Welspun Gujarat Stahl Rohren

Fresh investments with a two-three year perspective can be made in the stock of leading steel pipe manufacturer Welspun Gujarat Stahl Rohren .

The stock price has corrected significantly in the last couple of months following concerns that the fall in crude prices may possibly scale down the capex by global oil and gas companies.

This may be true of the incremental or fresh capex of these companies but it is unlikely that the plunge in oil price may affect the ongoing capex. To that extent, the company’s order book of over Rs 9,500 crore, executable over the next year and half, provides comfort.

At the current market price of Rs 91, the stock trades at about five times its likely FY-09 per share earnings, leaving ample scope for appreciation in the coming years.

Investors, nevertheless, should consider accumulating this mid-cap stock in lots since it may be subject to heightened volatility in price.

Demand scenario

To say that the global demand for pipes would continue to remain buoyant despite the global economic slowdown would be an exaggeration, as spends by oil and gas companies on E&P (exploration and production) activities may slow down.

However, it is unlikely to affect the expansion already undertaken by oil and gas majors.

Spends on pipelines happen only in the last leg of the entire capex and, thus, order flows from ongoing capex, may last a while. This does away with concerns that there may be any significant slowdown in demand for pipes in the foreseeable future.

Besides, demand may also get a lift from the need to replace some of the existing pipe networks in the US. That over 60 per cent of the existing line pipe network (over 1.5 million miles) in the US is over 30 years old and would soon be due for replacement, also lends ‘replacement’ market potential.

Strong presence in the export market and established relationships with many global oil and gas majors (in the US as well) reflect well on Welspun’s ability to grow its revenues, albeit at a slower pace.

The company’s order book, pegged at about Rs 9,500 crore (2.4 times FY-08 revenues), reinforces its stable prospects.
Financials

For the quarter ended September 2008, the company registered a 60 per cent growth in sales. Pipe volumes remained robust, witnessing a 34 per cent increase, while realisations grew by 12 per cent.

But the high sales volumes in Q2 were partly due to the deferment of shipments from first quarter when the government had imposed export tax on steel pipes. Blended pipe realisations that were up 4 per cent on a year-on-year basis registered a fall of over 7 per cent sequentially.

Operating margins, owing to higher raw material cost declined by 6 percentage points to 10.5 per cent.

Profits however declined by over 21 per cent due to forex losses (on account of realignment of net foreign currency exposure and ECB) of over Rs 88 crore during the quarter. If not for the forex loss, the company’s performance was commendable.
Concerns

The company’s steel plate facility, which was initially intended for both captive use and commercial purposes, however, may prove to be less of a money-spinner than expected.

After the recent fall in steel prices, which has made the commercial sale of steel plates less profitable, the management has reduced its plate production guidance to 340,000 tonnes (for this year) from 600,000 tonnes in the beginning of the year.

Instead, it plans to focus on using its plate facility for captive consumption and for upgrading it to manufacture pipes for critical applications such as the for the power sector.

While for now the company’s dependence on the US (45 per cent of its revenues) does not ring any alarm bell, given the possibility that the capex on pipeline network will continue, it may backfire if the US economy remains in recession for more than a couple of years.

In such a scenario, Welspun’s spiral pipe manufacturing facility (expected to be commissioned by Q3 FY-09) in the US may also prove counterproductive. The company may then need to increase its revenue share from countries in West Asia and South America and even India.

Till such time, trends in order inflows for the company over the next two-three quarters may bear a close watch.