Recommendation from Metals - Castings/Forgings Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

WELSPUN CORP LTD : PIPING UP THE PROFITS

HERE IS WHY
✓ Strong potential for global growth
✓ Largest welded pipes manufacturer
✓ Huge order from Saudi Aramco

The demand for oil and gas is increasing with time, according to International Energy Agency (IEA) in its latest World Energy Outlook 2023, which has estimated global oil demand to see a steady growth reaching 101.5 million barrels per day by 2030. Starting from 2025, a huge surge in LNG project is set to start off with the addition of 250 billion cubic metres per year liquefaction capacity by 2030. Most of these capacities will be in place between 2025 and 2027. Apart from oil and gas, there is a huge demand for water supply from one place to another within India and the rest of the world. 

The government is strongly focusing on enhancing water infrastructure in the country through various initiatives such as the ‘Jal Jeevan Mission’. The common factor among oil, gas and water is their requirement for large diameter steel pipes for supply. Considering the demand for steel pipes, the choice scrip recommendation for this issue is Welspun Corp Ltd. The company is one of the flagship companies of Welspun Group and a leading manufacturer of large diameter pipes globally, offering aone-stop solution for all line pipe-related requirements with its wide range of high-grade line pipes.

These pipes are used for offshore and onshore transmission of oil, gas and water. It is among the largest welded line pipes manufacturing companies in the world. In Q2FY24, on a consolidated basis the company’s revenue rose by 106.71 per cent YoY to ₹4,059.45 crore compared to ₹1,963.81 crore from the previous year’s same quarter. On a sequential basis, revenue remained flat and decreased marginally by 0.24 per cent. For Q2FY24 its PBIDT excluding other income increased to ₹399.52 crore from negative ₹131.23 crore in the same quarter the previous year, while it sequentially increased by 8.33 per cent. 

Net profit stood at ₹261.86 crore compared to loss of ₹76.74 crore in the previous year’s same quarter, while sequentially it increased by 45.16 per cent from ₹180.40 crore. The company’s highlights and triggers for the quarter are interesting as their sales volume of line pipe businesses in India and the US for H1FY24 rose 57 per cent YoY. The order book for line pipes in India and the US stands at 611 KMT, valued at approximately ₹8,000 crore. An associate company of Welspun Corp, EPIC in Saudi Arabia has a confirmed order book exceeding two years. 

The company is seeing huge potential from Saudi Armaco, which is the largest oil producer in the world. It has recently started the execution of Saudi Aramco’s order of SAR 1.8 billion and more orders are expected for 14 pipeline projects between 2023 and 2025. For the quarter the company has seen steady improvement in market penetration for both Sintex and TMT rebars segments. In Sintex, WST sales volume for H1FY24 rose 16 per cent YoY to 7,103 MT while TMT rebars’ sales volume for H1FY24 stood at 48 KMT. 

Both these segments herald strong business potential with various growth options at the current and new locations. The company is currently trading at a PE of 15.7 times as against the industry PE of 20.6 times and is higher than its three-year median PE of 12.6 times.Considering the company’s business and its status as one of the leading manufacturers of large diameter pipes, we recommend BUY.