Close price : Rs. 277.45 ( 06-NOV-2009)
Recommendation : BUY ( buy in Dips in small quantity)
| Market Cap | 5,167.28 | | | * EPS (TTM) | 20.10 | | | * P/E | 13.76 | | | * P/C | 10.31 |
| * Book Value | 82.67 | | | * Price/Book | 3.35 | | | Div(%) | 30.00 | | | Div Yield(%) | 0.54 |
| Market Lot | 1.00 | | | Face Value | 5.00 | | | Industry P/E | 12.40 |
The commodity cycle has again changed its direction and started looking upwards.Crude oil price in international market has crossed the $80 mark a rise of 60% in the last six months. This is likely to
trigger an increase in oil & gas exploration activities around the globe.
In addition, there are a large number oil and gas pipelines which are relatively old. For instance, more than half of the pipelines in the US
Welspun Gujarat Stahl Rohren (WGSRL), with strong accreditation among international oil majors, is one such mid-sized company which is likely to gain. Its capacity expansion, backward integration and higher order book are some of the factors that make its stock attractive for investors with a 2-3 years time horizon.
Business:
The company manufactures three kinds of welded pipes––LSAW, HSAW and ERW pipes. It has a combined annual capacity of 1.5 million tonne, out of which 60% is accounted for by HSAW pipes. Its manufacturing facilities are located on the western coast (mainly in Gujarat) and this helps it to reduce freight cost while exporting pipes to the
It also has a HSAW manufacturing facility, with a capacity of 0.35 million tonne in the
Financials:
The company’s net sales have tripled over the last four years, whereas, the net profit quadrupled during the same period. It has an annual operating margin of around 16-17%, which is higher that of its peers. Its September 2009 quarterly result is also very encouraging. Net profit more than doubled compared to same period last year.
Moreover, the company has a three-year average return on equity (RoE) of around 24%, which is the highestamong its peers. This is one of the reasons why the stock has always enjoyed a premium in terms of priceearning multiple over its peers. (Please see the table for details.) It has slightly leveraged itself to fund its expansion projects. Its debt-equity ratio is a little more than 2.5 but it generates sufficient operating cash flow to take care of the interest burden.
Growth driver:
The growth for the company will come mainly from three sources––expansion, a strong order book and improved operating margin backed by backward integration. The company is planning to expand its production capacity by around 40% within two years, taking total capacity to 2.1 million tonne. This rise in capacity appears to be timely considering the recovery in global as well as domestic demand. Its order book has swelled to Rs 10,000 crore, almost double of its FY ’09 net sales.
It indicates that the company has enough orders to execute for next 18-24 months. While the topline appears to be on a safe growth track, the company is trying its best to boost the bottomline. Its plate mill, once stabilized, is expected to boost the operating margin by at least 300-500 basis points.
Valuation:
The company reported strong financial numbers during the first half of financial year 2009-10. With increased capacity utilization, the next two quarters are expected to be even better. Its earning per share (EPS) for FY ’10 and FY ’11 are estimated to be Rs 35 and Rs 40 respectively.
At the current price level, the stock is trading at a forward price-earning multiple of 7.3 and 6.4 for FY ’10 and FY ’11 respectively. The stock, however, has always been traded at a P/E multiple of 17-25 in good times. Hence, we expect the stock to offer good returns in the next 1-2 years. Medium-term investors can include the stock in their portfolio.
SOURCE: Economic Times
Note: STOCK DREAMS blog brings for its readers the most suitable recommendations for long term investment by short listing different Recommendations given in other Sources.
Disclaimer:
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