Welspun Gujarat- BUY (Target: Rs346, Upside 23.9%)

Welspun Gujarat Ltd (WGL) plans to acquire MSK Projects, a road and industrial construction company, through its 100% subsidiary ‘Welspun Infratech Ltd’. Through a combination of share purchases from promoters, associates, investors, preferential allotment and open offer, WGL plans to buy ~75% stake in MSK Projects. WGL expects the total investment in this acquisition to be ~4bn. In FY09, MSK Projects’ consolidated revenue stood at Rs3.7bn and reported a PAT of Rs204mn. During 9M FY10, on a standalone basis, MSK managed to register revenues of Rs3.1bn and a PAT of Rs236mn. Average acquisition cost for WGL would be ~Rs130.5/share, at which MSK would be trading at 1x FY09 BVPS and at a P/E of 14.5x on FY09 EPS of Rs9. D/E ratio at the end of Q2 FY10 stood at 0.75x. WGL expects the acquisition process to be completed over next 90 days. We remain bullish on WGL’s pipe manufacturing business and maintain our BUY recommendation on the stock with target price of Rs346. We would include the impact of this acquisition on WGL’s numbers post the acquisition process is complete.