20 July 2010

COMPANY
REPORT
Welspun Corp Limited BUYBUY

TheCompany
The Company:
Industry: Pipes Manufacturing & Construction
Welspun Corp Ltd (formerly known as Welspun Gujarat Stahl Rohren Current Price 246
Ltd) or “Welcorp” is the world's leading Pipe manufacturing company. Target Price 308
The company manufactures high-grade Sub-merged arc welded Market Cap (Cr.) 5024
(SAW) pipes; both Spiral 'HSAW' & Longitudinal 'LSAW' and also 52 Week H/L 296/191
FV 5
Electric resistance welded (ERW) pipes. The current capacity
Book Value/Share 142
(including its manufacturing facility in US) is broken into HSAW
BSE Sensex 17937
(900,000 MTPA), LSAW (350,000 MTPA) and ERW (250,000
NSE Nifty 5383
MTPA). In addition to pipes, Welcorp also provide value added
BSE Code 532144
services such as coating and bending of pipes. In 2007, Welcorp was NSE Code WELCORP
named as the world's second largest producer of pipes of 16" diameter Reuters Code WGSR.BO
and above by the Financial Times, UK. Bloomberg Code WLCO:IN

1 Yr Stock / Index Performance

160.0

Welspun 140.0
Corp Ltd
120.0

100.0

Welspun Welspun Pipes

80.0

Ductile/Cast Welspun Natural Ltd. (Proposed 60.0

Iron Pipes Inc. USA Resources LSAW Plant)
Private Ltd. 40.0

20.0

Welspun Tubular 0.0

LLC 7/20/2009 10/26/2009 2/1/2010 5/10/2010
Welspun Global
(Pipes, coating Sensex Welspun Corp
and Double Trade LLC
Jointing)
Company FY 09 FY 10 FY 11E FY 12E
Net Revenue 5739.5 7350.3 8566.7 9886.0
The Company:
Investment Rationale
Operating Exp. 5104.8 6031.6 7190.4 8285.3
EBITDA 634.8 1318.6 1376.3 1600.7
Profit after Tax 213.5 610.4 629.7 745.5
Huge Market Opportunity for Pipe manufacturers; Globally EPS 11.4 29.9 30.8 36.5
ROE% 13.7% 21.0% 18.1% 17.9%

Pipelines are used in various industries and applications including ROCE% 4.8% 10.5% 10.2% 11.1%

EV/EBITDA 9.9 4.4 4.1 3.1

water, oil and natural gas and related products and sewage
Share Holding Pattern as on June 30, 2010
transportation as well as in oil refineries, petrochemical plants, Oil
Country Tubular Goods (OCTG) applications and in mechanical, General Public
16% Promoters
55%
Other Investors
structural, chemical, automobile and general engineering industries. 12%

Due to its inherent advantage such as low Operational cost, Safety in

transportation and protection against pilferage; Pipelines are the
Institutions
preferred mode of transportation for fluids, globally. Continuously 17%

increasing demand for Crude oil and Natural Gas has necessitated the
Tapan Trivedi
development and improvement of proper logistics infrastructure Tel - 0484-2796211
across the globe. Email: tapan.trivedi@jrg.co.in

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Different types of Pipes and their uses

Pipes are mainly classified on the basis of their manufacturing process into Welded pipes,
Seamless and Spun pipes.

Different types of Pipes and their usage

Units: inPipe
Rs Crore Units
Diameter
: in Rs Crore Industry Application
Seamless 0.5" to 14" Oil & Gas Transportation, Boiler and Automotive
ERW 0.5" to 22" Oil & Gas from Hub to Station
Ductile/Cast Iron 3" to 39" Water and Sewage
SAW
LSAW 16" to 50" Oil & Gas Transportation
HSAW 18" to 100" Oil & Gas and Water Transportation
Source: Company Annual Report

Welded steel pipes are generally manufactured from Hot rolled and Cold rolled steel coils
using the Electrical Resistance welding (ERW) process.
Submerged arc welded (SAW) pipes are another category which is primarily used in the
Energy industry, particularly for oil and natural gas transportation. SAW pipes are made
from steel plates and hot rolled steel coils. Under this, Longitudinal Saw (LSAW) pipes
are generally used for transportation of oil and natural gas in high temperature and
pressure applications in refineries and petrochemical units while Spiral/Helical Saw
(HSAW) pipes are generally used for transportation of crude and refined petroleum
products and natural gas under low pressure conditions.

Growth in Hydrocarbon sector fueling the demand in Pipe industry

Historically, the hydrocarbon sector has been one of the largest consumers of SAW and
ERW pipes globally. Accordingly, the outlook for Pipe industry is closely linked to the
growth in Oil exploration and production (E&P) and deep sea drilling.
The Global Economic slowdown during the previous year inflicted the demand and prices
of petroleum products for most part of 2009. With the affect of this, the Capex projects in
the Oil & Gas Onshore drilling and eventually in the transportation segment came to a
standstill. Despite these Short-term hiccups, the overall trend in the global pipeline
industry remains robust.

Shrinking oil and natural gas reserves coupled with rising demand is expected to fuel huge
investments in E&P. Over the next few years, the Capex activities in the hydrocarbon
industry are set to increase exponentially driven by demand in Middle East, North
America, CIS and Asia.
Moreover, with Crude Oil prices rising higher and higher, Natural gas is increasingly
emerging as a fuel of choice due to its qualities like environmentally friendly, scalable,
efficient and abundancy. Over the years, Gas has grown from a marginal fuel consumed in

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in regionally disconnected markets to a fuel that is transported across great distances for
consumption in many different economic sectors.

Increasing acceptance of Natural gas over Crude oil is driving Major gas pipeline
construction across the globe. Over the next five years, the pipeline Capex is
expected to be over US$78 Bln.

Expected Capital Expenditure - Global Pipeline development

Region No. of Projects Length Quantity (MT) Buss. Potential (Bln $)
North America 199 68615 13.7 16.5
Latin America 49 32880 6.6 7.9
Europe 124 46478 9.3 11.2
Africa 61 24400 4.9 5.9
Middle East 129 46664 9.3 11.2
Asia 156 91509 18.3 22
Australasia 46 16467 3.3 4
Total 764 327013 65.4 78.5
Source: Simdex, US, May 2010 update Data
Notes: 1. Conversion rate of 200 MT/KM;
2. Conversion rate of $1,200/MT

As per the Simdex data for May 2010, the international market is expected to create an
overall Pipe demand of more than 65 Mln MT until 2014 with an opportunity of more than
$78 Bln across the globe. According to the analysis, Asia alone is expected to create a
demand for over 18 Mln MT of pipe lines, contributing more than 28% of the total global
pipe demand in the next five years. The other significant demand would be coming from
North America and Latin American region which is estimated to up the demand for over
20 Mln MT i.e. nearly 30% of the total global demand. Other regions like Middle East and
Europe too are expected to add more than 90,000 Km's of pipelines and eventually
creating a pipe demand of 18 Mln MT.

Region-wise expected demand, based on No. of Projects

Australasia
6%

Asia
21%

North America
26%

Middle East
17%

Latin America
6%

Africa Europe
8% 16%

Source: Simdex, US, May 2010 update

Moreover, there is large scale replacement demand to arrive from the US as more than 1
Mln Miles of pipelines in the US were laid down during the 1960's and 1970's. Going with
the average economic lifetime of the pipelines of around 30 years, US can lead to
significant addition to total pipes demand in the world.

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Domestic demand too seems robust

In the domestic space too, Natural gas has emerged as one of the most preferred fuel due to
its environmentally benign nature, greater efficiency and cost effectiveness. The
production of Natural gas, which was almost negligible at the time of independence, is at
present at the level of around 87 MMSCMD.
As already discussed above, Pipeline is the cheapest and the most efficient mode of
transportation for all kinds of petroleum products across the globe. Due to low level of
investment for the development of logistical infrastructure in the past in India, only a
limited quantity of total petroleum products is transported through pipelines. However,
due to the underlying advantages of pipelines over other means of transportation, huge
investment has been planned by major Hydrocarbon companies in the nation.

Welcorp increasing its Capacity to boost future growth

To cater the huge opportunity for pipe manufacturers in the domestic and the international
market, Welcorp is stepping up its total Pipes capacity to more than 2 Mln MTPA by FY
12E. Welcorp's current pipes capacity is around 1.5 Mln MTPA which is the second largest
pipes manufacturing capacity in the world (Financial Times, UK). Its total capacity,
(including its manufacturing facility in US) is broken into HSAW capacity of 0.9 Mln
MTPA; LSAW 0.35 Mln MTPA and ERW 0.25 Mln MTPA. In addition to pipes; it
provides services like coating and bending of pipes. In its process of backward
integration, it also ventured into manufacturing Plates and Coils (2008) with a capacity of
1.5 Mln MTPA, the first step towards making Pipes from Steel Slabs.

(In 000' MT) Welcorp Pipes Capacity (Current and Planned)

1200
1100 1100

1000
900 900

800

650

600

400 400 400

400 350 350 350 350 350 350

250 250 250 250 250 250 250

200

0
FY 06 FY 07 FY 08 FY 09 FY 10 2011E 2012E
HSAW LSAW ERW

Source: Company Data, JRG Research

Currently, Welcorp plans to increase its LSAW pipes capacity by 0.3 Mln MTPA at its
plant in Anjar while also adding 0.1 Mln MTPA capacity of HSAW pipes. While the
management is confident of adding around 0.45 Mln MTPAof capacity by FY 11E, we
expect the plants to be fully commissioned only after FY 11.
The expansion will further enhance Welcorp's hold in the industry wherein it already is an
accredited supplier to over 50 Major oil and gas companies across the world. Moreover, a
company which already derives more than 75% of its revenues through exports; increase

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in capacity will further elevate its position in the global pipe manufacturing industry.

Order Book firm, expect further improvement in the future

As of June 2010, Welcorp's consolidated order book stands at over Rs 7100 Crore.
Recently the company got Rs 700 Crore for Pipes and plates from the Middle East. The
total order backlog of the company is in line with FY 10 financial performance of the
company and provides decent Revenue visibility for the next twelve months. In terms of
volumes, the total tonnage has increased to around 0.9 Mln MT in the Pipe manufacturing
segment, up from the 0.8 Mln MT which was at the end of FY 10.

(In 000' MT)

Quarterly Trend in Volumes of Pipes and Plates for Welcorp (In 000' MT)
Yearly Growth in Volumes of Pipes and Plates for Welcorp
250.0 1400

1200
200.0

1000

150.0
800

600
100.0

400

50.0
200

0.0 0
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11E FY 12E

Pipes Plates Pipes Plates

Source: Company Data, JRG Research

During FY 10, Welcorp sold pipes to the tune of 0.81 Mln MT and is targeting to sell more
than 1 Mln MT of pipes in FY 11E. The current Rs 700 Crore Order only strengthens the
company's expectation for the current fiscal year. Other than pipes, Welcorp also plans to
sell around 0.6 Mln MT of plates in FY11E; up by more than 55% of FY 10 sales of over
0.38 Mln MT of plates. Over the next two years, we expect the sales volume in the Pipe
and the Plates segment to grow at a GACR of around 18% and 40% respectively. Though
the volume growth is seen firm, margins are expected to taper down a bit due to lower
sales realization coupled with increasing cost of key raw materials.

Welcorp enters Construction sector through MSK Acquisition

Welspun Infratech Ltd., a wholly owned subsidiary of Welcorp has recently acquired
majority stake in the construction company, MSK Projects India Ltd for an all cash deal.
MSK is primarily engaged into Engineering, Procurement and Construction projects in
the Road and Industrial segment. The company also owns a number of BOOT (Build Own
Operate Transfer) assets in Road, water and bus terminals. The acquisition enhances
Welcorp's presence in the highly growing Infrastructure market in India, at the same time
will step-up its position as an One-stop-solution provider in the Line Pipe segment
ranging from Manufacturing of Plate & Coil to Line Pipe and finally to Pipe laying.

Welcorp is expecting MSK to cross Rs 1000 Crore mark by FY 12 in Revenue from

around Rs 420 Crore in FY 10. Based on these estimates, MSK should be able to

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contribute around 9% of the Net Sales of cumulative Welcorp in FY 12E. Though, in our
estimates of Welcorp, we have not factored any financial growth emerging from MSK as
of now.

Majority stake in Saudi Arabian Pipe manufacturing firm to enhance hold in GCC
region

Welcorp has initiated agreements to acquire majority stake in Aziz European Pipe Factory
Llc, a Saudi Arabian pipe and pipe coating facility. It is one of the largest Spiral Pipe
manufacturing facilities in the region, with total installed capacity on 270,000 MTPA of
Pipes. Other than Pipes, Welscorp will also hold majority stake in Azia's recently
commissioned Pipe coating facility thus enabling it to provide complete solution to the
Oil and Gas majors and water companies in the GCC (Gulf Corporation Council) region.

Valuation and Financial Projections

Financial Projections - Welspun Corp Limited
Units:In Rs Crore FY 09 FY 10 FY 11E FY 12E
Net Sales 5739.5 7350.3 8566.7 9886.0
Other Income 18.7 18.5 20.0 20.0
Net Raw Materials 4002.7 4748.4 5739.7 6603.9
% of Sales 69.7% 64.6% 67.0% 66.8%
Staff Cost 132.2 277.9 208.5 248.0
Other Expenses 969.9 1005.4 1242.2 1433.5
Operating Exp 5104.8 6031.6 7190.4 8285.3
EBITDA 634.8 1318.6 1376.3 1600.7
OPM 11.1% 17.9% 16.1% 16.2%
Depreciation 143.3 206.1 256.9 314.8
Interest 176.6 207.1 199.5 193.3
Provision for Taxes 120.0 313.6 310.2 367.2
% of Tax 36.0% 33.9% 33.0% 33.0%
Net Profit 213.5 610.4 629.7 745.5
OPM 3.7% 8.3% 7.3% 7.5%

Continuing with its firm performance FY 10, Welcorp is expected to step-up its growth in
the coming years. Aided by increasing capacity and soaring long-term demand for
pipelines in the global arena, the company is expected to record more than 18% and 40%
growth in Sales volumes in the Pipe and the Plates segment of the company by FY 12E.
Due to marginal contraction in realizations, the Top-line is expected to register a CAGR of
more than 16% and rise to Rs 9886 Crore (FY 12E) as equated to Rs 7350 Crore (FY 10).

Drop in realization coupled with rising input costs is expected to inflict company's
operating profit performance which are seen growing moderately at around 10% CAGR
to Rs 1601 Crore (FY 12E) as compared to Rs 1319 Crore (FY 10). The Operating margins
are seen stabilizing around the 16% mark for the next two fiscal years.

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(In Rs. Crore) Yearly Trend in Net Sales, EBITDA and OPM
12000 20.0%

17.9% 9886 18.0%

10000 16.4%
16.1% 16.0%
16.2%
8567
14.0%
8000
12.4% 7350
12.0%
11.1%
6000 5740 10.0%

8.0%
3994
4000
6.0%
2679
4.0%
2000 1601
1319 1376
655 635 2.0%
333
0 0.0%
FY 07 FY 08 FY 09 FY 10 FY 11E FY 12E

Net Sales EBITDA OPM

Source: Company Data, JRG Research

Increase in Capacity is expected to result into higher depreciation costs for Welcorp while
capital raised through QIP to pay-off and convert the high cost debt is anticipated to
reduce the interest expenses of the company going forward. The Bottom-line of the
company is expected to clock a CAGR of 10.5% and jump to Rs 745 Crore (FY 12E) as
against Rs 610 Crore (FY 10). NPM's are seen dipping to 7.3% levels in FY 11E, while
witness marginal improvement towards 7.5% in FY 12E.

Recommendation

At the Trailing market price of Rs 246, Welcorp is trading at 8X and less than 7X its FY
11E and FY 12E EPS of Rs 31 and Rs 37 respectively. Considering the firm performance
of the company over the years, healthy Order Book position coupled with the Large-scale
planned investment in the Pipelines sector we expect Welcorp looks attractive for
Medium to Long-term. Thus, recommend Investors to “Buy” the stock for a Target
price of Rs 308 in Twelve months.

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Profit and Loss Statement Key Ratios

Units: in Rs Crore FY 09 FY 10 FY 11E FY 12E Units: in Rs Crore FY 09 FY 10 FY 11E FY 12E
Net Sales 5739.5 7350.3 8566.7 9886.0 Valuations (x)
% Growth 43.7% 28.1% 16.6% 15.4% EPS 11.4 29.9 30.8 36.5
Net Raw Materials 4002.7 4748.4 5739.7 6603.9 PER 21.5 8.2 8.0 6.7
% of Sales 69.7% 64.6% 67.0% 66.8% CEPS 19.1 40.0 43.4 51.9
Staff Cost 132.2 277.9 208.5 248.0 CPER 12.8 6.1 5.7 4.7
% of Sales 2.3% 3.8% 2.4% 2.5% P/BV 2.9 1.7 1.4 1.2
Other Expenses 969.9 1005.4 1242.2 1433.5 Dividend Yield 0.6% 0.8% 1.0% 1.0%
% of Sales 16.9% 13.7% 14.5% 14.5% EV/EBITDA 9.9 4.4 4.1 3.1
Operating Expenses 5104.8 6031.6 7190.4 8285.3 EV/Sales 1.1 0.8 0.7 0.5
% Growth 52.9% 18.2% 19.2% 15.2% EV/Total Assets 1.4 1.0 0.9 0.7
EBITDA 634.8 1318.6 1376.3 1600.7 Profitability %
% Growth -3.2% 107.7% 4.4% 16.3% EBITDA Margin % 11.1% 17.9% 16.1% 16.2%
OPM 11.1% 17.9% 16.1% 16.2% PAT Margin % 3.7% 8.3% 7.3% 7.5%
Other Income 1870.0% 1853.0% 2000.0% 2000.0% ROCE 4.8% 10.5% 10.2% 11.1%
Depreciation 143.3 206.1 256.9 314.8 RONW 13.7% 21.0% 18.1% 17.9%
EBIT 510.2 1131.1 1139.4 1305.9 Efficiency Ratio
Interest 176.6 207.1 199.5 193.3 Debtors Days 29.3 40.1 40.0 40.0
Profit Before Tax 333.6 924.0 939.9 1112.6 Inventory Days 166.1 100.9 120.0 120.0
Provision for Taxes 120.0 313.6 310.2 367.2 Asset Turnover (Total) 1.3 1.3 1.4 1.5
% of Tax 36.0% 33.9% 33.0% 33.0% Leverage Ratio
Net Profit 213.5 610.4 629.7 745.5 Debt/Equity 1.7 0.9 0.7 0.5
% Growth -37.3% 185.9% 3.2% 18.4% Debt/EBITDA 4.2 1.9 1.7 1.3
OPM 3.7% 8.3% 7.3% 7.5% Interest coverage ratio 2.9 5.5 5.7 6.8

Balance Sheet Statement Cash Flow Statement

Units: in Rs Crore FY 09 FY 10 FY 11E FY 12E Units: in Rs Crore FY 09 FY 10 FY 11E FY 12E
Sources of Funds Cash from Operations 1319.5 787.8 643.0 1091.4
Share Capital 93.3 102.2 102.2 102.2 Cash from Investing -743.8 -334.2 -320.2 -320.2
Reserves & Surplus 1466.4 2799.0 3368.9 4054.5 Cash from Financing 101.0 301.0 -305.8 -272.6
Net Worth 1559.7 2901.1 3471.0 4156.7 Net change in Cash 676.7 754.6 17.1 498.5
Foreign Currency Item 0.0 7.5 Opening Cash balance 270.3 947.0 1701.6 1718.6
Secured Loans 2643.5 1865.4 1665.4 1465.4 Closing Cash balance 947.0 1701.6 1718.6 2217.2
Unsecured Loans 10.3 682.2 682.2 682.2
Total Debt 2653.8 2547.6 2347.6 2147.6
Deferred Tax Liability 248.8 337.7 350.0 400.0
Capital Employed 4462.3 5793.4 6175.6 6711.3
Application of Funds
Gross Block 3484.4 3881.0 4181.0 4481.0
Less: Depreciation 384.7 588.9 845.8 1160.6
Net Block 3099.7 3292.1 3335.2 3320.4
Capital WIP 580.8 541.2 541.2 541.2
Investments 114.0 159.6 200.0 200.0
Foreign Currency Item 35.5 0.0 0.0 0.0
Current Assets 4584.9 5150.0 6147.1 7303.9
Income on Investments 11.3 1.3
Inventories 2611.3 2032.2 2816.5 3250.2
Sundry Debtors 460.1 807.6 941.0 1085.6
Cash and Bank 947.0 1701.6 1718.6 2217.2
Loans and Advances 555.2 607.3 671.0 751.0
Current Liabilities 3895.5 3227.0 3898.0 4505.7
Provisions 60.1 125.7 150.0 150.0
Net Current Assets 632.4 1800.3 2099.1 2649.2
Deferred Revenue Exp 3.1 3.0 0.0 1.0
Total Assets 4462.4 5793.2 6175.6 6711.3

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E-mail: jrg.research@jrg.co.in
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Andheri (W), Mumbai – 400058; Tel: 91-22- 26711059/26719939

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