Welspun Gujarat

Welspun Gujarat: Sensible move (Posted 26 Mar 2010)

MSK Projects’ acquisition has been done at a reasonable price and marks Welspun’s foray into the infrastructure construction space

Welspun Gujarat Stahl Rohren announced on March 18 that it was acquiring a majority stake in MSK Projects through its 100 per cent subsidiary, Welspun Infratech.

The purchase of shares from the promoter group, open offer to the public and subscription to a preferential offer, put together, will cost Welspun about Rs 400 crore and ultimately give the company about 76 per cent stake in MSK. Notably, the deal, which marks Welspun’s move in the infrastructure construction business, has been done at fair valuations - a price to earnings (P/E) multiple of 9.8 and abook value of one - based on MSK’s estimated numbers for 2010-11.

Although MSK Projects is asmall infrastructure and industrial construction company, with turnover of Rs 365 crore and net profit of Rs 23.7 crore in 2008-09, it has been growing fast, with sales rising 68 per cent and net profits up 44 per cent annually over the last three years. Almost 60 per cent of its Rs 500crore order book is accounted by the oil and gas sector, while the road segment accounts for the rest.

The acquisition will also enable Welspun Gujarat, a manufacturer of pipes for the oil and gas sector, forward integrate into laying pipelines and undertake related projects. MSK will be able to scale up its infrastructure business and bid for larger projects given the Rs 212-crore equity infusion by Welspun.

Importantly, since Welspun is funding the acquisition through internal accruals, analysts believe it will add 7 per cent to its 2010-11 earnings. Meanwhile, Welspun has bagged several orders, including two worth Rs 600 crore each in March 2010. Consequently, its order book has risen to Rs 7,800 crore, providing visibility for the next three-four quarters. The order book is expected to improve further, given that Welspun is eying orders worth Rs 1,000 crore in the near term.

Analysts expect the company’s net profit to grow 1518 per cent annually over the next two years. At Rs 277, the stock is trading at a reasonable eight times its 2011-12 estimated earnings.

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