s guidance in the past. This was due to execution of high end orders and the management expects this to decline to Rs10,500-11,000 levels in the coming orders.
  
  
• WGS’s order book shrunk during the quarter by Rs14.3bn as order flows declined. Order book for the company at the end of Q1 FY11 decreased to Rs50bn from Rs64.3bn in Q4 FY10. However, in tonnage terms the decline in order book size was lower as pipe realisations have declined. In tonnage terms, order book stood at 675,000 tons, comprising of 180,000 tons of LSAW, 480,000 tons of HSAW and 15,000 tons of ERW. Order flows are expected to pick up as the company has bid for projects worth 0.5mn tons of pipes.
  
  
• Sales volume from US operations improved from 32,349 tons in Q4 FY10 to 54,000 tons in Q1 FY11. It plans to increase the capacity utilization rate from the present 52% in US to 60-65% in FY11.
  
  
• Consolidated revenue of Rs24.2bn was the highest quarterly revenue for the company. The jump in topline was aided by improved performance from the US subsidiary. Consolidated sales volume increased by 20.1% qoq to 246,000 tons, whereas production increased by 27% qoq to 253,490 tons.
  

We believe over the next one quarter the stock will be a strong performer as fresh orders are announced globally. The management has indicated that they are successful bidders for 1mn tons of international orders. They are at an advanced stage for 0.5mn tons of pipe orders. With the rise in crude oil prices and a gradual revival in order inflows, we believe WGL is the best bet in the pipe sector to exploit this opportunity. This coupled with strong order book and improving visibility in its plate business, we maintain our BUY rating with a target price of Rs346.