HDFC Sec has initiated coverage on Welspun Gujarat Stahl Rohren – WGSRL with a Long Term BUY rating. The fundamentals of the company remain unchanged post Q1FY09 results with minor cut in plate production for FY09E and FY10E which will be partly compensated by volumes in the higher grade (API) category. WGSRL is a mere converter of of various forms of steel and not a steel producer. The pipe segment globally is of national interest in terms of its use in infrastructure development.
The company will not be impacted to the extent of its current order book position [Rs 72 bn] as its profits were locked in at the time of getting the orders. Further, the current decline in steel prices will present big opportunities going forward as projects which were put on the back burner on rising costs will become more viable in future and we expect the company to get more of these orders.
Its expansion plans in India and the US are on schedule. The company is setting up a new facility in the US of 0.3 mn tons and in India of 0.475 mn tons between FY09E and FY10E incurring a Capex of US$ 200 mn. This will enhance its capacity to 1.75 mn tons by FY10E from 1 mn tons in FY08.
Considering the current scenario of financial crisis and macro, WGSRL’s earnings have been marginally revised downwards and the company is expected to report a PAT of Rs 593 crore and Rs 926 crore for FY09 and FY10 respectively. EPS is expected to be Rs 31.5 and Rs 49.5 for FY09 and FY10. HDFC Sec has a BUY rating on the stock with a target price of Rs 592 [revised downwards from Rs 774].
Long term Investors can consider exposure to the stock.