Description
This document about the equity research report of Welspun India.
BULLS OF BAGHDAD
EQUITY RESEARCH ON WELSPUN GUJARAT STAHL ROHREN LTD.
ANKIT GUPTA [email protected] +919860912037
ARPIT MITTAL [email protected] +919011021016 SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT, Pune
10/6/2008
Executive Summary
Company: Welspun Gujarat Stahl Rohren Ltd CMP (as on September 1st 2008):
Valuation Method DCF P/E ratio P/BV ratio Target Price
Rs. 323.9
Share value 385.63 290.22 353.26
Weigtage 70% 15% 15%
366.46
Target Price: Rs. 366.46 Recommendation: BUY Brief of Analysis:
We started with EIC (Economy – Industry – Company) Model for Fundamental Analysis. As it is an Indian company, we have not analyzed Indian Economy. We have analyzed steel pipes industry in detail and growth drivers of the company are identified as a part of Fundamental Analysis. In Technical Analysis we have made use of Moving Averages, RSI, MFI, Bollinger Bands and Candle graphs to predict direction of stock price movement in short-term. Valuation is done by using both DCF method and Relative valuation technique using P/E and P/BV. In Financial Modeling, Ratio Analysis is done and Revenue Model is developed. Finally, Competitor Analysis is done to understand the positioning of the company in the Industry.
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Table of Contents
I. Fundamental and Technical Analysis ................................................................................ 4 Industry Analysis: Steel Pipe Industry in India ..................................................................... 4 Company Analysis: Growth Drivers ...................................................................................... 8 1. 2. 3. 4. 5. Strong Order Book................................................................................................... 9 Backward Integration .............................................................................................. 9 Capacity Additions and Better Capacity Utilization ............................................... 9 HSAW plant in USA ............................................................................................... 9 International Accreditations and Niche Customer Base .......................................... 9
Technical Analysis ............................................................................................................... 10 Candle Graph: Hammer Pattern ....................................................................................... 10 Relative Strength Index (RSI) .......................................................................................... 10 Money Flow Index (MFI) ................................................................................................ 11 Bollinger Bands ............................................................................................................... 12 II. Valuation Models and Theory of Research ..................................................................... 14 DCF Valuation ..................................................................................................................... 14 Beta .................................................................................................................................. 14 WACC.............................................................................................................................. 15 Reinvestment and Growth Rate ....................................................................................... 16 Inputs for Valuation ......................................................................................................... 17 Estimates .......................................................................................................................... 17 Fair Value......................................................................................................................... 18 Scenario Analysis............................................................................................................. 18 Relative Valuation ............................................................................................................... 18 Valuation Summary – Target Price...................................................................................... 19 III. Financial Models ........................................................................................................... 20 Balance Sheet and P&L Analysis ........................................................................................ 20 Quarterly Analysis ............................................................................................................... 21 Ratio Analysis ...................................................................................................................... 22 Revenue Model .................................................................................................................... 23 IV. V. Competitor Analysis ..................................................................................................... 25 Miscellaneous Factors ...................................................................................................... 27 Forex Management .............................................................................................................. 27 Forward and Options Contracts (in millions) .................................................................. 27 Bibliography ............................................................................................................................ 29
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I.
Fundamental and Technical Analysis
Industry Analysis: Steel Pipe Industry in India
Pipe of all types and sizes is critical in building, construction, chemical, energy, and other industrial applications. The pipe industry is expected to experience considerable change and varying growth rates in these uncertain economic times. The global export market of the steel pipes is stated to be close to $27 billion a year with the US, Western Europe, Australia, and Japan being the biggest importers. India is one of the major exporting nations including Indonesia, Malaysia and Thailand. The building & construction industries along with the oil & gas sector are the major marketplaces for pipe. Pipe demand is dependent on exploration & finds apart from replacement demand of existing. Globally Oil & Gas exploration and production capital expenditure has a very strong correlation with crude oil prices. Since crude oil prices have recently touched record highs, E&P activity is expected to pick up further momentum in coming years. The fact is substantiated by steady rise in rig counts globally. Globally, more than 500 projects have already been announced, to be executed over next 5 years, covering an additional 250,000 kms. This may require approximately 65 million tones of different grades of pipes. Also in India GAIL, Reliance, GSPL, Cairn and others are expected to lay pipelines covering nearly 6400 kms over the next 3-4 years.
Rising Crude Oil Prices
Increasing Exploration & Prodcution Activities
Increasing Number of Refineries
Increased Crude & Petroleum Products Supply
Increased Need for Transporting Petroleum Products
Increased Demand for Pipeline Transport
Pipe transportation is an economical mode of transport compared to traditional modes of rail, road and sea transport. This mode of transportations also helps in saving scarce natural 4|Page
energy resources and time taken for transportation. However, pipe networks need to be guarded from any kind of damage. Despite the above advantages, India with its large geographical area has very low pipe penetration levels at 32% compared to global average of 79% in oil and gas transport. The pipeline network of India for oil and gas transport stood at 13,517 kms as on April 06. Sanitation levels are also lower at 33% compared to 91% in Sri Lanka and 100% in France. Of 140 mn hectares of cultivable land, only 40% land is irrigated.
The lower penetration levels offer a huge scope for Indian pipe companies. Pipes can be broadly classified into – Steel Pipes – SAW Pipes (HSAW, LSAW, and DSAW); Seamless Pipes & ERW pipes (as shown in the figure below). Cement Pipes – RCC Pipes, Pre-stressed Concrete Pipes and Pre-stressed Concrete Cylinder Pipes and PVC Pipes. The various types of classification are due to use of different basic raw materials and manufacturing processes. Applications of different pipes also vary as per their physical and tensile properties.
HSAW SAW LSAW Seamless ERW DVCI
Steel Coils Steel Plates Billets Steel Sheets Pig Iron
Pipes
Steel pipes are widely used and find application in critical areas of oil and gas transport, water transport, heavy industries, cold storage, etc due to their toughness and durability properties. Cement pipes are used in irrigation systems, sewage, water supply, etc. PVC pipes are widely used in irrigation and water supply systems. Consumption of pipes by oil and gas sector is 50%, construction sector is 30% and by government programs is 20%. The industry is highly fragmented with large number of players’ in cement and PVC pipes due to their less critical applications. This leads to competition and pricing pressures among the players. However, pipe companies catering to oil and gas sector and government orders 5|Page
have limited competition but need to focus on stringent quality norms. Steel pipe manufacturing players’ like Welspun Gujarat, Jindal SAW, Man Industries have gained several accreditations and certifications and have become major exporters to oil and gas companies. Exports also led to better price realizations and these players’ could pass on the hike in RM prices to their customers. With growing sales and profits, these players’ have announced capacity expansions in India and abroad. Companies like Welspun Gujarat are also integrating backward to take care of raw material availability issues. The positive trend in the pipe industry to continue in the coming years on the back of good economic growth, more oil and gas discoveries, infrastructure focus by government, booming real estate market and low penetration levels.
Indian companies with their ability to produce export quality products at competitive price coupled with location advantage are well poised to cater to the US and Middle East markets. However, concerns on raw material availability and pricing and slow down in US economy loom in the horizon.
Future Pipeline Projects No. of Projec ts North America Latin America Europe Africa Mid-East & Asia Australasia Total 153 53 91 40 215 31 583 Total Length (km) 64,433 37,166 43,326 14,274 135,036 8,451 302686 Share in Demand 21% 12% 14% 5% 45% 3% 100% Required Tonnage (mn ton) 19.5 11.3 13.1 4.3 40.9 2.6 Total Val (USD bn) 20.50 11.82 13.78 4.54 42.96 2.69 Addressable Market Size 10% 2% 2% 15% 40% 5% Addressable (USD bn) 2.05 0.24 0.28 0.68 17.18 0.13 20.56
Source: www.simdex.com
Worldwide supply for SAW pipes is estimated at 16 mn tonnes (Metal bulletin Research 2006, Company). Of companies mentioned above majority of them are catering to world’s demand for seamless pipes. Only about 65-70% of these capacities are considered as operable (Source: Industry). Japan and Korea leads the world supply for pipes controlling nearly 40% of world supply followed by European countries controlling 35%and India contributing nearly 15% to the world capacities.
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All major line-pipe manufacturing companies in America, Russia, and Europe have their order book full in respect with their capacities and new capacities are yet to come on the floor. With domestic demand in India for pipelines still being under explored and capacities already in setup, Indian companies are in a sweet spot to explore worldwide demand for Pipes. We have not considered Chinese players while finding out current world capacities because as a Chinese market had huge internal demand for pipes, thus leaving limited room for exports by Chinese companies. However with internal demand meeting up gradually and newer capacities added up in coming years we can’t rule out some competition coming from Chinese players especially in LSAW market. However we don’t expect competition to be stiff enough in short term primarily due to two reasons namely, Accreditations procedure are long drawn which will take Chinese players’ time to penetrate into them posing threat to world market and Chinese government has been imposing additional duties on export of such pipes which discourages exports of the same.
Target markets for Indian firms: Most prominent players like Sumitomo, Nippon Steel, Hyundai Pipe co, Ippsco, IIIva, and Corus are fully integrated players. Pipe manufacturing for such companies is secondary operations. Whereas, for Indian companies are dedicatedly pipe manufacturing companies and two Indian companies are included in top 20 global companies. Indian companies have well timed capacities lined up ahead of anticipation of robust global demand. Europe and Russia satisfy their demand for pipes internally due to strong presence of domestic players and feasible imports from Japan, so no major export opportunity is expected for Indian Players. USA presents a huge opportunity for Indian players, with many Indian players (WGSRL, Man Industries, PSL Ltd.) setting up their plants in the Eastern region of America as it is cost effective to set up facilities there rather than exporting pipes to United States. Middle East virtually has no facilities for manufacturing of pipes, where India having a proximity advantage can easily cater to Middle East markets.
Domestic Scenario: India has traditionally been net importer of all source of energy (Source: KPMG) .To meet its energy security Government has continuously been encouraging investment in various energy sectors To meet its Oil and Gas requirement India has been trying various supply mix. India has been importing Oil and Gas in considerable quantity predominantly from Middle East countries. Increasing investments in these sectors has led to exploration of Domestic reserves for Oil and Gas. Only 30% of India’s Oil and Gas transportation is through pipelines as compared to 60% in U.S.A, which means there is great 7|Page
potential for pipelines to be used domestically. Growing supply for Oil and Gas domestically (by way of exploring new reserves) as well as through imports, impetus a strong need for Pipeline Infrastructure to be set upped in India. A total pipeline under construction for transporting crude oil is around 1846 km; such pipelines are expected to get completed by 2008-09 (Source: CRISIL Infac). New pipelines of 2718 km are proposed for construction for meeting country’s growing demand for Crude Oil. With average realizations of US$ 1050 per tonne and average consumption of 303.5 tonne per km stimulates a demand of US$ 0.87 bn for SAW pipes used in transporting crude oil for next five years. Government of India has also considered various pipelines for transporting gas from the KG basin, biggest of all being IPI pipeline that is expected stretched for 2800km. Other pipelines, which are under consideration, are TAPI and MBI. If such pipeline construction decision gets matured, it would incept a demand for construction of 5625km of SAW pipes .i.e. for 1.71 mn tonnes of pipe. India needs total 17,205 kms of pipeline transport for transporting Natural Gas and Crude Oil within the country. Besides such pipelines India is also considering 5625 km of transnational pipelines to cater to the burgeoning demand for Natural Gas. This need for pipeline infrastructure creates a total domestic demand for SAW pipes for 7 Mn kms i.e. $7.8 bn (With transnational pipelines) and 5 Mn Kms i.e. $5.5 bn (without transnational pipelines)
Company Analysis: Growth Drivers
Welspun Gujarat Stahl Rohren Ltd is a part of USD 1 billion Welspun Group. The company started manufacturing pipes in 1995 and since then it has supplied pipes for major projects all around the world including the World’s deepest pipeline project in the Gulf of Mexico, USA. Its manufacturing plants are located in Dahej and Anjar in Gujarat and it employs world class hybrid JCO technology. The company has the required accreditations from leading International companies and is well placed to meet the growing demand, stringent requirements and standards of high quality pipes.
The company is a good pick for investments with strong fundamentals. Although market is undergoing a bearish phase, WGSRL is driven by strong fundamentals which have the potential to drive its valuation in upward direction.
The major growth drivers of the company can be summarized as follows:
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1. Strong Order Book According to the Annual Report, Company has the order book of Rs. 5.3 billion, most of which are to be executed in next two years. Company has also bided for USD 4 billion worth of orders. Such a huge order book gives the earning sustainability and certain profitability to the company for coming years. 2. Backward Integration WGSRL is setting up a 1.5 million tonne plate cum coil mill at Anjar, Gujarat which will be fully operational from FY09. This backward integration by producing the input materials needed for pipes manufacturing will increase EBITDA margins for the company. EBITDA margins are expected to increase from 12.6% in FY07 to 16.7% in FY08 toaround 17.5% from FY09 onwards. 3. Capacity Additions and Better Capacity Utilization To cater the huge demand of pipes worldwide, WGSRL is expending HSAW capacity by 0.15 million tonnes and LSAW capacities by 0.3 million tones which are expected to come in phases from in FY09-10. The capacity additions along with better capacity utilization from 50% in FY06-07 to 65% in FY08-09 which is expected to rise further gives company sufficient production to cater to global demand. 4. HSAW plant in USA Even after the financial meltdown, USA has substantial demand of pipes for laying its Oil and Gas transportation infrastructure. To cater the growing demand in USA, WGSRL is setting up a 0.3 million tonnes HSAW plant in USA which will be fully operational by FY09. Company will not have to incur transportation cost which will further add to its profitability. 5. International Accreditations and Niche Customer Base A major hurdle in pipe manufacturing industry is Accreditations from major Oil and Gas companies. Over the years WGSRL has gathered 44 accreditations from major International Oil and Gas companies. Besides these accreditations, approvals from companies like British Petroleum, Chevron and Saudi Aramco helps WGSRL gaining advantage over its competitors.
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Technical Analysis
Candle Graph: Hammer Pattern We can clearly see a hammer pattern developing on the candle chart which is evident from a sharp decline towards the end and a small up-close with a large range on the last day. This hammer pattern is a bullish indicator if it occurs after a persistent decline in the stock over the last few days this indicates a reversal in the downtrend.
600 500 400 300 200 100 0 1 12 23 34 45 56 67 78 89 100
Relative Strength Index (RSI)
The RSI is a comparison between the days that a stock finishes up against the days it finishes down. This indicator is a big tool in momentum trading. The chart
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The figure shows last 3- year RSI, we can clearly see that the stock has traded just 3 times below 20 in the last 3 years. The current RSI is close to 20, which strongly indicates that the stock is currently oversold and one should consider buying it for a 20 -30% appreciation in the short term.
Money Flow Index (MFI) The chart below is 3- year money flow index for the scrip. We can see the same pattern emerging here also when MFI is at historically low level and very close to 20 which is considered to be a level where the scrip becomes oversold in a bear market. Thus MFI also suggest that the stock can be bought to make a quick return in the short term.
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Bollinger Bands The chart below shows 1-year and 3 –year Bollinger bands. Here we can clearly see that the price indicated by the purple line is very close to the lower band as indicated by the green line, which is an indication that the stock is in an oversold position and one can go long on the stock.
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600 560 520 480 440 400 360 320 280 240 200 160 120 80 40 0
20 days MA Upper Band Lower Band Price
600 560 520 480 440 400 360 320 280 240 200 160 120 80 40 0
20 days MA
Upper Band
Lower Band
Price
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II.
Valuation Models and Theory of Research
DCF Valuation
1. The Method used for Valuation is DCF as suggested by Damodaran in his book "Damodaran on Valuation"
2. Beta is calculated by regressing return on WGSRL with return on BSE SENSEX for last 3 years as business mix and risk perception of firm has not changed for the last three years Beta
Beta 1 yr 2 yr 3 yr 1.06 1.01 0.92
Adj Beta 1.04 1.01 0.95
Source: Refer excel sheet
3. Beta is first unlevered using average D/E ratio for last 3 years to remove historical effect of financial leverage and then levered using current D/E ratio to introduce the effect of current financial leverage
4. Risk free rate is taken as 7.68% which is the yield of 91-day T-bill issued by Govt. of India on September 24th 2008
5. Market Premium is taken as 8.50% from the spreadsheet provided by Damodaran on his site. It is same as suggested in IIM Ahmadabad WP “A First Cut Estimate of the Equity Risk Premium in India”
6. Cost of Equity is calculated by applying CAPM model
7. Cost of debt is calculated by dividing total financial expenses by total loan amount in the last year which comes out to be 9.26%. We have also calculated Cost of debt by using Synthetic Rating method which comes out to be 9.38%.
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8. Tax rate is taken as 33.99% which is the marginal tax rate for Indian Companies
9. Market value of debt and equity is taken from Bloomberg to calculate weights of debt and equity
10. For stable period, D/E ratio of industry is taken from Bloomberg to leverage the unlevered beta and CAPM is used to calculate cost of equity
11. Cost of debt is assumed to be 9% for stable period which is lower than current cost of debt as D/E is expected to reduce in stable period giving higher credit rating to firm
12. Weight of equity is assumed to be 55% which is more than current weight of equity because D/E ratio is expected to reduce in stable growth period
WACC
Cost of Equity Risk free rate (Rf) BETA Current Beta Unlevered Beta Levered Beta Debt Equity Ratio 2008 2007 2006 Average for 3 years 2.342 1.622 1.314 1.759 Marginal Tax Rate After tax cost of debt Industry D/E ratio 1.65 MV of equity MV of debt We Wd Cost of capital Cost of debt 0.949 0.439 1.118 Risk premium (Rm-Rf) Levered beta Cost of equity (Ke) Cost of Debt Interest charges Total loan
High Growth 7.68% 8.50% 1.118 17.18%
Stable growth
0.917 15.48%
708.06 7649.83 9.26% 33.99% 6.11% 25876.05 14346.23 64.33% 35.67% 13.23% 55.00% 45.00% 11.18% 5.94% 9.00%
Source: Refer excel sheet
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13. Reinvested rate and Return on Capital (ROC) for the company is normalized by taking arithmetic mean for last 6 years which roughly represents the start of business cycle for the company
14. Company is investing highly in capacity expansion and has large Cap WIP, therefore it is assumed that company will grow at around 45% (arrived at by multiplying reinvestment rate and ROC) for the next 5 years with reinvestment rate of 261%
15. It is expected that company will not be able to sustain such high growth rates and reinvestment for a long time and hence growth will moderate to 16% and reinvestment rate to 110% for next 10 years
16. No company can grow at a rate more than that of economy forever and hence it is assumed that the company will grow at 5.5% forever after moderate growth period
17. For stable period it is assumed that ROC will be almost equal to WACC and reinvestment rate is calculated accordingly Reinvestment and Growth Rate
Reinvestment 2000 2001 2002 2003 2004 2005 2006 2007 2008
Change in net block Change in capital WIP
-11.07 2539.18 133.35 -2455
162.33 -18.46
-158.95 38.35
-121.77 -11.87
1313.62 2515.46
744.34
12722.54 -4963.99
1263.65 2246.03 5591.14
Change in non cash CA Change in non cash CL Change in non cash WC
246.3 216.13 30.17
662.12 335.58 326.54
-109.16 -186.15 76.99
22.97 60.22 -37.25
941.46 1014.6 -73.14
4838.71 2488.29 3174.19 6110.33 1371.86 1402.01 -1271.62 1116.43 1772.18
10689.27 6832.86 3856.41
Total reinvestment
152.45
410.72
220.86
-157.85
-206.78
1305.65 5877.92 8107.66
11614.96
EBIT EBIT EBIT(1-t) AM of reinvestment rate (Last 6 years) Reinvestment rate Avg ROC (Last 6 years) ROC Growth Rate 1.38% 9.33% 10.97% 9.07% 502.72% 183.03% 76.79% 45.94 339.94 435.73 375.5 1387.42 260.73% -63.68% -22.58% 18.21% 34.66% 47.49% 13.32% 13.35% 16.70% 280.68% 673.37% 423.66% 704.69 1322.39 2899.14 872.91 1913.72 30.32499 224.394 287.6254 247.86755 915.8359 465.1659
TTM 6447.00 4255.66 272.93%
22.19%
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Inputs for Valuation
Inputs High growth Moderate growth period period Stable growth period
Reinvestment rate Return on capital Expected growth rate Beta D/E ratio Cost of capital Cost of equity After tax Cost of debt Tax rate
260.73% 18.21% 47.49% 1.12 2.34 13.23% 17.18% 6.11% 33.99%
109.95% 14.70% 16.16% 1.02 2.00 12.21% 16.33% 6.03% 33.99%
49.17% 11.18% 5.50% 0.92 1.65 11.18% 15.48% 5.94% 33.99%
Source: Refer excel sheet
18. Present value of FCFF (Free Cash Flow to Firm) is calculated for each year and added to get value of the firm Estimates
Growth Phase Year EBIT(1-t) Reinvestment FCFF Present value
TTM 2009 First stage of high growth = 47% 2010 2011 2012 2013 2014 2015 2016 2017 Moderate growth period = 16% 2018 2019 2020 2021 2022 2023 Stable growth period 2024 onwards
0
4255.66
11095.81486 -6840.15
-6840.15
1 6276.517 2 9256.994 3 13652.79 4 20135.97 5 29697.77 6 34497.19 7 40072.24 8 46548.27 9 54070.88 10 62809.21 11 72959.72 12 84750.66 13 14 98447.1 114357
16364.79241 -10088.3 -8909.428 24135.80562 -14878.8 -11604.7
35596.97541 -21944.2 -15115.35 52500.61581 -32364.6 -19688.04 77431.1477 -47733.4 -25644.05 37928.76859 -3431.57 -1719.287 44058.39013 -3986.15 -1779.852 51178.61225 -4630.34 -1842.552 59449.5247 -5378.65 -1907.46
69057.08911 -6247.88 -1974.654 80217.32017 -7257.6 -2044.216 93181.14241 -8430.49 -2116.228 108240.032 -9792.93 -2190.777 125732.5701 -11375.6 -2267.952 146052.0558 -13213.9 -2347.846 68914.79502 71229.42 194286.8
15 132838.1 16 140144.2
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19. Value of equity is obtained by subtracting net debt from Value of the firm which is when divided by Number of shares outstanding gives fare value per share for the company Fair Value
Fair Value 385.63
Sum of PV Value of debt Value of cash Value of Equity No of shares
86294.2147 18031.00 3447.21 71710.4247 185956044
Source: Refer excel sheet
20. Scenario Analysis is done by changing terminal growth rate by 0.5% and WACC by 0.5% as follows: Scenario Analysis
Scenario Summary
Current Values 5.50% 13.23% 385.63
Scenario1 Scenario2 Scenario3 Scenario4 Scenario5 Scenario6 Scenario7 Scenario8 6.00% 13.23% 398.09 5.00% 13.23% 373.07 5.50% 13.73% 328.07 5.50% 12.73% 447.87 6.00% 13.73% 337.36 6.00% 12.73% 476.78 5.00% 13.73% 318.63 5.00% 12.73% 431.89
Changing Cells:
Terminal Growth Rate WACC
Result Cells:
Fair Vlaue
Source: Refer excel sheet
Relative Valuation
1. Ten comparable firms are chosen from the Steel Pipes and Tubes Industry 2. Mean of their P/E ratio and P/BV ratio is taken 3. EPS and Book Value of WGSRL is multiplied by average P/E and average P/BV to arrive at the fair value for the company
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Company Name Bihar Tubes Ltd. Good Luck Steel Tubes Ltd. Jindal Saw Ltd. Indian Seamless Metal Tubes (Kalyani Seamless Tubes) Ltd. Lloyds Metals & Engineers Ltd. Maharashtra Seamless Ltd. P S L Ltd. Rajasthan Tube Mfg. Co. Ltd. Suraj Stainless Ltd. Welspun-Gujarat Stahl Rohren Ltd. Valuation Mean Multiples Fair value of Welspun Gujarat Stahl Rohren Ltd
Closing Price
P/E
P/B
EPS 10.59 25.03 62.26 4.72 1.55 28.71 20.93 1.02 5.27 18.94
BV per Share 53.56 111.34 401.76 43.84 2.02 163.57 138.55 4.65 28.67 88.44
178.75 16.8791313 3.33737864 399.05 15.9428686 3.58406682 575.25 9.2394796 1.43182497 86.7 18.3686441 1.97764599 32.2 20.7741935 15.9405941 272.65 9.49669105 1.66687045 219.25 10.4753942 1.58246121 13 12.745098 2.79569892 137.45 26.0815939 4.79420998 250.55 13.2286167 2.83299412 15.32 290.22 3.99 353.26
Source: CMIE database
Valuation Summary – Target Price
We have used three Valuation methods: DCF Valuation, Relative valuation using P/E and Relative valuation using P/BV. Now depending upon our confidence on different methods, we have assigned different weights. Final Target price is arrived at by taking weighted average of the Price calculated in different methods.
Valuation Method DCF P/E ratio P/BV ratio Target Price
Share value 385.63 290.22 353.26
Weigtage 70% 15% 15%
366.46
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III.
Financial Models
Balance Sheet and P&L Analysis
First of all Balance Sheet and Profit and Loss Account is analyzed for last 10 years.
31.03.99 31.03.00 31.03.01 31.03.02 31.03.03 31.03.04 31.03.05 31.03.06 31.03.07 31.03.08
BALANCE SHEET Sources of Funds Shareholders' Funds Share Capital Reserves and Surplus Share Application Money Loan Funds Secured Loans Unsecured Loans Deferred Tax Liabilities Total Application of Funds Fixed Assets Gross Block Less: Depriciation Net Block Capital Work in Progrees Investments Current Assets, Loans & Advances Income Accrued on investments Inventories Sundry Debtors Cash and Bank Balances Loans & Advances Less: Current Liabilities & Provisions Current Liabilities Provisions Net Current Assets Miscellaneous Expenditure Total
1203.12 0 1203.12
1205.61 0 1205.61
1206.32 4.61 1210.93
1392.7 0.95 1393.65
1407.29 16.42 1423.71
1413.56 743.76 2157.32
756.4 2172.09 2928.49
865.27 4082.56 4947.83 68.45 3933.28 4093.69 8026.97 700.92 13744.17
699.1 5767.74 6466.84 68.45 11635.08 3511.15 15146.23 793.95 22475.47
888.77 14005.9 14894.67 886.9 17924.55 106.45 18031 1737.88 35550.45
1909.75 112.99 2022.74 0 3225.86
2134.84 84.68 2219.52 0 3425.13
2563.64 87.29 2650.93 0 3861.86
2662.53 27.25 2689.78 32.01 4115.44
2717.84 55.88 2773.72 26.1 4223.53
1595.63 56.5 1652.13 376.38 4185.83
2040.41 1806.33 3846.74 538.53 7313.76
308.41 56.9 251.51 2426.46 2677.97 16.64 0 157.46 170.52 71.52 302.54 702.04 233.84 0 233.84 468.2 63.02 3225.83
312.94 72.5 240.44 2559.81 2800.25 22.99 0 214.78 359.59 113.76 302.45 990.58 449.97 0 449.97 540.61 61.24 3425.09
2973.58 193.96 2779.62 104.81 2884.43 50 0 385.71 891.94 120.49 261.29 1659.43 785.55 0 785.55 873.88 53.54 3861.85
3287.08 345.13 2941.95 86.35 3028.3 84.1 0.18 499.85 680.71 124.91 249.22 1554.87 599.4 0 599.4 955.47 47.64 4115.51
3295.98 512.98 2783 124.7 2907.7 84.1 0.18 455.68 648.25 396.73 348.82 1849.66 659.62 0 659.62 1190.04 41.74 4223.58
3348.39 687.16 2661.23 112.83 2774.06 84.1 0.18 909.88 1115.77 607.5 368.56 3001.89 1615.05 59.17 1674.22 1327.67 0 4185.83
5032.68 1057.83 3974.85 1376.48 5351.33 52.89 0.18 3756.77 2623.3 2460.99 852.85 9694.09 7649.78 134.77 7784.55 1909.54 0 7313.76
7892.7 1402.39 6490.31 3622.51 10112.82 0.01 0 5428.87 3069.75 3066.55 1222.59 12787.76 9031.02 125.39 9156.41 3631.35 0 13744.18
9111.91 1877.26 7234.65 9213.65 16448.3 256.29 0 5135.15 5849.38 3433.9 1910.87 16329.3 10089.78 468.64 10558.42 5770.88 0 22475.47
22324.85 2367.66 19957.19 4249.66 24206.85 3905.68 37.91 12878.35 7259.11 1207.71 3447.21 24830.29 16714.27 677.01 17391.28 7439.01 0 35551.54
Source: Annual Report
Profit and Loss Account is made for TTM (Trailing Twelve Months) by adding last 4 quarterly results to arrive at latest valuation which is more accurate.
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PROFIT & LOSS ACCOUNT Income Sales & Services (Gross) Less: Excise duty Sales & Services (Net) Other Income Increase/(decrease) in stocks Total Expenditure Cost of Goods Mfg and other expenses EBITDA Depreciation EBIT Financial expenses(net) Profit before tax & Exceptional Items Exceptional Items Profit Before Tax Provision for taxation Current tax Earlier years Deferred tax Fringe benefit tax Profit after tax Balance Brought Forward Profit available for appropriation Appropriations: General Reserves Debenture redemption reserve Proposed dividend on equity shares Tax on proposed dividend Dividend on equity shares for earlier periods Tax on dividend Balance carried to BS Earnings Per Share Basic Diluted Weighted Avg no of shares EPS - Basic Diluted
31.03.99
31.03.00
31.03.01
31.03.02
31.03.03
31.03.04
31.03.05
31.03.06
31.03.07
31.03.08
TTM
414.3 47.25 367.05 0.69 60.28 428.02
575.65 71.68 503.97 2.26 22.79 529.02
2562.97 306.45 2256.52 0.81 8.76 2266.09
2849.45 167.32 2682.13 4.66 157.5 2844.29
3971.01 129.86 3841.15 20.76 -205.44 3656.47
8690.46 413.83 8276.63 198.41 -16.11 8458.93
10904.67 519.79 10384.88 262.08 171.46 10818.42
19117.65 819.99 18297.66 19.11 0 18316.77
28522.98 1738.16 26784.82 42.73 0 26827.55
41730.49 1625.95 40104.54 186.44 0 40290.98
44663 1844 42819 216 2752 45787
349.52 44.63 33.87 35.22 -1.35 36.79 -38.14 0 -38.14 0 53.11 0 0 14.97 -21.04 -6.07 0 0 0 0 0 0 -6.07
397.51 70.76 60.75 14.81 45.94 42.72 3.22 0 3.22 0 -0.41
1575.68 229.16 461.25 121.31 339.94 331.18 8.76 0 8.76 -0.77 -0.07
1733.19 523.85 587.25 151.52 435.73 404.87 30.86 0 30.86 -2.5 -21.06
2387.86 723.09 545.52 170.02 375.5 365.15 10.35 0 10.35 -0.8 5.92 15.47 0.95 16.42 0 0 0 0 0 0 16.42
5924.77 963.57 1570.59 183.17 1387.42 230.03 1157.39 -35.85 1121.54 -51.5 0.01 -350.28 0 719.77 16.42 736.19 0 0 0 0 0 0 736.19
8244.87 1627.89 945.66 240.97 704.69 203.39 501.3 0 501.3 -45.5 6.84 -124.34 0 338.3 736.19 1074.49 0 0 -5.72 -0.8 0 0 1067.97
13573.64 3068.84 1674.29 351.9 1322.39 418.85 903.54 0 903.54 -115.5 -3.9 -162.4 -8.02 613.72 1067.97 1681.69 0 0 -64.42 -9.04 0 0 1608.23
20224.01 3228.85 3374.69 475.55 2899.14 708.06 2191.08 0 2191.08 -636.35 -26.78 -93.02 -9.07 1425.86 1608.23 3034.09 -145 0 -139.82 -23.76 -1.89 -0.26 2723.36
26440.2 7135.63 6715.15 571.5 6143.65 801.57 5342.08 0 5342.08 -894.33 19.58 -943.93 -9.17 3514.23 2738.13 6252.36 -351.5 -268.75 -266.63 -45.31 -12.45 -2.12 5305.6
30622 7972 7193 746 6447 1101 5346 0 5346 -1813
2.81 -6.07 -3.26 0 0 0 0 0 0 -3.26
7.92 -3.26 4.66 0 0 0 0 0 0 4.66
7.3 4.61 11.91 0 0 0 0 0 0 11.91
3533
0.06 0.06
0.11 0.11
5.11 5.11
3.1 2.93
5.14 4.24
10.68 8.66
21.53 18.89
122770818 141355760 140909000 107069032 114882835 133293520 163259990 122770818 141355760 140909000 113858324 140314150 164593401 186079450
Source: Annual Report
Quarterly Analysis
Then, Quarterly results for last nine quarters is analyzed to understand the growth of the company quarter on quarter and to identify cyclical patterns in growth if any.
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Particulars Income Sales & Services (Gross) Less: Excise duty Sales & Services (Net) Other Income Total Expenditure Increase/(decrease) in stocks Consumption of raw materials Staff cost Depreciation Other expenditure Total Profit before Interest and Tax Interest/Financial expenses(net) Profit Before Tax Provision for taxation Profit afterTax Paid up Equity capital Earnings Per Share Basic Diluted Public Shareholding Number of Shares % of shareholding
Quarter ended 30.06.06
Quarter ended 30.09.06
Quarter ended 31.12.06
Quarter ended 31.03.07
Quarter ended 30.06.07
Quarter ended 30.09.07
Quarter ended 31.12.07
Quarter ended 31.03.08
Quarter ended 31.06.08
5699 339 5360 3 5363 -684 4592 143 116 635 4802 561 162 399 136 263 663 1.99 1.62 80181443 0.6046
7132 388 6744 5 6749 370 4569 149 116 861 6065 684 176 508 173 335 663 2.53 2.06 77919391 58.75%
7777 326 7451 5 7456 -312 5922 152 122 736 6620 836 192 644 232 412 666 3.1 2.54 80536603 60.43%
-2696.02 609.16 -3305.18 -92.27 -3397.45 -151.65 -8.34 55.38 28.55 -1875.53 -1951.59 -1445.86 27.06 -1472.92 -490.78 -982.14 699 3.05 2.53 84201901 60.22%
8570 503 8067 8 8075 -159 5644 168 120 1081 6854 1221 155 1066 373 693 754 4.74 3.74 86392191 57.32%
9772 496 9276 22 9298 -1643 7866 187 127 1333 7870 1428 172 1256 431 825 857 5.06 4.54 105573354 61.57%
10544 180 10364 22 10386 53 6598 188 145 1784 8768 1618 143 1475 501 974 857 5.68 5.31 107307884 62.58%
12898 623 12275 108 12383 370 7753 200 180 1989 10492 1891 346 1545 523 1022 889 5.95 5.49 103274411 58.10%
11449 545 10904 64 10968 -1532 8405 277 294 2014 9458 1510 440 1070 358 712 932 3.89 3.78 103504205 55.51%
Source: Company website
Ratio Analysis
Ratio analysis is done for last eight years to understand liquidity position, turnover and profitability of the company. Liquidity Ratios (like Current ratio, Debt Equity ratio), Turnover Ratios (like Fixed assets turnover, Inventory turnover) and Profitability Ratios (like EBIT margin, Return on capital) are calculated and tabulated.
Dupont Analysis is done both on RoA and RoE basis to understand the relationship between margins, turnover and profitability of the company.
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Liquidity Ratios Debt Equity Ratio Lomg term debt equity ratio Current Ratio Acid test ratio Turnover Ratio Fixed Asset FA including WIP Inventory Debtors Profitability ratios EBITDA margin EBIT margin EAT margin ROCE ROE Dupont Analysis RoA basis Return on total Asset (RoA) EAT margin Asset turnover ratio RoE Basis Return on Equity (RoE) EAT margin Equity turnover ratio
1999 1.88 1.68 3.00 1.04 1999 1.46 0.14 2.33 2.43 1999 9.23% -0.37% 4.08% -0.04% 1.24% 1999 0.44% 4.08% 0.11 1.24% 4.08% 0.31
2000 2.21 1.84 2.20 1.05 2000 2.05 0.18 2.71 2.17 2000 12.05% 9.12% 0.56% 1.38% 0.23% 2000 0.08% 0.56% 0.14 0.23% 0.56% 0.42
2001 2.84 2.19 2.11 1.29 2001 1.49 0.79 7.52 4.10 2001 20.44% 15.06% 0.35% 9.33% 0.66% 2001 0.19% 0.35% 0.54 0.66% 0.35% 1.87
2002 2.36 1.93 2.59 1.34 2002 0.94 0.91 6.06 3.62 2002 21.89% 16.25% 0.27% 10.97% 0.56% 2002 0.16% 0.27% 0.58 0.56% 0.27% 2.06
2003 2.41 1.95 2.80 1.58 2003 1.34 1.29 8.04 5.98 2003 14.20% 9.78% 0.40% 9.07% 1.10% 2003 0.33% 0.40% 0.81 1.10% 0.40% 2.73
2004 1.54 0.77 1.79 1.03 2004 3.04 2.91 12.12 9.85 2004 18.98% 16.76% 8.70% 34.66% 40.20% 2004 13.45% 8.70% 1.55 40.20% 8.70% 4.62
2005 3.97 1.31 1.25 0.65 2005 3.13 2.56 4.45 5.83 2005 9.11% 6.79% 3.26% 13.32% 13.30% 2005 3.23% 3.26% 0.99 13.30% 3.26% 4.08
2006 3.47 1.62 1.40 0.67 2006 3.50 2.37 3.98 6.72 2006 9.15% 7.23% 3.35% 13.35% 15.58% 2006 3.23% 3.35% 0.96 15.58% 3.35% 4.65
2007 3.97 2.34 1.55 0.88 2007 3.90 2.02 5.07 6.40 2007 12.60% 10.82% 5.32% 16.70% 24.98% 2007 5.10% 5.32% 0.96 24.98% 5.32% 4.69
2008 2.38 1.21 1.43 0.49 2008 2.95 1.97 4.45 6.37 2008 16.74% 15.32% 8.76% 22.19% 32.90% 2008 8.17% 8.76% 0.93 32.90% 8.76% 3.75
Source: Refer excel sheet
Revenue Model
Revenue model for the company is developed using data about capacity additions, capacity utilizations and rates for next three years.
Capacity Capacity Utilization Increase in Rates LSAW (MTPA) Production (MTPA) Revenue from LSAW (mn) Revenue per MTPA (INR) HSAW (MTPA) Production (MTPA) Revenue from HSAW (mn) Revenue per MTPA (INR) ERW (MTPA) Production (MTPA) Revenue from ERW (mn) Revenue per MTPA (INR) Coating (SMMPA)) Production (MTPA) Revenue from coating (mn) Revenue per SMMPA ('000 INR) Net Sales 350000 175000 15950.00 91142.86 450000 225000 9653.00 42902.22 250000 125000 1069.00 8552.00 6.24 3.12 113.00 36217.95 26785.00 2007 50% 2008 63% 9.00% 350000 220500 21905.73 99345.71 450000 283500 13257.43 46763.42 250000 157500 1468.16 9321.68 6.24 3.93 155.19 39477.56 36786.52 2009E 65% 17.00% 350000 227500 26443.35 116234.49 900000 585000 32007.22 54713.20 250000 162500 1772.28 10906.37 6.24 4.06 187.34 46188.75 60410.20 2010E 57% 6.00% 650000 370500 45648.77 123208.55 900000 513000 29751.95 57996.00 250000 142500 1647.41 11560.75 6.24 3.56 174.14 48960.08 77222.26
Source: Refer excel sheet
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31.03.05 Income Sales & Services (Net) Other Income Increase/(decrease) in stocks Total Expenditure Mfg and other expenses EBITDA EBITDA margin Depreciation EBIT EBIT margin Financial expenses(net) Profit before tax & Exceptional Items Exceptional Items Profit Before Tax Provision for taxation Tax Profit after tax Earnings Per Share Basic Diluted Weighted Avg no of shares EPS - Basic Diluted
31.03.06
31.03.07
31.03.08
31.03.09
31.03.10
10384.88 262.08 171.46 10818.42
18297.66 19.11 0 18316.77
26784.82 42.73 0 26827.55
36782 70 0 36852
60584 70 0 60654
77390 70 0 77460
9872.76 945.66 9.11% 240.97 704.69 6.79% 203.39 501.3 0 501.3 -45.5 455.8
16642.48 1674.29 9.15% 351.9 1322.39 7.23% 418.85 903.54 0 903.54 -115.5 788.04
23452.86 3374.69 12.60% 475.55 2899.14 10.82% 708.06 2191.08 0 2191.08 -636.35 1554.73
30538 6314 17.17% 674 5640 15.33% 750 4890 0 4890 -1550 3340
49852 10802 17.83% 1541 9261 15.29% 933 8328 0 8328 -2665 5663
63254 14206 18.36% 1566 12640 16.33% 553 12087 0 12087 -3626 8461
4.26 4.00 107069032 113858324
6.86 5.62 114882835 140314150
11.66 9.45
22.94 19.50
35.76 30.40
53.53 45.50
133293520 145589743.6 158340460.5 158062637.4 164593401 171282051.3 186282894.7 185956044
Source: Refer excel sheet
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IV.
Competitor Analysis
Indian Players: Jindal Saw is the most diversified player having capacities of all types of pipes except ERW pipes, whereas players like WGRSL and Maharashtra Seamless are focused either on SAW or Seamless Pipes. It is interesting to note that only Welspun Gujarat manufactures ERW pipes amongst the larger well known players.
Players Welspun Gujarat Jindal Saw PSL Maharashtra Seamless Man Industries Others
Saw Pipes LSAW Y Y N N Y N HSAW Y Y Y N Y N
Seamless Pipes N Y N Y N Y
Ductile Cast Iron N Y N N N Y
Iron/
ERW Pipes Y N N N N N
Source: Company websites
Capacity: Jindal Saw is the largest manufacturer of LSAW pipes, whereas PSL is the largest manufacturer of HSAW pipes.
Capacities (MTPA) FY08 Particulars LSAW HSAW Seamless Pipes Ductile Iron ERW Total Jindal Saw 800,000 150,000 100,000 200,000 1,250,000 250,000 1,000,000 1,100,000 425,000 WGRSL 350,000 400,000 PSL 1,100,000 Man Indus. 275,000 150,000 Total 1,425,000 1,800,000 100,000 200,000 250,000 375,000
Source: Company websites
Planned Capex: To cater to world’s burgeoning demand of pipes, all major players are currently undertaking capex, which are expected to be operational by FY10. Players like WGRSL, Man Industries and PSL are setting up facilities in USA to specifically cater to US demand.
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Capacities Post Expansion (MTPA) FY10 Particular LSAW HSAW Seamless Pipes Ductile Iron ERW Total Jindal Saw 1,000,000 500,000 250,000 200,000 1,950,000 WGRSL 650,000 850,000 250,000 1,750,000 PSL 1,400,000 1,100,000 Man Indus. 500,000 800,000 425,000 Total 2,150,000 3,550,000 100,000 200,000 250,000 375,000
Source: Company websites
Jindal Saw is the largest player in term of volumes. Largest capacity, operation in USA and above average capacity utilization has helped the company to register sales more than double of its competitor. WGRSL which has a smaller capacity than PSL has registered sales which is almost double than that of PSL mainly due to higher capacity utilization rate (Larger and heavier the pipe manufactured better would be the capacity utilization) Both Jindal Saw and WRGSL sales have depicted unprecedented sales CAGR growth of 73% and 46% due to increase in capacity, increasing capacity utilization and increasing realization of pipes.
Margins: WGSRL has highest EBIDTA margin over its domestic peer players due to its presence in niche market and timely booking of its raw material. WGSRL with its backward integration would further improve company’s EBIDTA
5.22 12.44
EBITDA and PAT Margins
EBITDA (%) PAT (%) 13.36
11.57 5.52
13.28
margins. High gearing has led to erosion of EBITDA margins for PSL and WSGRL as evident from the D/E ratios of 2.26 and 2.03 resp. as against 0.86 for Man Industries and 0.52 for Jindal Saw. Return Ratios: The graph alongside shows the return on capital employed and return on net worth for the competitors. The graph shows that WSGRL has the highest return on capital as far as competitors are concerned, but return on net worth is the lowest primarily because of the huge interest cost due to higher gearing.
Source: Company websites
4.52
5.58
Man Indus.
Jindal Saw
PSL
WSGRL
ROCE and RONW
ROCE (%) 21.28 19.03 21.63 21.21 14.62 16.99 RONW (%) 25.45 20.76
Man Indus. Jindal Saw
PSL
WSGRL
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V.
Miscellaneous Factors
Forex Management
The company is exposed to currency fluctuations on foreign currency transactions. With a view to minimize the volatility arising from fluctuations in the currency rates, the company follows established risk management policies including the use of exchange forward contracts and other derivative instruments. Forward and Options Contracts (in millions) 1) For payment to be received against export and other receivables:
Derivatives Contract USD/INR EUR/USD
Source: Annual Report
Amt in foreign currency 371.63 7.00
Equivalent INR 16,723.04 398.99
Thus, it can be seen that company has hedged around 60% of its exposure against export and other receivables.
2) For payments to be made against imports and other payables
Derivatives Contract USD/INR EUR/USD EUR/INR GBP/USD
Amt in foreign currency 211.45 97.10 23.06 1.20
Equivalent INR 9,495.70 5,550.70 1,378.48 101.83
Source: Annual Report
It is clear from the table that company is currently 80% protected against movements in exchange rates of various currencies for its imports and other payables.
3) Derivative interest rate Swaps Contract
Derivatives Contract INR
Equivalent INR 1,500.00
Source: Annual Report
4) Derivative Currency Swaps Contract 27 | P a g e
Derivatives Contract USD JPY CHF
Amt in foreign currency 10.00 1,216.14 7.43
Equivalent INR 435.10 1,28,508.99 323.49
Source: Annual Report
Apart from hedging its imports/exports and receivables/payables, company is also involved in Derivative Interest rate and Currency swaps servicing its foreign currency loans and other payments.
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Bibliography
1. Annual Reports of the Company 2. Bloomberg Terminal 3. www.bloomberg.com 4. www.stern.nyu.edu/~adamodar/ 5. www.nseindia.com 6. www.simdex.com 7. India Infoline research report – April 2008 8. finance.yahoo.com 9. Enam India Research – April 2008 10. www.investopedia.com
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doc_890119412.docx
This document about the equity research report of Welspun India.
BULLS OF BAGHDAD
EQUITY RESEARCH ON WELSPUN GUJARAT STAHL ROHREN LTD.
ANKIT GUPTA [email protected] +919860912037
ARPIT MITTAL [email protected] +919011021016 SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT, Pune
10/6/2008
Executive Summary
Company: Welspun Gujarat Stahl Rohren Ltd CMP (as on September 1st 2008):
Valuation Method DCF P/E ratio P/BV ratio Target Price
Rs. 323.9
Share value 385.63 290.22 353.26
Weigtage 70% 15% 15%
366.46
Target Price: Rs. 366.46 Recommendation: BUY Brief of Analysis:
We started with EIC (Economy – Industry – Company) Model for Fundamental Analysis. As it is an Indian company, we have not analyzed Indian Economy. We have analyzed steel pipes industry in detail and growth drivers of the company are identified as a part of Fundamental Analysis. In Technical Analysis we have made use of Moving Averages, RSI, MFI, Bollinger Bands and Candle graphs to predict direction of stock price movement in short-term. Valuation is done by using both DCF method and Relative valuation technique using P/E and P/BV. In Financial Modeling, Ratio Analysis is done and Revenue Model is developed. Finally, Competitor Analysis is done to understand the positioning of the company in the Industry.
2|Page
Table of Contents
I. Fundamental and Technical Analysis ................................................................................ 4 Industry Analysis: Steel Pipe Industry in India ..................................................................... 4 Company Analysis: Growth Drivers ...................................................................................... 8 1. 2. 3. 4. 5. Strong Order Book................................................................................................... 9 Backward Integration .............................................................................................. 9 Capacity Additions and Better Capacity Utilization ............................................... 9 HSAW plant in USA ............................................................................................... 9 International Accreditations and Niche Customer Base .......................................... 9
Technical Analysis ............................................................................................................... 10 Candle Graph: Hammer Pattern ....................................................................................... 10 Relative Strength Index (RSI) .......................................................................................... 10 Money Flow Index (MFI) ................................................................................................ 11 Bollinger Bands ............................................................................................................... 12 II. Valuation Models and Theory of Research ..................................................................... 14 DCF Valuation ..................................................................................................................... 14 Beta .................................................................................................................................. 14 WACC.............................................................................................................................. 15 Reinvestment and Growth Rate ....................................................................................... 16 Inputs for Valuation ......................................................................................................... 17 Estimates .......................................................................................................................... 17 Fair Value......................................................................................................................... 18 Scenario Analysis............................................................................................................. 18 Relative Valuation ............................................................................................................... 18 Valuation Summary – Target Price...................................................................................... 19 III. Financial Models ........................................................................................................... 20 Balance Sheet and P&L Analysis ........................................................................................ 20 Quarterly Analysis ............................................................................................................... 21 Ratio Analysis ...................................................................................................................... 22 Revenue Model .................................................................................................................... 23 IV. V. Competitor Analysis ..................................................................................................... 25 Miscellaneous Factors ...................................................................................................... 27 Forex Management .............................................................................................................. 27 Forward and Options Contracts (in millions) .................................................................. 27 Bibliography ............................................................................................................................ 29
3|Page
I.
Fundamental and Technical Analysis
Industry Analysis: Steel Pipe Industry in India
Pipe of all types and sizes is critical in building, construction, chemical, energy, and other industrial applications. The pipe industry is expected to experience considerable change and varying growth rates in these uncertain economic times. The global export market of the steel pipes is stated to be close to $27 billion a year with the US, Western Europe, Australia, and Japan being the biggest importers. India is one of the major exporting nations including Indonesia, Malaysia and Thailand. The building & construction industries along with the oil & gas sector are the major marketplaces for pipe. Pipe demand is dependent on exploration & finds apart from replacement demand of existing. Globally Oil & Gas exploration and production capital expenditure has a very strong correlation with crude oil prices. Since crude oil prices have recently touched record highs, E&P activity is expected to pick up further momentum in coming years. The fact is substantiated by steady rise in rig counts globally. Globally, more than 500 projects have already been announced, to be executed over next 5 years, covering an additional 250,000 kms. This may require approximately 65 million tones of different grades of pipes. Also in India GAIL, Reliance, GSPL, Cairn and others are expected to lay pipelines covering nearly 6400 kms over the next 3-4 years.
Rising Crude Oil Prices
Increasing Exploration & Prodcution Activities
Increasing Number of Refineries
Increased Crude & Petroleum Products Supply
Increased Need for Transporting Petroleum Products
Increased Demand for Pipeline Transport
Pipe transportation is an economical mode of transport compared to traditional modes of rail, road and sea transport. This mode of transportations also helps in saving scarce natural 4|Page
energy resources and time taken for transportation. However, pipe networks need to be guarded from any kind of damage. Despite the above advantages, India with its large geographical area has very low pipe penetration levels at 32% compared to global average of 79% in oil and gas transport. The pipeline network of India for oil and gas transport stood at 13,517 kms as on April 06. Sanitation levels are also lower at 33% compared to 91% in Sri Lanka and 100% in France. Of 140 mn hectares of cultivable land, only 40% land is irrigated.
The lower penetration levels offer a huge scope for Indian pipe companies. Pipes can be broadly classified into – Steel Pipes – SAW Pipes (HSAW, LSAW, and DSAW); Seamless Pipes & ERW pipes (as shown in the figure below). Cement Pipes – RCC Pipes, Pre-stressed Concrete Pipes and Pre-stressed Concrete Cylinder Pipes and PVC Pipes. The various types of classification are due to use of different basic raw materials and manufacturing processes. Applications of different pipes also vary as per their physical and tensile properties.
HSAW SAW LSAW Seamless ERW DVCI
Steel Coils Steel Plates Billets Steel Sheets Pig Iron
Pipes
Steel pipes are widely used and find application in critical areas of oil and gas transport, water transport, heavy industries, cold storage, etc due to their toughness and durability properties. Cement pipes are used in irrigation systems, sewage, water supply, etc. PVC pipes are widely used in irrigation and water supply systems. Consumption of pipes by oil and gas sector is 50%, construction sector is 30% and by government programs is 20%. The industry is highly fragmented with large number of players’ in cement and PVC pipes due to their less critical applications. This leads to competition and pricing pressures among the players. However, pipe companies catering to oil and gas sector and government orders 5|Page
have limited competition but need to focus on stringent quality norms. Steel pipe manufacturing players’ like Welspun Gujarat, Jindal SAW, Man Industries have gained several accreditations and certifications and have become major exporters to oil and gas companies. Exports also led to better price realizations and these players’ could pass on the hike in RM prices to their customers. With growing sales and profits, these players’ have announced capacity expansions in India and abroad. Companies like Welspun Gujarat are also integrating backward to take care of raw material availability issues. The positive trend in the pipe industry to continue in the coming years on the back of good economic growth, more oil and gas discoveries, infrastructure focus by government, booming real estate market and low penetration levels.
Indian companies with their ability to produce export quality products at competitive price coupled with location advantage are well poised to cater to the US and Middle East markets. However, concerns on raw material availability and pricing and slow down in US economy loom in the horizon.
Future Pipeline Projects No. of Projec ts North America Latin America Europe Africa Mid-East & Asia Australasia Total 153 53 91 40 215 31 583 Total Length (km) 64,433 37,166 43,326 14,274 135,036 8,451 302686 Share in Demand 21% 12% 14% 5% 45% 3% 100% Required Tonnage (mn ton) 19.5 11.3 13.1 4.3 40.9 2.6 Total Val (USD bn) 20.50 11.82 13.78 4.54 42.96 2.69 Addressable Market Size 10% 2% 2% 15% 40% 5% Addressable (USD bn) 2.05 0.24 0.28 0.68 17.18 0.13 20.56
Source: www.simdex.com
Worldwide supply for SAW pipes is estimated at 16 mn tonnes (Metal bulletin Research 2006, Company). Of companies mentioned above majority of them are catering to world’s demand for seamless pipes. Only about 65-70% of these capacities are considered as operable (Source: Industry). Japan and Korea leads the world supply for pipes controlling nearly 40% of world supply followed by European countries controlling 35%and India contributing nearly 15% to the world capacities.
6|Page
All major line-pipe manufacturing companies in America, Russia, and Europe have their order book full in respect with their capacities and new capacities are yet to come on the floor. With domestic demand in India for pipelines still being under explored and capacities already in setup, Indian companies are in a sweet spot to explore worldwide demand for Pipes. We have not considered Chinese players while finding out current world capacities because as a Chinese market had huge internal demand for pipes, thus leaving limited room for exports by Chinese companies. However with internal demand meeting up gradually and newer capacities added up in coming years we can’t rule out some competition coming from Chinese players especially in LSAW market. However we don’t expect competition to be stiff enough in short term primarily due to two reasons namely, Accreditations procedure are long drawn which will take Chinese players’ time to penetrate into them posing threat to world market and Chinese government has been imposing additional duties on export of such pipes which discourages exports of the same.
Target markets for Indian firms: Most prominent players like Sumitomo, Nippon Steel, Hyundai Pipe co, Ippsco, IIIva, and Corus are fully integrated players. Pipe manufacturing for such companies is secondary operations. Whereas, for Indian companies are dedicatedly pipe manufacturing companies and two Indian companies are included in top 20 global companies. Indian companies have well timed capacities lined up ahead of anticipation of robust global demand. Europe and Russia satisfy their demand for pipes internally due to strong presence of domestic players and feasible imports from Japan, so no major export opportunity is expected for Indian Players. USA presents a huge opportunity for Indian players, with many Indian players (WGSRL, Man Industries, PSL Ltd.) setting up their plants in the Eastern region of America as it is cost effective to set up facilities there rather than exporting pipes to United States. Middle East virtually has no facilities for manufacturing of pipes, where India having a proximity advantage can easily cater to Middle East markets.
Domestic Scenario: India has traditionally been net importer of all source of energy (Source: KPMG) .To meet its energy security Government has continuously been encouraging investment in various energy sectors To meet its Oil and Gas requirement India has been trying various supply mix. India has been importing Oil and Gas in considerable quantity predominantly from Middle East countries. Increasing investments in these sectors has led to exploration of Domestic reserves for Oil and Gas. Only 30% of India’s Oil and Gas transportation is through pipelines as compared to 60% in U.S.A, which means there is great 7|Page
potential for pipelines to be used domestically. Growing supply for Oil and Gas domestically (by way of exploring new reserves) as well as through imports, impetus a strong need for Pipeline Infrastructure to be set upped in India. A total pipeline under construction for transporting crude oil is around 1846 km; such pipelines are expected to get completed by 2008-09 (Source: CRISIL Infac). New pipelines of 2718 km are proposed for construction for meeting country’s growing demand for Crude Oil. With average realizations of US$ 1050 per tonne and average consumption of 303.5 tonne per km stimulates a demand of US$ 0.87 bn for SAW pipes used in transporting crude oil for next five years. Government of India has also considered various pipelines for transporting gas from the KG basin, biggest of all being IPI pipeline that is expected stretched for 2800km. Other pipelines, which are under consideration, are TAPI and MBI. If such pipeline construction decision gets matured, it would incept a demand for construction of 5625km of SAW pipes .i.e. for 1.71 mn tonnes of pipe. India needs total 17,205 kms of pipeline transport for transporting Natural Gas and Crude Oil within the country. Besides such pipelines India is also considering 5625 km of transnational pipelines to cater to the burgeoning demand for Natural Gas. This need for pipeline infrastructure creates a total domestic demand for SAW pipes for 7 Mn kms i.e. $7.8 bn (With transnational pipelines) and 5 Mn Kms i.e. $5.5 bn (without transnational pipelines)
Company Analysis: Growth Drivers
Welspun Gujarat Stahl Rohren Ltd is a part of USD 1 billion Welspun Group. The company started manufacturing pipes in 1995 and since then it has supplied pipes for major projects all around the world including the World’s deepest pipeline project in the Gulf of Mexico, USA. Its manufacturing plants are located in Dahej and Anjar in Gujarat and it employs world class hybrid JCO technology. The company has the required accreditations from leading International companies and is well placed to meet the growing demand, stringent requirements and standards of high quality pipes.
The company is a good pick for investments with strong fundamentals. Although market is undergoing a bearish phase, WGSRL is driven by strong fundamentals which have the potential to drive its valuation in upward direction.
The major growth drivers of the company can be summarized as follows:
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1. Strong Order Book According to the Annual Report, Company has the order book of Rs. 5.3 billion, most of which are to be executed in next two years. Company has also bided for USD 4 billion worth of orders. Such a huge order book gives the earning sustainability and certain profitability to the company for coming years. 2. Backward Integration WGSRL is setting up a 1.5 million tonne plate cum coil mill at Anjar, Gujarat which will be fully operational from FY09. This backward integration by producing the input materials needed for pipes manufacturing will increase EBITDA margins for the company. EBITDA margins are expected to increase from 12.6% in FY07 to 16.7% in FY08 toaround 17.5% from FY09 onwards. 3. Capacity Additions and Better Capacity Utilization To cater the huge demand of pipes worldwide, WGSRL is expending HSAW capacity by 0.15 million tonnes and LSAW capacities by 0.3 million tones which are expected to come in phases from in FY09-10. The capacity additions along with better capacity utilization from 50% in FY06-07 to 65% in FY08-09 which is expected to rise further gives company sufficient production to cater to global demand. 4. HSAW plant in USA Even after the financial meltdown, USA has substantial demand of pipes for laying its Oil and Gas transportation infrastructure. To cater the growing demand in USA, WGSRL is setting up a 0.3 million tonnes HSAW plant in USA which will be fully operational by FY09. Company will not have to incur transportation cost which will further add to its profitability. 5. International Accreditations and Niche Customer Base A major hurdle in pipe manufacturing industry is Accreditations from major Oil and Gas companies. Over the years WGSRL has gathered 44 accreditations from major International Oil and Gas companies. Besides these accreditations, approvals from companies like British Petroleum, Chevron and Saudi Aramco helps WGSRL gaining advantage over its competitors.
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Technical Analysis
Candle Graph: Hammer Pattern We can clearly see a hammer pattern developing on the candle chart which is evident from a sharp decline towards the end and a small up-close with a large range on the last day. This hammer pattern is a bullish indicator if it occurs after a persistent decline in the stock over the last few days this indicates a reversal in the downtrend.
600 500 400 300 200 100 0 1 12 23 34 45 56 67 78 89 100
Relative Strength Index (RSI)
The RSI is a comparison between the days that a stock finishes up against the days it finishes down. This indicator is a big tool in momentum trading. The chart
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The figure shows last 3- year RSI, we can clearly see that the stock has traded just 3 times below 20 in the last 3 years. The current RSI is close to 20, which strongly indicates that the stock is currently oversold and one should consider buying it for a 20 -30% appreciation in the short term.
Money Flow Index (MFI) The chart below is 3- year money flow index for the scrip. We can see the same pattern emerging here also when MFI is at historically low level and very close to 20 which is considered to be a level where the scrip becomes oversold in a bear market. Thus MFI also suggest that the stock can be bought to make a quick return in the short term.
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Bollinger Bands The chart below shows 1-year and 3 –year Bollinger bands. Here we can clearly see that the price indicated by the purple line is very close to the lower band as indicated by the green line, which is an indication that the stock is in an oversold position and one can go long on the stock.
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600 560 520 480 440 400 360 320 280 240 200 160 120 80 40 0
20 days MA Upper Band Lower Band Price
600 560 520 480 440 400 360 320 280 240 200 160 120 80 40 0
20 days MA
Upper Band
Lower Band
Price
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II.
Valuation Models and Theory of Research
DCF Valuation
1. The Method used for Valuation is DCF as suggested by Damodaran in his book "Damodaran on Valuation"
2. Beta is calculated by regressing return on WGSRL with return on BSE SENSEX for last 3 years as business mix and risk perception of firm has not changed for the last three years Beta
Beta 1 yr 2 yr 3 yr 1.06 1.01 0.92
Adj Beta 1.04 1.01 0.95
Source: Refer excel sheet
3. Beta is first unlevered using average D/E ratio for last 3 years to remove historical effect of financial leverage and then levered using current D/E ratio to introduce the effect of current financial leverage
4. Risk free rate is taken as 7.68% which is the yield of 91-day T-bill issued by Govt. of India on September 24th 2008
5. Market Premium is taken as 8.50% from the spreadsheet provided by Damodaran on his site. It is same as suggested in IIM Ahmadabad WP “A First Cut Estimate of the Equity Risk Premium in India”
6. Cost of Equity is calculated by applying CAPM model
7. Cost of debt is calculated by dividing total financial expenses by total loan amount in the last year which comes out to be 9.26%. We have also calculated Cost of debt by using Synthetic Rating method which comes out to be 9.38%.
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8. Tax rate is taken as 33.99% which is the marginal tax rate for Indian Companies
9. Market value of debt and equity is taken from Bloomberg to calculate weights of debt and equity
10. For stable period, D/E ratio of industry is taken from Bloomberg to leverage the unlevered beta and CAPM is used to calculate cost of equity
11. Cost of debt is assumed to be 9% for stable period which is lower than current cost of debt as D/E is expected to reduce in stable period giving higher credit rating to firm
12. Weight of equity is assumed to be 55% which is more than current weight of equity because D/E ratio is expected to reduce in stable growth period
WACC
Cost of Equity Risk free rate (Rf) BETA Current Beta Unlevered Beta Levered Beta Debt Equity Ratio 2008 2007 2006 Average for 3 years 2.342 1.622 1.314 1.759 Marginal Tax Rate After tax cost of debt Industry D/E ratio 1.65 MV of equity MV of debt We Wd Cost of capital Cost of debt 0.949 0.439 1.118 Risk premium (Rm-Rf) Levered beta Cost of equity (Ke) Cost of Debt Interest charges Total loan
High Growth 7.68% 8.50% 1.118 17.18%
Stable growth
0.917 15.48%
708.06 7649.83 9.26% 33.99% 6.11% 25876.05 14346.23 64.33% 35.67% 13.23% 55.00% 45.00% 11.18% 5.94% 9.00%
Source: Refer excel sheet
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13. Reinvested rate and Return on Capital (ROC) for the company is normalized by taking arithmetic mean for last 6 years which roughly represents the start of business cycle for the company
14. Company is investing highly in capacity expansion and has large Cap WIP, therefore it is assumed that company will grow at around 45% (arrived at by multiplying reinvestment rate and ROC) for the next 5 years with reinvestment rate of 261%
15. It is expected that company will not be able to sustain such high growth rates and reinvestment for a long time and hence growth will moderate to 16% and reinvestment rate to 110% for next 10 years
16. No company can grow at a rate more than that of economy forever and hence it is assumed that the company will grow at 5.5% forever after moderate growth period
17. For stable period it is assumed that ROC will be almost equal to WACC and reinvestment rate is calculated accordingly Reinvestment and Growth Rate
Reinvestment 2000 2001 2002 2003 2004 2005 2006 2007 2008
Change in net block Change in capital WIP
-11.07 2539.18 133.35 -2455
162.33 -18.46
-158.95 38.35
-121.77 -11.87
1313.62 2515.46
744.34
12722.54 -4963.99
1263.65 2246.03 5591.14
Change in non cash CA Change in non cash CL Change in non cash WC
246.3 216.13 30.17
662.12 335.58 326.54
-109.16 -186.15 76.99
22.97 60.22 -37.25
941.46 1014.6 -73.14
4838.71 2488.29 3174.19 6110.33 1371.86 1402.01 -1271.62 1116.43 1772.18
10689.27 6832.86 3856.41
Total reinvestment
152.45
410.72
220.86
-157.85
-206.78
1305.65 5877.92 8107.66
11614.96
EBIT EBIT EBIT(1-t) AM of reinvestment rate (Last 6 years) Reinvestment rate Avg ROC (Last 6 years) ROC Growth Rate 1.38% 9.33% 10.97% 9.07% 502.72% 183.03% 76.79% 45.94 339.94 435.73 375.5 1387.42 260.73% -63.68% -22.58% 18.21% 34.66% 47.49% 13.32% 13.35% 16.70% 280.68% 673.37% 423.66% 704.69 1322.39 2899.14 872.91 1913.72 30.32499 224.394 287.6254 247.86755 915.8359 465.1659
TTM 6447.00 4255.66 272.93%
22.19%
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Inputs for Valuation
Inputs High growth Moderate growth period period Stable growth period
Reinvestment rate Return on capital Expected growth rate Beta D/E ratio Cost of capital Cost of equity After tax Cost of debt Tax rate
260.73% 18.21% 47.49% 1.12 2.34 13.23% 17.18% 6.11% 33.99%
109.95% 14.70% 16.16% 1.02 2.00 12.21% 16.33% 6.03% 33.99%
49.17% 11.18% 5.50% 0.92 1.65 11.18% 15.48% 5.94% 33.99%
Source: Refer excel sheet
18. Present value of FCFF (Free Cash Flow to Firm) is calculated for each year and added to get value of the firm Estimates
Growth Phase Year EBIT(1-t) Reinvestment FCFF Present value
TTM 2009 First stage of high growth = 47% 2010 2011 2012 2013 2014 2015 2016 2017 Moderate growth period = 16% 2018 2019 2020 2021 2022 2023 Stable growth period 2024 onwards
0
4255.66
11095.81486 -6840.15
-6840.15
1 6276.517 2 9256.994 3 13652.79 4 20135.97 5 29697.77 6 34497.19 7 40072.24 8 46548.27 9 54070.88 10 62809.21 11 72959.72 12 84750.66 13 14 98447.1 114357
16364.79241 -10088.3 -8909.428 24135.80562 -14878.8 -11604.7
35596.97541 -21944.2 -15115.35 52500.61581 -32364.6 -19688.04 77431.1477 -47733.4 -25644.05 37928.76859 -3431.57 -1719.287 44058.39013 -3986.15 -1779.852 51178.61225 -4630.34 -1842.552 59449.5247 -5378.65 -1907.46
69057.08911 -6247.88 -1974.654 80217.32017 -7257.6 -2044.216 93181.14241 -8430.49 -2116.228 108240.032 -9792.93 -2190.777 125732.5701 -11375.6 -2267.952 146052.0558 -13213.9 -2347.846 68914.79502 71229.42 194286.8
15 132838.1 16 140144.2
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19. Value of equity is obtained by subtracting net debt from Value of the firm which is when divided by Number of shares outstanding gives fare value per share for the company Fair Value
Fair Value 385.63
Sum of PV Value of debt Value of cash Value of Equity No of shares
86294.2147 18031.00 3447.21 71710.4247 185956044
Source: Refer excel sheet
20. Scenario Analysis is done by changing terminal growth rate by 0.5% and WACC by 0.5% as follows: Scenario Analysis
Scenario Summary
Current Values 5.50% 13.23% 385.63
Scenario1 Scenario2 Scenario3 Scenario4 Scenario5 Scenario6 Scenario7 Scenario8 6.00% 13.23% 398.09 5.00% 13.23% 373.07 5.50% 13.73% 328.07 5.50% 12.73% 447.87 6.00% 13.73% 337.36 6.00% 12.73% 476.78 5.00% 13.73% 318.63 5.00% 12.73% 431.89
Changing Cells:
Terminal Growth Rate WACC
Result Cells:
Fair Vlaue
Source: Refer excel sheet
Relative Valuation
1. Ten comparable firms are chosen from the Steel Pipes and Tubes Industry 2. Mean of their P/E ratio and P/BV ratio is taken 3. EPS and Book Value of WGSRL is multiplied by average P/E and average P/BV to arrive at the fair value for the company
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Company Name Bihar Tubes Ltd. Good Luck Steel Tubes Ltd. Jindal Saw Ltd. Indian Seamless Metal Tubes (Kalyani Seamless Tubes) Ltd. Lloyds Metals & Engineers Ltd. Maharashtra Seamless Ltd. P S L Ltd. Rajasthan Tube Mfg. Co. Ltd. Suraj Stainless Ltd. Welspun-Gujarat Stahl Rohren Ltd. Valuation Mean Multiples Fair value of Welspun Gujarat Stahl Rohren Ltd
Closing Price
P/E
P/B
EPS 10.59 25.03 62.26 4.72 1.55 28.71 20.93 1.02 5.27 18.94
BV per Share 53.56 111.34 401.76 43.84 2.02 163.57 138.55 4.65 28.67 88.44
178.75 16.8791313 3.33737864 399.05 15.9428686 3.58406682 575.25 9.2394796 1.43182497 86.7 18.3686441 1.97764599 32.2 20.7741935 15.9405941 272.65 9.49669105 1.66687045 219.25 10.4753942 1.58246121 13 12.745098 2.79569892 137.45 26.0815939 4.79420998 250.55 13.2286167 2.83299412 15.32 290.22 3.99 353.26
Source: CMIE database
Valuation Summary – Target Price
We have used three Valuation methods: DCF Valuation, Relative valuation using P/E and Relative valuation using P/BV. Now depending upon our confidence on different methods, we have assigned different weights. Final Target price is arrived at by taking weighted average of the Price calculated in different methods.
Valuation Method DCF P/E ratio P/BV ratio Target Price
Share value 385.63 290.22 353.26
Weigtage 70% 15% 15%
366.46
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III.
Financial Models
Balance Sheet and P&L Analysis
First of all Balance Sheet and Profit and Loss Account is analyzed for last 10 years.
31.03.99 31.03.00 31.03.01 31.03.02 31.03.03 31.03.04 31.03.05 31.03.06 31.03.07 31.03.08
BALANCE SHEET Sources of Funds Shareholders' Funds Share Capital Reserves and Surplus Share Application Money Loan Funds Secured Loans Unsecured Loans Deferred Tax Liabilities Total Application of Funds Fixed Assets Gross Block Less: Depriciation Net Block Capital Work in Progrees Investments Current Assets, Loans & Advances Income Accrued on investments Inventories Sundry Debtors Cash and Bank Balances Loans & Advances Less: Current Liabilities & Provisions Current Liabilities Provisions Net Current Assets Miscellaneous Expenditure Total
1203.12 0 1203.12
1205.61 0 1205.61
1206.32 4.61 1210.93
1392.7 0.95 1393.65
1407.29 16.42 1423.71
1413.56 743.76 2157.32
756.4 2172.09 2928.49
865.27 4082.56 4947.83 68.45 3933.28 4093.69 8026.97 700.92 13744.17
699.1 5767.74 6466.84 68.45 11635.08 3511.15 15146.23 793.95 22475.47
888.77 14005.9 14894.67 886.9 17924.55 106.45 18031 1737.88 35550.45
1909.75 112.99 2022.74 0 3225.86
2134.84 84.68 2219.52 0 3425.13
2563.64 87.29 2650.93 0 3861.86
2662.53 27.25 2689.78 32.01 4115.44
2717.84 55.88 2773.72 26.1 4223.53
1595.63 56.5 1652.13 376.38 4185.83
2040.41 1806.33 3846.74 538.53 7313.76
308.41 56.9 251.51 2426.46 2677.97 16.64 0 157.46 170.52 71.52 302.54 702.04 233.84 0 233.84 468.2 63.02 3225.83
312.94 72.5 240.44 2559.81 2800.25 22.99 0 214.78 359.59 113.76 302.45 990.58 449.97 0 449.97 540.61 61.24 3425.09
2973.58 193.96 2779.62 104.81 2884.43 50 0 385.71 891.94 120.49 261.29 1659.43 785.55 0 785.55 873.88 53.54 3861.85
3287.08 345.13 2941.95 86.35 3028.3 84.1 0.18 499.85 680.71 124.91 249.22 1554.87 599.4 0 599.4 955.47 47.64 4115.51
3295.98 512.98 2783 124.7 2907.7 84.1 0.18 455.68 648.25 396.73 348.82 1849.66 659.62 0 659.62 1190.04 41.74 4223.58
3348.39 687.16 2661.23 112.83 2774.06 84.1 0.18 909.88 1115.77 607.5 368.56 3001.89 1615.05 59.17 1674.22 1327.67 0 4185.83
5032.68 1057.83 3974.85 1376.48 5351.33 52.89 0.18 3756.77 2623.3 2460.99 852.85 9694.09 7649.78 134.77 7784.55 1909.54 0 7313.76
7892.7 1402.39 6490.31 3622.51 10112.82 0.01 0 5428.87 3069.75 3066.55 1222.59 12787.76 9031.02 125.39 9156.41 3631.35 0 13744.18
9111.91 1877.26 7234.65 9213.65 16448.3 256.29 0 5135.15 5849.38 3433.9 1910.87 16329.3 10089.78 468.64 10558.42 5770.88 0 22475.47
22324.85 2367.66 19957.19 4249.66 24206.85 3905.68 37.91 12878.35 7259.11 1207.71 3447.21 24830.29 16714.27 677.01 17391.28 7439.01 0 35551.54
Source: Annual Report
Profit and Loss Account is made for TTM (Trailing Twelve Months) by adding last 4 quarterly results to arrive at latest valuation which is more accurate.
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PROFIT & LOSS ACCOUNT Income Sales & Services (Gross) Less: Excise duty Sales & Services (Net) Other Income Increase/(decrease) in stocks Total Expenditure Cost of Goods Mfg and other expenses EBITDA Depreciation EBIT Financial expenses(net) Profit before tax & Exceptional Items Exceptional Items Profit Before Tax Provision for taxation Current tax Earlier years Deferred tax Fringe benefit tax Profit after tax Balance Brought Forward Profit available for appropriation Appropriations: General Reserves Debenture redemption reserve Proposed dividend on equity shares Tax on proposed dividend Dividend on equity shares for earlier periods Tax on dividend Balance carried to BS Earnings Per Share Basic Diluted Weighted Avg no of shares EPS - Basic Diluted
31.03.99
31.03.00
31.03.01
31.03.02
31.03.03
31.03.04
31.03.05
31.03.06
31.03.07
31.03.08
TTM
414.3 47.25 367.05 0.69 60.28 428.02
575.65 71.68 503.97 2.26 22.79 529.02
2562.97 306.45 2256.52 0.81 8.76 2266.09
2849.45 167.32 2682.13 4.66 157.5 2844.29
3971.01 129.86 3841.15 20.76 -205.44 3656.47
8690.46 413.83 8276.63 198.41 -16.11 8458.93
10904.67 519.79 10384.88 262.08 171.46 10818.42
19117.65 819.99 18297.66 19.11 0 18316.77
28522.98 1738.16 26784.82 42.73 0 26827.55
41730.49 1625.95 40104.54 186.44 0 40290.98
44663 1844 42819 216 2752 45787
349.52 44.63 33.87 35.22 -1.35 36.79 -38.14 0 -38.14 0 53.11 0 0 14.97 -21.04 -6.07 0 0 0 0 0 0 -6.07
397.51 70.76 60.75 14.81 45.94 42.72 3.22 0 3.22 0 -0.41
1575.68 229.16 461.25 121.31 339.94 331.18 8.76 0 8.76 -0.77 -0.07
1733.19 523.85 587.25 151.52 435.73 404.87 30.86 0 30.86 -2.5 -21.06
2387.86 723.09 545.52 170.02 375.5 365.15 10.35 0 10.35 -0.8 5.92 15.47 0.95 16.42 0 0 0 0 0 0 16.42
5924.77 963.57 1570.59 183.17 1387.42 230.03 1157.39 -35.85 1121.54 -51.5 0.01 -350.28 0 719.77 16.42 736.19 0 0 0 0 0 0 736.19
8244.87 1627.89 945.66 240.97 704.69 203.39 501.3 0 501.3 -45.5 6.84 -124.34 0 338.3 736.19 1074.49 0 0 -5.72 -0.8 0 0 1067.97
13573.64 3068.84 1674.29 351.9 1322.39 418.85 903.54 0 903.54 -115.5 -3.9 -162.4 -8.02 613.72 1067.97 1681.69 0 0 -64.42 -9.04 0 0 1608.23
20224.01 3228.85 3374.69 475.55 2899.14 708.06 2191.08 0 2191.08 -636.35 -26.78 -93.02 -9.07 1425.86 1608.23 3034.09 -145 0 -139.82 -23.76 -1.89 -0.26 2723.36
26440.2 7135.63 6715.15 571.5 6143.65 801.57 5342.08 0 5342.08 -894.33 19.58 -943.93 -9.17 3514.23 2738.13 6252.36 -351.5 -268.75 -266.63 -45.31 -12.45 -2.12 5305.6
30622 7972 7193 746 6447 1101 5346 0 5346 -1813
2.81 -6.07 -3.26 0 0 0 0 0 0 -3.26
7.92 -3.26 4.66 0 0 0 0 0 0 4.66
7.3 4.61 11.91 0 0 0 0 0 0 11.91
3533
0.06 0.06
0.11 0.11
5.11 5.11
3.1 2.93
5.14 4.24
10.68 8.66
21.53 18.89
122770818 141355760 140909000 107069032 114882835 133293520 163259990 122770818 141355760 140909000 113858324 140314150 164593401 186079450
Source: Annual Report
Quarterly Analysis
Then, Quarterly results for last nine quarters is analyzed to understand the growth of the company quarter on quarter and to identify cyclical patterns in growth if any.
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Particulars Income Sales & Services (Gross) Less: Excise duty Sales & Services (Net) Other Income Total Expenditure Increase/(decrease) in stocks Consumption of raw materials Staff cost Depreciation Other expenditure Total Profit before Interest and Tax Interest/Financial expenses(net) Profit Before Tax Provision for taxation Profit afterTax Paid up Equity capital Earnings Per Share Basic Diluted Public Shareholding Number of Shares % of shareholding
Quarter ended 30.06.06
Quarter ended 30.09.06
Quarter ended 31.12.06
Quarter ended 31.03.07
Quarter ended 30.06.07
Quarter ended 30.09.07
Quarter ended 31.12.07
Quarter ended 31.03.08
Quarter ended 31.06.08
5699 339 5360 3 5363 -684 4592 143 116 635 4802 561 162 399 136 263 663 1.99 1.62 80181443 0.6046
7132 388 6744 5 6749 370 4569 149 116 861 6065 684 176 508 173 335 663 2.53 2.06 77919391 58.75%
7777 326 7451 5 7456 -312 5922 152 122 736 6620 836 192 644 232 412 666 3.1 2.54 80536603 60.43%
-2696.02 609.16 -3305.18 -92.27 -3397.45 -151.65 -8.34 55.38 28.55 -1875.53 -1951.59 -1445.86 27.06 -1472.92 -490.78 -982.14 699 3.05 2.53 84201901 60.22%
8570 503 8067 8 8075 -159 5644 168 120 1081 6854 1221 155 1066 373 693 754 4.74 3.74 86392191 57.32%
9772 496 9276 22 9298 -1643 7866 187 127 1333 7870 1428 172 1256 431 825 857 5.06 4.54 105573354 61.57%
10544 180 10364 22 10386 53 6598 188 145 1784 8768 1618 143 1475 501 974 857 5.68 5.31 107307884 62.58%
12898 623 12275 108 12383 370 7753 200 180 1989 10492 1891 346 1545 523 1022 889 5.95 5.49 103274411 58.10%
11449 545 10904 64 10968 -1532 8405 277 294 2014 9458 1510 440 1070 358 712 932 3.89 3.78 103504205 55.51%
Source: Company website
Ratio Analysis
Ratio analysis is done for last eight years to understand liquidity position, turnover and profitability of the company. Liquidity Ratios (like Current ratio, Debt Equity ratio), Turnover Ratios (like Fixed assets turnover, Inventory turnover) and Profitability Ratios (like EBIT margin, Return on capital) are calculated and tabulated.
Dupont Analysis is done both on RoA and RoE basis to understand the relationship between margins, turnover and profitability of the company.
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Liquidity Ratios Debt Equity Ratio Lomg term debt equity ratio Current Ratio Acid test ratio Turnover Ratio Fixed Asset FA including WIP Inventory Debtors Profitability ratios EBITDA margin EBIT margin EAT margin ROCE ROE Dupont Analysis RoA basis Return on total Asset (RoA) EAT margin Asset turnover ratio RoE Basis Return on Equity (RoE) EAT margin Equity turnover ratio
1999 1.88 1.68 3.00 1.04 1999 1.46 0.14 2.33 2.43 1999 9.23% -0.37% 4.08% -0.04% 1.24% 1999 0.44% 4.08% 0.11 1.24% 4.08% 0.31
2000 2.21 1.84 2.20 1.05 2000 2.05 0.18 2.71 2.17 2000 12.05% 9.12% 0.56% 1.38% 0.23% 2000 0.08% 0.56% 0.14 0.23% 0.56% 0.42
2001 2.84 2.19 2.11 1.29 2001 1.49 0.79 7.52 4.10 2001 20.44% 15.06% 0.35% 9.33% 0.66% 2001 0.19% 0.35% 0.54 0.66% 0.35% 1.87
2002 2.36 1.93 2.59 1.34 2002 0.94 0.91 6.06 3.62 2002 21.89% 16.25% 0.27% 10.97% 0.56% 2002 0.16% 0.27% 0.58 0.56% 0.27% 2.06
2003 2.41 1.95 2.80 1.58 2003 1.34 1.29 8.04 5.98 2003 14.20% 9.78% 0.40% 9.07% 1.10% 2003 0.33% 0.40% 0.81 1.10% 0.40% 2.73
2004 1.54 0.77 1.79 1.03 2004 3.04 2.91 12.12 9.85 2004 18.98% 16.76% 8.70% 34.66% 40.20% 2004 13.45% 8.70% 1.55 40.20% 8.70% 4.62
2005 3.97 1.31 1.25 0.65 2005 3.13 2.56 4.45 5.83 2005 9.11% 6.79% 3.26% 13.32% 13.30% 2005 3.23% 3.26% 0.99 13.30% 3.26% 4.08
2006 3.47 1.62 1.40 0.67 2006 3.50 2.37 3.98 6.72 2006 9.15% 7.23% 3.35% 13.35% 15.58% 2006 3.23% 3.35% 0.96 15.58% 3.35% 4.65
2007 3.97 2.34 1.55 0.88 2007 3.90 2.02 5.07 6.40 2007 12.60% 10.82% 5.32% 16.70% 24.98% 2007 5.10% 5.32% 0.96 24.98% 5.32% 4.69
2008 2.38 1.21 1.43 0.49 2008 2.95 1.97 4.45 6.37 2008 16.74% 15.32% 8.76% 22.19% 32.90% 2008 8.17% 8.76% 0.93 32.90% 8.76% 3.75
Source: Refer excel sheet
Revenue Model
Revenue model for the company is developed using data about capacity additions, capacity utilizations and rates for next three years.
Capacity Capacity Utilization Increase in Rates LSAW (MTPA) Production (MTPA) Revenue from LSAW (mn) Revenue per MTPA (INR) HSAW (MTPA) Production (MTPA) Revenue from HSAW (mn) Revenue per MTPA (INR) ERW (MTPA) Production (MTPA) Revenue from ERW (mn) Revenue per MTPA (INR) Coating (SMMPA)) Production (MTPA) Revenue from coating (mn) Revenue per SMMPA ('000 INR) Net Sales 350000 175000 15950.00 91142.86 450000 225000 9653.00 42902.22 250000 125000 1069.00 8552.00 6.24 3.12 113.00 36217.95 26785.00 2007 50% 2008 63% 9.00% 350000 220500 21905.73 99345.71 450000 283500 13257.43 46763.42 250000 157500 1468.16 9321.68 6.24 3.93 155.19 39477.56 36786.52 2009E 65% 17.00% 350000 227500 26443.35 116234.49 900000 585000 32007.22 54713.20 250000 162500 1772.28 10906.37 6.24 4.06 187.34 46188.75 60410.20 2010E 57% 6.00% 650000 370500 45648.77 123208.55 900000 513000 29751.95 57996.00 250000 142500 1647.41 11560.75 6.24 3.56 174.14 48960.08 77222.26
Source: Refer excel sheet
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31.03.05 Income Sales & Services (Net) Other Income Increase/(decrease) in stocks Total Expenditure Mfg and other expenses EBITDA EBITDA margin Depreciation EBIT EBIT margin Financial expenses(net) Profit before tax & Exceptional Items Exceptional Items Profit Before Tax Provision for taxation Tax Profit after tax Earnings Per Share Basic Diluted Weighted Avg no of shares EPS - Basic Diluted
31.03.06
31.03.07
31.03.08
31.03.09
31.03.10
10384.88 262.08 171.46 10818.42
18297.66 19.11 0 18316.77
26784.82 42.73 0 26827.55
36782 70 0 36852
60584 70 0 60654
77390 70 0 77460
9872.76 945.66 9.11% 240.97 704.69 6.79% 203.39 501.3 0 501.3 -45.5 455.8
16642.48 1674.29 9.15% 351.9 1322.39 7.23% 418.85 903.54 0 903.54 -115.5 788.04
23452.86 3374.69 12.60% 475.55 2899.14 10.82% 708.06 2191.08 0 2191.08 -636.35 1554.73
30538 6314 17.17% 674 5640 15.33% 750 4890 0 4890 -1550 3340
49852 10802 17.83% 1541 9261 15.29% 933 8328 0 8328 -2665 5663
63254 14206 18.36% 1566 12640 16.33% 553 12087 0 12087 -3626 8461
4.26 4.00 107069032 113858324
6.86 5.62 114882835 140314150
11.66 9.45
22.94 19.50
35.76 30.40
53.53 45.50
133293520 145589743.6 158340460.5 158062637.4 164593401 171282051.3 186282894.7 185956044
Source: Refer excel sheet
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IV.
Competitor Analysis
Indian Players: Jindal Saw is the most diversified player having capacities of all types of pipes except ERW pipes, whereas players like WGRSL and Maharashtra Seamless are focused either on SAW or Seamless Pipes. It is interesting to note that only Welspun Gujarat manufactures ERW pipes amongst the larger well known players.
Players Welspun Gujarat Jindal Saw PSL Maharashtra Seamless Man Industries Others
Saw Pipes LSAW Y Y N N Y N HSAW Y Y Y N Y N
Seamless Pipes N Y N Y N Y
Ductile Cast Iron N Y N N N Y
Iron/
ERW Pipes Y N N N N N
Source: Company websites
Capacity: Jindal Saw is the largest manufacturer of LSAW pipes, whereas PSL is the largest manufacturer of HSAW pipes.
Capacities (MTPA) FY08 Particulars LSAW HSAW Seamless Pipes Ductile Iron ERW Total Jindal Saw 800,000 150,000 100,000 200,000 1,250,000 250,000 1,000,000 1,100,000 425,000 WGRSL 350,000 400,000 PSL 1,100,000 Man Indus. 275,000 150,000 Total 1,425,000 1,800,000 100,000 200,000 250,000 375,000
Source: Company websites
Planned Capex: To cater to world’s burgeoning demand of pipes, all major players are currently undertaking capex, which are expected to be operational by FY10. Players like WGRSL, Man Industries and PSL are setting up facilities in USA to specifically cater to US demand.
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Capacities Post Expansion (MTPA) FY10 Particular LSAW HSAW Seamless Pipes Ductile Iron ERW Total Jindal Saw 1,000,000 500,000 250,000 200,000 1,950,000 WGRSL 650,000 850,000 250,000 1,750,000 PSL 1,400,000 1,100,000 Man Indus. 500,000 800,000 425,000 Total 2,150,000 3,550,000 100,000 200,000 250,000 375,000
Source: Company websites
Jindal Saw is the largest player in term of volumes. Largest capacity, operation in USA and above average capacity utilization has helped the company to register sales more than double of its competitor. WGRSL which has a smaller capacity than PSL has registered sales which is almost double than that of PSL mainly due to higher capacity utilization rate (Larger and heavier the pipe manufactured better would be the capacity utilization) Both Jindal Saw and WRGSL sales have depicted unprecedented sales CAGR growth of 73% and 46% due to increase in capacity, increasing capacity utilization and increasing realization of pipes.
Margins: WGSRL has highest EBIDTA margin over its domestic peer players due to its presence in niche market and timely booking of its raw material. WGSRL with its backward integration would further improve company’s EBIDTA
5.22 12.44
EBITDA and PAT Margins
EBITDA (%) PAT (%) 13.36
11.57 5.52
13.28
margins. High gearing has led to erosion of EBITDA margins for PSL and WSGRL as evident from the D/E ratios of 2.26 and 2.03 resp. as against 0.86 for Man Industries and 0.52 for Jindal Saw. Return Ratios: The graph alongside shows the return on capital employed and return on net worth for the competitors. The graph shows that WSGRL has the highest return on capital as far as competitors are concerned, but return on net worth is the lowest primarily because of the huge interest cost due to higher gearing.
Source: Company websites
4.52
5.58
Man Indus.
Jindal Saw
PSL
WSGRL
ROCE and RONW
ROCE (%) 21.28 19.03 21.63 21.21 14.62 16.99 RONW (%) 25.45 20.76
Man Indus. Jindal Saw
PSL
WSGRL
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V.
Miscellaneous Factors
Forex Management
The company is exposed to currency fluctuations on foreign currency transactions. With a view to minimize the volatility arising from fluctuations in the currency rates, the company follows established risk management policies including the use of exchange forward contracts and other derivative instruments. Forward and Options Contracts (in millions) 1) For payment to be received against export and other receivables:
Derivatives Contract USD/INR EUR/USD
Source: Annual Report
Amt in foreign currency 371.63 7.00
Equivalent INR 16,723.04 398.99
Thus, it can be seen that company has hedged around 60% of its exposure against export and other receivables.
2) For payments to be made against imports and other payables
Derivatives Contract USD/INR EUR/USD EUR/INR GBP/USD
Amt in foreign currency 211.45 97.10 23.06 1.20
Equivalent INR 9,495.70 5,550.70 1,378.48 101.83
Source: Annual Report
It is clear from the table that company is currently 80% protected against movements in exchange rates of various currencies for its imports and other payables.
3) Derivative interest rate Swaps Contract
Derivatives Contract INR
Equivalent INR 1,500.00
Source: Annual Report
4) Derivative Currency Swaps Contract 27 | P a g e
Derivatives Contract USD JPY CHF
Amt in foreign currency 10.00 1,216.14 7.43
Equivalent INR 435.10 1,28,508.99 323.49
Source: Annual Report
Apart from hedging its imports/exports and receivables/payables, company is also involved in Derivative Interest rate and Currency swaps servicing its foreign currency loans and other payments.
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Bibliography
1. Annual Reports of the Company 2. Bloomberg Terminal 3. www.bloomberg.com 4. www.stern.nyu.edu/~adamodar/ 5. www.nseindia.com 6. www.simdex.com 7. India Infoline research report – April 2008 8. finance.yahoo.com 9. Enam India Research – April 2008 10. www.investopedia.com
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doc_890119412.docx