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Welspun Gujarat diversifies into EPC with MSK Projects

March 19, 2010

Welspun Gujarat, India’s leading pipe manufacturing company has announced the acquisition of MSK Projects (MSKP IN, not rated) – a construction company – for a consideration of INR8bn (75% stake). Synergies from this acquisition may include – diversification into the infrastructure sector, enhancing Welspun’s ability to provide its customers with end-to-end solutions to plate-pipe-pipeline laying; and MSK Projects through Welpsun’s balance sheet support likely to bid for large infrastructure projects specifically into the road sector. MSK’s current order book of INR5bn constitutes 40% road projects.

Here is the take from various brokerages on Welspun Gujarat’s Diversification move. Kotak analysts said there will be few orders where pipe laying and manufacturing will be bundled and would like to assess how a manufacturing company executes in a ‘projects’ business. We maintain our REDUCE rating and target price of Rs245. EPS is likely to be flat at Rs 25 for FY 11.

HSBC is OVERWEIGHT as the company has a strong order book – the largest among peers – and a sound customer base with committed capex plans; and given the rise in crude prices, which has improved the new order book outlook. Based on target PE of 13.5x and September 2011e earnings, we arrive at target price of INR335.

Anand Rathi is the Welspun bull with a BUY rating and a target price of Rs 395 with EPS expectations of Rs 26 and Rs 33 for FY 10 and FY 11 respectively.

Macquarie analyst says that WGS is trading at a 40% discount to the global peer FY11E PER. Our target price of Rs360 implies a FY3/11E PER of 14x, which is a 20% discount to global peers, despite better earnings growth prospects.

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