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Business News/ Opinion / Online-views/  New orders alone may not help Welspun shares
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New orders alone may not help Welspun shares

New orders alone may not help Welspun shares

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Welspun Corp. Ltd’s new order inflow augurs well for the company. It reported on last Monday that it has won an order worth Rs1,182 crore to supply pipes, mainly to Australia.

Also See | Recovery Path (PDF)

Welspun had a bad spell last fiscal. For the nine months ended December, it reported a net sales decline of 11.87% over a year ago. Net profits fell even more sharply by 24.9%.

Even with this order, Welspun will most likely report a quarterly decline in its order book. It had orders worth Rs5,000 crore at the end of the December quarter. With brokerages estimating an average Rs1,600 crore sales for the March quarter, its order book will still shrink to Rs4,582 crore.

Not that Welspun is alone in this regard. In the aftermath of the global meltdown, economic activity declined and order inflows dried up for all steel pipe makers. But things may be getting better for these firms. Although they still underperformed the benchmark, shares of many firms in this sector posted quarterly gains as orders started trickling in.

Brent crude oil has posted its biggest quarterly gain in two years. Most brokerages and economists have increased their forecasts in the past month. India has auctioned off 34 blocks recently. With the Japanese earthquake raising questions about nuclear power, and no let-up in energy demand, it’s going to be all oil and gas for some more time.

Thus, the argument goes, it’s going to be boom time for the makers of steel. Religare reckons that 15,000km, or $4 billion, of pipe orders will come from the domestic market alone in the next three-four years. With economic activity picking up in the West, it is even better for Welspun, which gets 70% of its revenue from overseas contracts.

However, this scenario does not preclude risks such as overcapacity in the industry. The industry is fragmented and with some firms such as Jindal Saw Ltd and Welspun itself planning to expand capacity, there is the danger that margins might be under pressure due to aggressive bidding. Steel prices are also rising and pose a major risk to profit margins.

That explains why steel pipe makers are still trading below their historic average valuations. Welspun, which is trading at 5.8 times its fiscal 2012 estimated earnings—a 40% discount to that of market leader Jindal Saw—has another problem. Sebi banned its promoters from dealing in the company shares in December. Although that has nothing to do with the company’s operations, it still remains a shadow on the stock.

Graphic by Paras Jain/Mint

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Published: 03 Apr 2011, 10:47 PM IST
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