Welspun Gujarat –Buy- Anand Rathi
Welspun announced the addition of Rs6 billion to its order book of Rs66 billion (as at end-Dec’09). Ahead, we expect its order book to keep growing, given strong international demand for pipes. We reiterate our BUY rating on the stock with a target price of Rs380.
Of the Rs6 billion in orders added, about Rs4.8bn are for pipes, Rs0.6bn for plates and about Rs0.6 billion for coatings. The addition to Welspun’s order book comes mainly from the high-margin North American market, with some orders coming from the domestic market.
We are positive on Welspun, given the rising worldwide demand for pipes, its enviable accreditations, capacity ramp-up and margin-enhancing backward integration, which could further add to upside.
Capacity ramp-up, backward integration to boost earnings. Welspun is increasing pipe capacity from 1.5 million tonne now to 2.1 miliion by FY12. In addition, its backward-integration strategy (plate-cumcoil mill) could lead to a rise in margins. We thus estimate it to report earnings CAGR of 33% over FY09-12.
Our Rs380 target price for Welspun Gujarat is based on 12x one-year forward earnings. Our PE-based valuation is at a 33% discount to its global peer average and implies potential upside.
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