Steel pipe manufacturer Welspun Gujarat Stahl Rohren Ltd’s March quarter results have come as a surprise. On a stand-alone basis, net sales fell 23.8% to Rs1,400 crore, but margins rose at a higher-than-expected rate, resulting in a 59% jump in operating profit. Of course, margins were depressed in the March quarter a year ago because of the slowdown. But even on a sequential basis, margins improved by 125 basis points (bps).
One basis point is one-hundredth of a percentage point.
According to an analyst, it remains to be seen if the company derived any benefits from forex fluctuations. The company hasn’t mentioned anything specifically in its accounts statement.
For the year as a whole, Welspun has ended with a 12.5% growth in net sales on a stand-alone basis and a 75% rise in operating profit, thanks to a 600 bps improvement in margins. On a consolidated basis, revenue grew 28% to Rs7,350 crore and operating profit more than doubled to Rs1,113 crore.
Both sales and profit growth will be relatively subdued this fiscal.
Growth in the company’s order book has been sluggish lately and has hovered around the Rs6,500-7,000 crore mark. That amounts to only around 0.8 time estimated sales for the current fiscal. The company management has said that it expects orders of Rs1,000 crore in the next couple of months. This will result in a growth of around 15% in the order book. But given the relatively low order book currently, revenue growth should be lower compared with the previous year.
But the bigger problem is that margins will come under pressure from the current year’s high levels. Steel prices have been rising and so have other commodity prices and it will be difficult for the firm to maintain margins by passing on the entire increase in costs to customers. According to a report by Anand Rathi Securities dated 3 March, Welspun’s earnings per share is likely to grow 10% and 11%, respectively, in FY11 and FY12. So even while valuations seem attractive at around 10 times trailing earnings, they seem to capture the expected growth in this.
The company recently acquired MSK Projects (India) Ltd, which will give it an entry into the growing infrastructure segment, apart from strengthening its presence in the pipes business. Considering that the firm is cash-rich, it may make more acquisitions, and this may drive valuations going forward.
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