Even as we usher in the Union Budget to be delivered by the Finance Minister, Nirmala Sitharaman all eyes would be on a boost to the economy. Infrastructure stocks are likely to hog the limelight, as we believe the government may again give a boost to the infra space.
Markets are volatile and it is hard to find value at the moment. However, we believe that Welspun Corporation is an undervalued stock that is a good buy at the current levels.
This company is the second largest manufacturer of large diameter pipes in the world. The company has a capacity to manufacture Longitudinal (LSAW), Spiral (HSAW) and HFERW / HFI (ERW) pipes. The company additionally offers coating, bending and double jointing facilities, thereby giving a 360-degree pipe solution to its customers. Welspun Corporation also has manufacturing plant in the US, for supplying its products in and around the region.
Solid order book, surging oil prices provides good outlook
Welspun Corporation has a current global order book at Rs. 4900 crores (US $665 mn), which should keep revenues flowing. Since bulk of its clients are from the global oil and gas space, the surge in crude oil price to $87 a barrel, should provide superb business opportunities for the company. In fact, this could result in larger outlay for oil and gas companies, which should benefit a major pipe manufacturer like Welspun Corporation, which is a large global player. Domestically too, the company should benefit from higher infrastructure outlay.
Financials and valuations
The company has a strong net cash position of Rs. 1,022 crores on 30th Sep 21 vs. Rs. 620 crores as on March 31, 2021. Welspun Corporation has yet to declare numbers for the Dec 31, 2021 quarter, but, the financial performance for the first six months of the current financial year have been pretty decent.
Total Income from Operations stood at Rs. 1,306 crores, up 12.8% YoY for the quarter ending Sept 20, 2021. During the quarter, the company also generated an Operating Cash Flow of Rs. 548 crores, thanks to a focus on operational excellence, cost controls and working capital management.
The company reported an EPS of Rs 3.3 for the quarter ending Sept 30, 2021. We believe that for 2022-23, the company can report an EPS of Rs 18 at the very least. If one assigns a p/e of even 15 times, the stock should trade at Rs 270, as against the current market price of Rs 185. Buy the midcap stock of Welspun Corporation for good long-term gains.
The price to book for the stock is 1.27, which is also reasonable and the dividend yield on the stock is almost 3%.
Ductile iron project to boost revenues
The company is setting up a Greenfield facility at Anjar to enter the Ductile Iron (DI) Pipe business. These pipes find application in water supply infrastructure.
The project is on track and is expected to be commissioned by March 2022.
There is a big focus on creating water supply infrastructure through various government schemes.
Considering the expected growth and budgetary allocation by GOI under Jal Jeevan Mission, there is expected to be a huge demand for DI Pipes in the country. This should boost performance of the company in the coming years.
Investing in equities is risky and investors must therefore understand the risk. The author and Greynium Information Technologies Pvt Ltd would not be responsible for any losses caused based on the article. The author and his family do not hold any shares in Tata Steel Long as on the date of this article. It is also important to remember that Indian stocks markets are expensive and one needs to be careful.