Welspun Corporation Ltd. – BUY

Reco. Price – Rs 408

Target Price – Rs 471

Upside – 15%

Time Horizon – 12 Months

Established in 1995, Welspun Corporation Ltd. (WCL) is the main company of the Welspun Group. WCL is a prominent global manufacturer of line pipes, with a production capacity of 2.2 million metric tonnes per annum (MTPA) and a presence in 50 countries across six continents.

To expand its reach in both B2B and B2C markets, the company has diversified its product range. This includes offerings in home and advanced textiles, flooring solutions, retail, infrastructure, warehousing, DI pipes, stainless steel pipes, tubes and bars, pig iron, and TMT rebars. This diversification allows the company to serve various industries such as oil & gas, water, new energy, and infrastructure & housing.

Furthermore, WCL recently acquired Sintex-BAPL, a renowned leader in water tanks and other plastic products. This acquisition has expanded its building materials portfolio and enhanced its offerings for consumers (B2C). Additionally, the company has plans to enter the defence and commercial shipbuilding, green steel, ship breaking, and ship repair segments through the acquisition of specific assets from ABG Shipyard. Currently, WCL operates four modern manufacturing facilities in India and two overseas facilities in the USA and Saudi Arabia.

Why should you Invest in WCL?

Robust order book

The Company has a strong order book for line pipes valued at Rs 8,675 crore, with the majority expected to be executed in FY24. In India, there is a growing demand for oil and gas pipelines due to government initiatives to expand natural gas coverage and increase oil demand. WCL also has promising opportunities overseas. In the US, WCL has a 23% market share and benefits from opportunities in the Permian basin. The company plans to supply three more large gas pipelines from Permian to the Gulf coast.

In Saudi Arabia, the spending on oil and gas projects has increased by 24%, and the country is investing heavily in water desalination projects, offering additional opportunities for WCL, which holds over 25% market share. Furthermore, WCL’s associate company, EPIC, has signed a contract worth SAR 1.8 billion with Saudi Aramco for the supply of large-diameter steel pipes, securing the plant’s capacity for the next 1-1.5 years.

Focusing on other business segments and augmenting B2C offerings

The company has ventured into the Ductile Iron (DI) Pipes business, which is showing steady sales growth. It has expanded its capacity to produce pipes ranging from 80 mm to 1200 mm and has a strong order backlog of about 149 KMT valued at approximately Rs 1,195 crores. The DI Pipes market in India is expected to grow significantly, becoming a quarter of the total pipe market share, with a robust CAGR of 13-15%. This growth is driven by substantial government investments of Rs 69,684 crores in water infrastructure projects, creating opportunities for the company.

In the building materials segment, the acquisition of Sintex with its extensive network of 900 distributors and 13,000 retailers allows the company to tap into the Water Storage Tanks (WST) market, which is projected to grow at a CAGR of 19% from 2022 to 2026. Additionally, the company plans to expand into related categories like pipe fittings and adhesives, aiming to regain a market share of 23-25%, up from its current 9% level. Furthermore, the company is enhancing its offerings in the TMT bar segment with the Welspun Shield brand, which is gaining strong traction in Gujarat. These strategic moves position the company for growth and diversification in various segments.

Valuation and Outlook

Favourable trends in the Indian, US, and Saudi Arabian markets, along with WCL’s strong market presence, position the company well to capitalise on opportunities. The business also has a positive export outlook, focusing on markets such as Australia, Europe, Southeast Asia, and the Middle East. WCL is set to benefit from future demand related to new energy initiatives, including hydrogen hubs, carbon capture, and ammonia pipeline projects in the US. Welspun Specialty Steels Ltd. (WSSL) has turned around its performance, aided by government efforts to curb cheaper imports, increased demand in Europe, and improvements in its value chain. The development of S30432 grade steel and boiler tubes in India further supports the company’s growth.

Additionally, WCL anticipates monetizing ABG Shipyard assets by year-end, providing further upside potential. For FY24, the company expects significant financial improvement, with a 50% increase in revenue to Rs. 15,000 crores, a 90% rise in EBITDA to Rs. 1,500 crores, and an improved ROCE of 16% compared to 7% in FY23. WCL aims to reduce its gross debt to Rs. 1,211 crores from Rs. 3,316 crores in FY23. We value the company with a FY25E P/E multiple of 13x, setting a target price of Rs. 471, representing a 15% upside from the current market price, with a 12-month investment horizon.