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Should You Invest in Welspun Corp?

Editor, TRANSFIN
Nov 11, 2021 9:14 AM 4 min read
Editorial

Welspun Corp Ltd (NSE: WELCORP) is the parent company of the $2.7bn Welspun Group. As the second-largest manufacturer of large-diameter ‘line pipes’ globally, the company has a strong foothold across India, the Middle East and the United States.

The business sits at an interesting inflection point. Here's how: 

  1. successful deleveraging efforts, 
  2. potentially low input prices
  3. favourable tailwinds, and 
  4. a reasonable valuation.

Let's dig deeper into WELCORP to see if it is a worthy investment bet.

Company Overview

Building on rising requirements for oil, natural gas and water transportation globally, WELCORP was founded in 1995. Based out of Mumbai, the company’s operational presence spreads not just within India (Dahej and Anjar, Gujarat) but also overseas (Arkansas, USA and Damman, Saudi Arabia).

Principal products include helically-welded pipes (65% sales) and longitudinally-welded pipes (23% sales) for onshore/offshore oil, gas, and water transportation as well as high frequency electric-welded pipes (12% sales) for onshore and downstream transmission. Geographical split is diversified with almost 37% of revenues from overseas. 

Clients include most of the Fortune 100 Oil and Gas Companies starting with Transcanada, Texas Gas and Gazprom to even marquee ones like ExxonMobil, Shell, Bechtel, British Petroleum, Chevron and Saudi Aramco.

Policy Push and Broader Macro Tailwinds Providing Support

India is presently the third largest oil-consuming economy behind US and China. India’s share of global oil demand is expected to jump from 5% to 10% by FY 2045, effectively growing at 4% annually. The global oil and gas pipeline market is expected to grow by 6% CAGR during FY 2021-26.

Demand outlook appears favorable with the Government planning to invest over 7,500bn ($101bn) in oil and gas infrastructure, with authorisation for a 33,764 km natural gas pipeline network in place from March 2021. Policies like the Jal Jeevan Mission with a capital outlay of ₹3,600bn ($48.5bn) are expected to further support growth. Gas demand is also expected to pick up as PNGRB estimates a requirement of 174,000 inch-km pipelines, of which only 75,224 inch-km has been laid out as of September 2020.

 

Company Financials

Revenue/EBITDA saw a CAGR of 18%/20% during FY 2017-20 (pre-COVID) helping the company deliver a lofty 15.4% ROCE and 10.9% ROE (L4Y average). While FY 2021 revenue fell by 35.3%, EBITDA margin has increased by c. 3% on account of changing product mix towards higher margins and cost optimisation.

Leverage is fairly accommodative with debt-to-total assets of 0.1x and debt-to-equity of 0.2x resulting in 11.8x interest coverage as at FY21, up from 2.5x as at FY19. Cash Flow generation looks strong with FCFF of ₹639cr ($86.1m) as at FY21. Revenue for Q2 FY22 stood at ₹1,306cr ($176m), increasing by 1% on a q-o-q basis and 13% on a y-o-y basis.

The stock remains a  strong performer with a not-too-expensive valuation (7.8x P/E and 4.5x EV/EBITDA on FY23F). Close comparables include Ratnamani Metals (NSE: RATNAMANI) which trades at 21.9x P/E and 15.5x EV/EBITDA and Jindal Saw (NSE: JINDALSAW) which trades at 4.8x P/E and 2.1x EV/EBITDA on FY23F but with much lower ROE/ROCE.

The order book appears strong at 492 MT/₹4,700cr ($633.4m), after considering execution up to August 2021.

Pic: Balkrishan Goenka, Chairman of WELCORP

 

Our Assessment

An interesting business node for the company lies in its backward integration of products - from pipes to steel plates (which are needed to make pipes). This happened somewhere around 2008. The aim was to give the company a tighter control over costs and flexibility to ship orders.  

In fact, more integration is in the pipeline (pun intended!) with Chairman Balkrishna Goenka's plans to reassign “Welspun Steel” into a position of assisting WELCORP by providing the steel the latter needs to make plates (through a ₹363cr ($49m) acquisition). 

The thrust on localisation of steel products coupled with a shift towards Hydrogen and Carbon capture pipelines due to renewable substitution presents significant LT opportunities and a hedge against excessive exposure to traditional oil and gas demand.

Speaking of steel, being the raw material in the pipe-making business, steel prices remain crucial to enabling the business of WELCORP. Hitting ₹65,000 ($876)/MT levels thus resulting in slim margins in FY21, steel prices are now expected to moderate thus potentially enabling margin expansion.

A global foothold, a strong balance sheet and low debt make WELCORP ideally-positioned to capitalise on cheaper inputs and an increase in oil and gas demand. However, this is a cyclical business and its dependency on macro tailwinds and commodity prices will remain potential risk factors to be considered and watched closely.