Index. Viewpoint >> Welspun Corp. Viewpoint >> Rossell India. Visit us at December 30, For Private Circulation only

Transcription

1 Visit us at December 30, 2015 Index Viewpoint >> Welspun Corp Viewpoint >> Rossell India For Private Circulation only REGISTRATION DETAILS Regd Add: Sharekhan Limited, 10th Floor, Beta Building, Lodha ithink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai , Maharashtra. Tel: Sharekhan Ltd.: SEBI Regn. Nos. BSE - INB/INF ; BSE- CD ; NSE - INB/ INF ; CD-INE ; MSEI - INB/INF ; CD-INE ; DP - NSDL-IN-DP-NSDL ; CDSL-IN-DP-CDSL ; PMS- INP ; Mutual Fund-ARN ; Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX ; (MCX/TCM/CORP/0425) ; NCDEX ; (NCDEX/TCM/CORP/0142) ; NCDEX SPOT-NCDEXSPOT/116/CO/11/20626 ; For any complaints at igc@sharekhan.com ; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do s & Don ts by MCX & NCDEX and the T & C on before investing.

2 Welspun Corp View: Positive Viewpoint Strong growth in pipeline CMP: Rs115 Key points Global leadership in pipes, de-risks from domestic slowdown: Welspun Corp Ltd (WCL) is a leading global manufacturer of the large diameter steel pipes with around 10% market share. It has the largest capacity of 2.4 million metric tonne (MT) per annum, strategically located across the USA, Saudi Arabia and India. It is also a preferred vendor to over 50 major oil and gas companies like Shell, Saudi Aramco, TOTAL, Chevron, Exxon Mobile and TransCanada, as very few players qualify for the large global tenders. The company was able to survive the low domestic investment regime in the oil and gas pipeline over the past few years as it expanded successfully into overseas market while some players like PSL Ltd had to trim or shut down their operations over the same period. Robust revenue visibility from overseas: After the recent order win, its order book now stands at Rs6,400 crore/ 1,040KMT (0.76x its FY2015 pipe revenue) to be executable over the next 9-12 months. Robust bid books of 3,600KMT which are in pipeline are likely to provide further boost to the order book in coming quarters. By FY2017, global bidding opportunities for about 12,000KMT pipeline are likely to float mainly in the USA, Mexico, Europe and Saudi Arabia (where WCL is one of the strong contenders). Overall, global pipeline investment is likely to generate $422-billion opportunity over the next four to five years as the fall in prices of crude oil and metals lead to preference for steel pipeline over railways as the preferred mode of transport. Deleveraging balance sheet to lead healthier ratios: After the demerger of the non-pipe business in Welspun Enterprises in FY2013, WCL has become a pure and quality play on the global pipes sector. The company has been generating robust cash flows from which it has systematically repaid debt worth Rs2,555 crore over FY and further it is expected to annually repay debt of at least Rs200 crore for the next few years. Accordingly, its debt-equity ratio is likely to come down to 0.7x in FY2018 from 1.3x in FY2014. The operating profit margin is also expected to be stable at 10-11% as; (1) its future revenue traction is heavily tilted towards North America (62% of the current order book versus 16% in FY2014) which has higher margin; (2) increasing contribution of its capex-heavy plates facility to revenue would help in better utilisation of capital employed. Further, return ratios will also improve led by improved profitability and lower interest cost. Turnaround story at reasonable valuation: Given its diversified clientele portfolio, strong manufacturing capabilities and robust bids in pipeline, WCL is our preferred pick among the Indian pipe manufacturers. Backed by high-margin, North American revenue visibility and lower interest cost, we are expecting it to report a growth rate of 16% CAGR in revenues and 80% CAGR in earnings (on a low base of FY2015 earnings) in the three-year period of FY The company has reported very robust numbers in H1FY2016 with a PAT of Rs117 crore versus a loss of Rs92crore in H1FY2015. Based on valuation, the company is trading attractively at 10.9x its FY2017 earnings per share which is 20-25% lower than its post-demerger average price earnings (PE) multiple. Hence, we see a potential upside of 20-25% in the stock price from the current level. Key risks: (1) Slowdown in capex cycle of pipeline network both in domestic and overseas markets; (2) Unfavourable movement in foreign currency exchange rates, metal and crude oil. Valuations (consolidated) Particulars FY13 FY14 FY15 FY16E FY17E FY18E Net sales (Rs cr) 9, , , , , ,109.9 Y-o-Y growth (%) Operating margin (%) % 10.7 Net profit (80.3) Adjusted EPS (3.1) Y-o-Y growth (%) PER (x) (38.0) P/B EV/EBIDTA RoCE (%) RoNW (%) Debt/Equity (x) Sharekhan 2 December 30, 2015

3 Company background Incorporated in 1995, WCL is the flagship company of the $3.5-billion Welspun Group. It is a one-stop service provider offering complete line of pipe solution with a capability to manufacture line pipes ranging from half inch to 140 inches, along with specialised coating, double jointing and bending. Line pipes are used for transporting oil, gas or water over long distances (interstate or from offshore/under sea) or as gathering lines (from well to processing centre). Its product range includes high-grade line pipes like longitudinal (LSAW), spiral (HSAW) and HFERW/HFIW (ERW). In 2010, the company was renamed as Welspun Corp Ltd from Welspun Gujarat Stahl Rohern Ltd and has manufacturing operations at Dahej, Anjar and Mandya in India, at Little Rock in the USA, and Dammam in Saudi Arabia. To maintain effective business focus and a leaner balance sheet, it demerged its nonpipe business (infrastructure, DRI, oil & gas and energy most of which have asset-heavy model) into Welspun Enterprises Ltd in FY2013. FY2015 revenue break-up (types of pipe) FY2015 revenue break-up (region) Investment argument in details Leadership position in global large diameter pipes space: The company has emerged as the largest player in the large diameter pipes supported by its capacity expansion programme at the strategically suitable places. Today, it has the largest manufacturing capacity in the world followed by a European player Euro Pipes (with a capacity of 2 million MT but incurred operating losses in CY2014) and a Japanese player JSP Pipes. The company has crossed the milestone of 1-million tonne production and sales volume for the third successive year in FY2015, a record across the global pipe industry. WCL also has a plate and coil mill facility in India which enhances its backward integration and also its ability to meet pipe as well as other customer requirements across markets. Largest manufacturing capacity in the world Country India Saudi Arabia USA Total Capacity Products Anjar Dahej Mandya Damman Little Rock KMT LSAW HSAW ,350 ERW/ HFIW Current pipe capacity 1, ,425 Plate & coil 1,500 1,500 Sharekhan 3 December 30, 2015

4 Products offerings details Type of product Description Used for Diameter in Wall Thickness inches HSAW pipes Helically welded pipes made from HR coils Onshore oil, gas & water Moderate transmission LSAW pipes Longitudinally welded pipes made from HR plates; Onshore / off-shore oil & High gas transmission ERW/HFIW pipes High-frequency electric welded pipes made Downstream distribution of Low/moderate from HR coils; oil, gas & water Plates & coils Coating systems Ancillary services Provides WCL with vertical integration & competitive advantage in a few market segments Concrete weight coating, double jointing, 3LPE, 3LPP, DJ, internal solvent /solvent free coating, coal tar enamel, etc Pipe bending, dump site & inventory management Exceptional project execution record It has the experience of delivering pipes with stringent specifications which gives the edge for prestigious and challenging projects like Keystone Pipeline, Peru LNG, Wasit Gas Program, Independence Trail, IGAT-IV and Master Gas. Its client base includes some of the biggest names from the oil and gas sector like Shell, Saudi Aramco, TOTAL, Chevron, Exxon Mobile, British Gas, TransCanada and Petrobras. It is a preferred vendor to over 50 major oil and gas companies, as very few players qualify for the large global tenders. This also helps the company to command better margins in overseas order. Expertise in complex projects Sharekhan 4 December 30, 2015

5 Robust order visibility: Its current order book stands at Rs6,400 crore/1,200 KMT at 0.76x its FY2015 pipe revenue (including the order win announced after Q2FY2016 results) which are to be executed over the next eight to nine months. Bids in pipeline are also robust at 3,600KMT which are likely to provide further boost to the order book in the coming quarters. By FY2017, the global bidding opportunities for about 12,000KMT pipeline are likely to float (where WCL is one of the strong contenders) mainly in the USA, Mexico, Europe and Saudi Arabia. Of the total transmission pipeline of 2.2 million kilometer, present worldwide, half of it is in two countries, the USA and Russia. Further, eight countries (Canada, China, Ukraine, Argentina, the UK, Iran, Mexico and India) take the cumulative total to 70% of the world network by length. Order book detail Rs cr Particulars FY13 FY14 FY15 H1FY15 H1FY16 India/Asia Y-o-Y growth (%) Americas Y-o-Y growth (%) EU/ MENA Y-o-Y growth (%) Closing order book ,030 1, Y-o-Y growth (%) Pipe order book by Type (KT) LSAW HSAW ERW/HFIW Total ,030 1, Region-wise revenue break-up Galore global opportunity to boost growth: It is said that for every new born, 2 meter of pipe is needed. Large diameter steel pipes market, though encountering overcapacity conditions at present, is expected to witness steady growth in the coming years driven by the implementation of new pipeline projects across the globe. Overall, global pipeline investment is likely to generate $422-billion opportunity over the next four years as the fall in crude and metal prices lead to preference for pipeline over railways as the preferred mode of transport. We expect that in markets like North America, India and the Middle East, where the company has strong manufacturing capabilities and execution record, the company would be presented with opportunities worth over $1.7 billion annually for the next few years. We are expecting its pipe segment revenue to grow by a compounded annual growth rate (CAGR) of 18.5% over FY E. Global pipeline demand over FY Region No. of Est tonnage Project projects (KMT) value (Bn $) North America , Europe , Middle East , Latin America 82 16, Africa 77 5, Australasia 55 8, Asia 79 22, Total , Opportunities in pipes Annual opportunity in region where WCL has strong presence Annual opportunity for share Source Simdex, Sharekhan research Sharekhan 5 December 30, 2015

6 Demand from major markets expected to be robust Market Demand driver North America USA A large pipeline of projects is being executed by Energy Transfer Co, Spectra, Dominion and Williams over the next two years Oil production is at the highest level in the USA and this will continue to drive pipeline demand USA is on track to become a net exporter of gas (source: EIA). The key markets would be Mexico, South East Asia and Europe Replacement demand estimated at $3.5 billion (particularly for HSAW pipes) provides further upside as the average lifespan of oil and gas transportation pipes ranges between 25 and 30 years North America Canada Imperative for Canada to find new markets for its vast oil and gas potential Steady progress in the pipeline projects to supply natural gas to LNG projects on the west coast of Canada Further demand potential from feeder pipeline projects which would supply gas to the above lines North America Mexico Strong demand witnessed from Mexico in FY2015 which is likely to continue The opening of Mexico market for international investment and deep water development is a positive First round of bidding for oil and gas blocks saw the involvement of international bidders CFE plans to install 6,500km of pipeline in Mexico over the next five years Middle East Focus on cross-arabia gas transmission pipelines Iraq-Jordan crude export pipeline (total over 1,100km) Replacement of terminated oil pipelines in Kuwait Huge demand to distribute de-salined water from western coast to interiors in KSA Possible opening up of Iran India City gas distribution pipeline projects in multiple cities Around 1.5 million ton water pipeline projects expected in near future 1,820km of Turkmenistan, Afghanistan, Pakistan and India pipeline India has announced 15,000km of gas pipelines Source: Company, Industry Leaner balance sheet would boost quality growth: After the demerger of the non-pipe business (infrastructure, DRI, oil & gas and energy most of which have asset-heavy model) in Welspun Enterprises in FY2013, WCL has become a quality play on global pipes sector. The company has been generating robust free cash flows (Rs901 crore in FY2015) from which it is systematically repaying its debt. Its borrowings have reduced by Rs2,555 crore over FY which has reduced debt burden and eased financial flexibility for the company. The company is further planning to reduce its borrowings funded from its internal accruals (currently sitting on cash + current investments of Rs1,374 crore at the end of H2FY2016). Accordingly, the debt-equity (DE) ratio is expected to come down to 0.7x in FY2018 from 1.3x in FY2014. DE ratio to fall on repayment of debt Sharekhan 6 December 30, 2015

7 Return ratios to improve Profitability of the company is likely to improve in the coming few quarters as 62% of its current order book is from the Americas where it commands a better margin as the number of qualifying bidders are very less. Accordingly, return ratios are also likely to improve further boosted by lower interest cost. The company was able to survive the low domestic capital expenditure (capex) regime in oil and gas pipeline over the past few years as it focused on overseas opportunities while some players like PSL had to trim or shut down their operations over the same period. Return ratios are expected to move in double digit from FY2016 onwards High-margin orders Revenue to see a CAGR of 16%: WCL registered a fall of 3.5% CAGR in revenue over FY owing to fall in revenue from coils and plates segments. This was mainly due to unprecedented fall in steel prices and changes emerging in cost dynamics of the steel sector. The company was not able to sustain the operation of the plates manufacturing as the sourcing of plates from outside became cheaper. Hence, the revenue from plates facility fell to a mere Rs78 crore from Rs1,544 crore in FY2013. With a revival in the wind industry and better cost economics, the company is expecting a gradual revival of this segment operation. Further pick-up in orders from the American markets is likely to drive the revenue growth from the pipes segment. Overall, backed by the good order book and bids in pipeline we are expecting a CAGR of 15.7% in FY Margins to be stable led by the revival in operation of plates facility and good contribution from America In FY2015, the company had to shut down its US facility during H1FY2015 for refurbishment. This along with the low-demand environment resulted in poor profitability in the non-middle Eastern business. In the Middle Eastern subsidiary, the company has formed 50:50 joint venture with a local client. Hence, in spite of reporting a robust Rs300 crore in profit after tax (PAT) in this subsidiary, the company had to pay half of it as minority interest and reported a mere Rs69 crore as PAT. With a revival of the plates facility operation and good contribution from US orders, the margins are likely to sustain at 10-11% at the operating level. Further, reduction in interest cost and moderate capex would improve PAT margins from sub 1% level to 2.5-3% in future. All these factors will lead to 80% CAGR in earnings (on a low base of FY2015 earnings) in the three-year period of FY The company has already reported very robust numbers in H1FY2016 with a PAT of Rs117 crore versus a loss of Rs92 crore in H1FY2015. Revenue break-up Particulars FY13 FY14 FY15 FY16 FY17 FY18 H1FY16 Pipes (Rs cr) 7,556 7,556 8,372 9,510 10,689 12,783 4,447 Y-o-Y growth (%) 0% 11% 14% 12% 20% Volume - KMT 1,018 1,019 1,152 1, , , Y-o-Y growth (%) 0% 13% 30% 25% 20% Plates (Rs cr) 1, Volume - KMT Total revenue 9,067 7,705 8,451 9,661 10,854 12,965 Sharekhan 7 December 30, 2015

8 Margins to improve B.K.Mishra Mr B K Mishra is the managing director of Welspun Corp Ltd and has been instrumental in the growth of the company since He is an MBA in marketing & finance from Aligarh Muslim University. He has over 25 years of experience and possesses immense know-how regarding oil and gas - steel pipe manufacturing industry. In the past, he has also been rated by Business World as the 6th most valuable CEO of corporate India. Valuation comparison Profile of top management Balkrishan Goenka Mr Goenka is the prime architect of the Welspun Group and is regarded as one of the foremost corporate leaders of India. For over 27 years, Mr Goenka with his strong business acumen and risk-taking abilities is credited to having successfully steered the Welspun Group in many high-growth sectors. Based on valuation, the company is trading attractively at 10.9x its FY2017 earnings per share, which is over 20% discount to valuations of its closest peers like Ratnamani Tubes (which is majorly concentrating in India). Looking at the company s growth potential, we see a significant scope for re-rating with a 20-25% upside potential in the near term. PE band R.R.Mandawewala Rajesh R Mandawewala is the Group Managing Director of Welspun. As a key business leader at the Welspun Group, he has enabled the organisation's expansion and global reach in over 50 countries and has led Welspun India s emergence as one of the most pioneering global textile giants. A chartered accountant by profession, Mr Mandawewala has a rich experience of over 30 years in industries varying from textiles to SAW pipes. Peer comparision PeeCompany CMP Market Cap Net sales EPS EPS P/E (Rs) (Rs cr) FY15 FY16 FY17 FY15 FY16 FY17 CAGR FY15 FY16 FY17 Welspun Corp 115 3,050 8,450 9,753 10, % Apollo 755 1,766 1,810 3,805 4, % Ratnamani Metals 546 2,619 1,326 1,676 1, % Man Industries ,307 1,743 2, % Source: Sharekhan Research, Bloomberg Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Sharekhan 8 December 30, 2015

9 Rossell India Viewpoint Risk-reward ratio unfavourable after recent appreciation; Book profit CMP: Rs162 Key points Handsome gains; stock appreciated by 25%: Since our Viewpoint on April 13, 2015, the stock of Rossell India has posted handsome returns of 25% in the last nine months. In the volatile market environment, the stock has outperformed the major indices. Declining tea supply from Kenya positive for Indian tea producers: The drought in Kenya (largest tea exporter globally) has affected the tea production in the country, which led to an increase in the Kenyan tea prices. The increase in Kenyan tea prices should fetch better realisation for Indian tea producers in the upcoming tea season (starting from March-April 2016), as domestic tea prices are expected to move up in line with international tea prices. Also, the tea exports from India are expected to increase due to the short supply from the Kenyan market. Rossell India (tea contributes 85% of consolidated revenues) will be one of the key beneficiaries of rising tea prices in the domestic and international markets, as it will help to improve profitability of the tea business on the backdrop of stable tea production in FY2017. However, in the event of a significant Y-o-Y decline in the tea production in India, the likely benefits of higher tea prices would get moderated. Defence and QSR businesses still in nascent stage: Though we continue to remain positive on the value creation in its defence and quick-service restaurant (QSR) businesses, it would take few years before they start contributing meaningfully to the consolidated earnings. Moreover, these businesses could require infusion of funds to scale up to a viable scale in the near term. Near-term positive priced in; Book profit: The expected improvements in the performance of the tea business (in FY2017) and positives from emerging footprints of defence and hospitality space have been factored in the recent run-up in Rossell India s stock price. Thus, we see limited upside and advise investors to Book profit at the current level. Valuations (consolidated) Particulars FY11 FY12 FY13 FY14 FY15 Total revenues (Rs cr) EBIDTA margins (%) Adjusted net profit (Rs cr) EPS (Rs) PER (x) EV/EBIDTA (x) RoE (%) RoCE (%) Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Sharekhan 9 December 30, 2015

10 Sharekhan Stock Ideas Automobiles Apollo Tyres Ashok Leyland Bajaj Auto Gabriel Industries Hero MotoCorp M&M Maruti Suzuki Rico Auto Industries TVS Motor Banks & Finance Allahabad Bank Andhra Bank Axis (UTI) Bank Bajaj Finance Bajaj Finserv Bank of Baroda Bank of India Capital First Corp Bank Federal Bank HDFC HDFC Bank ICICI Bank IDBI Bank LIC Housing Finance PTC India Financial Services Punjab National Bank SBI Union Bank of India Yes Bank Consumer goods Britannia GSK Consumers Godrej Consumer Products Hindustan Unilever ITC Jyothy Laboratories Marico Zydus Wellness IT / IT services Firstsource Soluation HCL Technologies Infosys Persistent Systems Tata Consultancy Services Wipro Capital goods / Power Bharat Heavy Electricals CESC Crompton Greaves Finolex Cable Greaves Cotton Kalpataru Power Transmission PTC India Skipper Thermax Triveni Turbine Va Tech Wabag V-Guard Industries Infrastructure / Real estate Gayatri Projects ITNL IRB Infra Jaiprakash Associates Larsen & Toubro Punj Lloyd Oil & gas Oil India Reliance Ind Selan Exploration Technology Pharmaceuticals Aurobindo Pharma Cipla Cadila Healthcare Divi's Labs Glenmark Pharmaceuticals Ipca Laboratories Lupin Sun Pharmaceutical Industries Torrent Pharma Building materials Grasim The Ramco Cements Shree Cement UltraTech Cement Discretionary consumption Century Plyboards (India) Cox and Kings Inox Leisure Info Edge (India) KDDL KKCL Orbit Exports Raymond Relaxo Footwear Speciality Restaurants Thomas Cook India Wonderla Holidays Zee Entertainment Diversified / Miscellaneous Aditya Birla Nuvo Bajaj Holdings Bharti Airtel Bharat Electronics Gateway Distriparks Max India PI Industries Ratnamani Metals and Tubes Supreme Industries United Phosphorus To know more about our products and services click here. Disclaimer This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on a reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees ( SHAREKHAN and affiliates ) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as he deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of SHAREKHAN may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licencing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Either SHAREKHAN or its affiliates or its directors or employees/representatives/clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. The analyst certifies that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. Further, no part of the analyst s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Sharekhan 10 December 30, 2015 Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do s and Dont s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Please refer disclaimer for Terms of Use. Compliance Officer: Ms. Namita Amod Godbole; Tel: ; compliance@sharekhan.com Contact: myaccount@sharekhan.com