HDFC Securities is bullish on Welspun Gujarat and has maintained buy rating on the stock with price target of Rs 420.

HDFC Securities research report on Welspun Gujarat

The company is setting up a new facility in the US of 0.3 million tons to be closer to one of the biggest markets for pipes, as US accounts for 35% of the global demand. This will enhance its capacity to 1.6 million tons by FY10E from 1 million tons in FY07.

Currently, the company sources HR plates from Europe, as high grade and larger size plates are not available in India. EBITDA margins in FY09E are likely to improve by more than 810 bps to 20.5% from 12.4% in FY07, as the benefits of this backward integration will come during that period. 

WGSRL has an outstanding order book of Rs. 48.5 billion (executable by Sept 08). This order book is 1.8x its FY07 turnover, giving clear visibility of its long-term growth. Oil and Gas constitute more than 99% of the unexecuted order book and the rest is in the water segment. WGSRL has the capacity to book orders worth USD 7 billion over next 5 years.

Outlook & Valuation

WGSRL’s business is set to grow at a robust pace in the next two to three years. The company has planned a capex in step with the growing demand. Tighter control of costs and a steady growth in volumes will be the focus of the company. WGSRL’s leadership position in each of its businesses, combined with the steady demand from derived industries, augurs well for the company’s growth. The change in product mix is expected to drive sustained profitability and further growth in the future.

The revenues and profits of WGSRL are expected to grow at a CAGR of 37.7% and 76% between FY07-10E. The stock currently trades at a huge discount to its fair value on a DCF basis. We expect it to re-rate positively and when coupled with the underlying earnings growth, should deliver significant out-performance to investors in the long term. We, therefore, maintain the Strong BUY recommendation on the stock with a target price of Rs. 420 (upside of 40%). Please note we had initiated coverage on the stock earlier in October 2006, at a price of Rs. 74.

Financial Highlights 

For Q1 FY08, WGSRL has achieved a net turnover of Rs. 8.06 billion, a growth of 50.5% over Q1 FY07. The operating profits during the quarter were up by 97.8% y-o-y at Rs. 1.33 billion and PAT showed an increase of 163.5% to Rs. 693 million. Operating profits showed a sharp growth on the back of a significant improvement in realizations for the quarter by 23% to Rs. 58,400/ton from Rs. 47,466/ton in Q1FY07. 

OPMs increased by 395 bps to 16.5% in Q1 FY08 from 12.6% in Q1 FY07, mainly due to order execution of higher value added HSAW and LSAW pipes. As per the our discussion with the management, most of the orders executed during the quarter and existing orders are of the very high value segment, where there is less competition from domestic players.

The company, during the quarter, sold 1,38,150 tons, compared to 1,12,929 tons in Q1 FY07. EBIDTA per ton went up during Q1 FY08 by 61.7% to Rs. 9649/ton, compared to Rs. 5968/ton in Q1 FY07.