April 15, 2019 Pick of the Week Welspun Corp Limited Analyst: Jatin Damania (Email: [email protected]; Contact: +91 22 6218 6440) CMP (Rs) Target Price (Rs) Potential Upside (%) 52 Week H/L (Rs) Mkt Cap (Rs mn) 136.20161 18.21% 187 / 87 36124 Key Highlights: Welspun Corp (WCL) is a leading global manufacturer of large diameter pipes with an installed capacity of 2.4 Mn tonnes. Given its presence in USA, Saudi Arabia and India, we believe that, the company is better placed compared to its peers in terms of tapping the global market opportunity of over US$400 bn. The company has entered into agreement to divest its Plate and Coil Mill Division (PCMD) and its 43 MW Power Division at a consideration of Rs9.4bn. The transaction is likely to complete by end of Dec’19. Post the completion of the transaction, balance sheet will strengthen and it will improve profitability & RoCE, as PCMD contribution to EBITDA was nil. The Company has received additional pipe orders of 180 KT, of these 136 KT will be serviced from India, with a major portion to be executed from the new facility in Madhya Pradesh and balance mainly from Americas. After considering the above additions and the execution, the WCL order book at the start of financial year stands at 1.66 M, valued at Rs141 bn to be executed over the next 15-18 months, thereby providing strong revenue visibility. We expect WCL to register growth of ~11% CAGR in revenue during the FY18-FY21E period. The overseas order book not only provides good revenue visibility, but also comes with the stronger margin compared to the domestic market, as number of qualified bidders are less. In addition, increasing demand of spiral pipes in US due to increase in shale gas production and the country’s focus on reducing imports of pipes augurs well of local manufacturers. We have a BUY rating and target price of Rs.161, valuing the stock at 4.5x FY21 EV/EBITDA. There is upside risk to our target price due to the potential divestment of its Plate & Coil Mill division. Key Risks Steel price volatility can impact performance and Low crude price can defer investments in oil and gas industry. Financials (Rs mn)* FY18 FY19E FY20E Price Performance (3 Years) Sales 75,873 99,068 101,566 200 Welspun Corp Limited Growth (%) 25.7 30.6 2.5 Nifty EBITDA 6,834 6,787 93,098 150 EBITDA margin (%) 9.0 6.9 91.7 PBT 2,501 3,468 4,076 100 Net profit 1,530 1,835 3,257 Adjusted EPS (Rs) 5.8 6.9 12.3 50 Growth (%) 1,412.4 20.0 77.5 P/E (x) 23.5 19.7 11.1 Jul-16 Jul-17 Jul-18 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 BV (Rs/share) 107.6 114.0 125.8 Jan-17 Jan-18 Jan-19 ROE (%) 5.4 6.0 9.7 Source: Bloomberg ROCE (%) 6.7 7.1 10.0 Net Debt (Rs Mn) 6,568 5,367 3,512 Share Holding Pattern (%) Others Source: Kotak Securities - Private Client Research; *Consolidated 36.3% Financials (Rs mn)* 9M-FY18 9M-FY19 % Chg Promoter Revenues 59,284 70,359 18.7 48.8% EBITDA 5,365 4,931 (8.1) EBITDA Margin (%) 9.0% 7.0% DII PAT 1,628 1,345 (17.4) 8.7% FII PAT Margin (%) 2.7% 1.9% 6.3% EPS (Rs) 6.2 5.1 (17.4) Source: Kotak Securities - Private Client Research; *Consolidated Source: Bloomberg This one pager on the company is extracted from last Kotak Securities – Private Client Research update dated 28 March 2019 and from the company press release dated 31 Mach 2019 and 10 April 2019 and it does not contain events beyond that date. Above company recommendation is of Kotak Securities – Private Client Research. Detailed rating scale and disclaimer is provided at the end of this report. It is advisable to read the last report of Kotak Securities – Private Client Research before taking any investment decision on the above company recommendation. RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ADD – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. FUNDAMENTAL RESEARCH TEAM Rusmik Oza Arun Agarwal Amit Agarwal Cyndrella Carvalho Ledo Padinjarathala, CFA Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6426 +91 22 6218 7021 Sanjeev Zarbade Ruchir Khare Jatin Damania Krishna Nain K. Kathirvelu Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap M&A, Corporate actions Support Executive [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 7907 +91 22 6218 6427 Teena Virmani Sumit Pokharna Pankaj Kumar Deval Shah Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap Research Associate [email protected] [email protected] [email protected] [email protected] +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 6423 TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale Faisal Shaikh, FRM, CFTe Siddhesh Jain [email protected] [email protected] Research Associate Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] [email protected] +91 22 62185499 +91 22 62185498 DERIVATIVES RESEARCH TEAM Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810 Disclosure/Disclaimer Following analyst: Jatin Damania of Kotak Securities – Private Client Research hereby certify that all of the views expressed in this report accurately reflect their personal views about the subject company or companies and its or their securities. He also certify that no part of their compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house. Kotak Securities Limited is a corporate trading and clearing member of BSE Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE), National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management. 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