Buy Welspun Corp | NSE: WELCORP | Long Term Investment Advice | Capital Goods Sector | 12 Aug 2024 | Upside Potential 45% – 50%

NOTE

Closing Price: ₹654 (as of Aug 12, 2024)
StopLoss*: Apply on the daily close. After the first target, reset the StopLoss to your buying price.
Duration^: Approximate holding period based on the active trading days (excluding market holidays). Actual holding may vary with the market conditions.
Upside Potential#: Based on median of the suggested buy range.

Welspun Corp Limited manufactures and sells steel pipes, coatings, plates, and coils in the US, Europe, Saudi Arabia, and India. The company offers helically, longitudinally, and electric resistance welded pipes, pig iron and ductile iron pipes, billets, thermo mechanically treated rebars, stainless steel pipes, tubes, and bars. Its products are used in various industries, including oil, gas, water transmission, infrastructure, and defense. The company was incorporated in 1995 and is based in Mumbai, India.

Technical Analysis

Key Observations

In January 2008, the stock faced significant resistance around the 500 level, leading to a substantial price correction.
Over time, it established a support base near the 45 level, from which it began to rebound, climbing back towards the 300 level.
However, the stock struggled to break past the 300 threshold and eventually retreated to its former support.
Following this, it entered an extended phase of consolidation until it finally broke through the 300 level in July 2023.
This pivotal moment propelled the stock into strong upward momentum, culminating in a multi-year breakout at the 500 mark after nearly 16 years.
Subsequently, the stock not only maintained this breakout level but has also begun to steadily rise.

Technical Image

Technical Analysis

Key Observations

In January 2008, the stock faced significant resistance around the 500 level, leading to a substantial price correction.
Over time, it established a support base near the 45 level, from which it began to rebound, climbing back towards the 300 level.
However, the stock struggled to break past the 300 threshold and eventually retreated to its former support.
Following this, it entered an extended phase of consolidation until it finally broke through the 300 level in July 2023.
This pivotal moment propelled the stock into strong upward momentum, culminating in a multi-year breakout at the 500 mark after nearly 16 years.
Subsequently, the stock not only maintained this breakout level but has also begun to steadily rise.

Technical Image

Stock Valuation

Intrinsic Value

The current price-to-earnings ratio for the stock is 14.5.
The median price-to-earnings ratio for the stock over the past year stands at 15.4, while the earnings per share for the trailing twelve months is 45.55.
This leads us to calculate the intrinsic value of the stock as follows: 15.4 * 45.55 is equals to 701.47.
With the current market price hovering around 695, which is below the intrinsic value of 701, it clearly indicates that the stock is considerably undervalued right now.

P/B Ratio

The present PB ratio for this stock stands at 3.06, indicating a slightly high valuation but not reaching overvalued territory.

Stock Valuation

Intrinsic Value

The current price-to-earnings ratio for the stock is 14.5.
The median price-to-earnings ratio for the stock over the past year stands at 15.4, while the earnings per share for the trailing twelve months is 45.55.
This leads us to calculate the intrinsic value of the stock as follows: 15.4 * 45.55 is equals to 701.47.
With the current market price hovering around 695, which is below the intrinsic value of 701, it clearly indicates that the stock is considerably undervalued right now.

P/B Ratio

The present PB ratio for this stock stands at 3.06, indicating a slightly high valuation but not reaching overvalued territory.

Debt Analysis

The company's current debt is Rs. 1,949 crore, which is quite minimal compared to its market capitalization of Rs. 17,249 crore.
With a debt-to-equity ratio of just 0.35, it’s evident that the debt level is relatively low for this type of capital-intensive business, providing the company with the flexibility to secure additional funding as needed.
A glance at the balance sheet reveals a significant reduction in debt, dropping from Rs. 3,381 crore last year to the current Rs. 1,949 crore.

Debt Analysis

The company's current debt is Rs. 1,949 crore, which is quite minimal compared to its market capitalization of Rs. 17,249 crore.
With a debt-to-equity ratio of just 0.35, it’s evident that the debt level is relatively low for this type of capital-intensive business, providing the company with the flexibility to secure additional funding as needed.
A glance at the balance sheet reveals a significant reduction in debt, dropping from Rs. 3,381 crore last year to the current Rs. 1,949 crore.

Revenue Break-up

Product wise break-up

The company generates its revenue through three primary product categories:

HSAW Pipe, which accounts for approximately 76% of the total revenue,
LSAW Pipe, contributing close to 15% of the total revenue,
ERW Pipe, responsible for about 8% of the total revenue.

Location wise break-up

The company derives approximately 54% of its revenue from India. Additionally, Welspun Corp. operates facilities in the USA and Saudi Arabia, contributing around 8.6% and 34.2% to its overall revenue, respectively.

Revenue Break-up

Product wise break-up

The company generates its revenue through three primary product categories:

HSAW Pipe, which accounts for approximately 76% of the total revenue,
LSAW Pipe, contributing close to 15% of the total revenue,
ERW Pipe, responsible for about 8% of the total revenue.

Location wise break-up

Profit & Loss Analysis

Over the past three years, this stock has achieved an outstanding compounded annual growth rate of 34% in sales.
The cumulative profit increase over the past three years has been an impressive 21%, indicating a strong upward trend.
The profit margin has seen a significant boost, rising to 9% from 5% YoY.
For the fiscal year 2024, the growth in earnings per share is striking, skyrocketing to 42.41 from 7.90 in fiscal year 2023.

Profit & Loss Analysis

Over the past three years, this stock has achieved an outstanding compounded annual growth rate of 34% in sales.
The cumulative profit increase over the past three years has been an impressive 21%, indicating a strong upward trend.
The profit margin has seen a significant boost, rising to 9% from 5% YoY.
For the fiscal year 2024, the growth in earnings per share is striking, skyrocketing to 42.41 from 7.90 in fiscal year 2023.

Cash Flow Analysis

Operating cash flow has seen a remarkable surge, soaring to 1,306 crore from a negative 185 crore in FY23.

Cash Flow Analysis

Operating cash flow has seen a remarkable surge, soaring to 1,306 crore from a negative 185 crore in FY23.

Shareholding Summary

As of the June 2024 quarter, the promoters own a notable 50.03% stake in the company.
Goldman Sachs possesses a notable 10.51% share in the company, reflecting a slight decline from 10.70% in March 2024.
Domestic Institutional Investors (DIIs) have reduced their stakes since the previous quarter, yet they still hold over 9%, which remains quite significant.

Shareholding Summary

As of the June 2024 quarter, the promoters own a notable 50.03% stake in the company.
Goldman Sachs possesses a notable 10.51% share in the company, reflecting a slight decline from 10.70% in March 2024.
Domestic Institutional Investors (DIIs) have reduced their stakes since the previous quarter, yet they still hold over 9%, which remains quite significant.

Conclusion

The steel industry in India is set for expansion, bolstered by new government initiatives. Lower import duties on essential raw materials, combined with heightened public investment in infrastructure and housing, are anticipated to greatly enhance the sector's performance. Therefore, we are excited to see how Welspun Corp will thrive in the near future.

Conclusion

MONEY MANAGEMENT AND TRADING RULES

Buy within the recommended price range. You may allow up to 1% flexibility beyond the range if needed.
No need to rush. The recommendation remains valid for up to 7 days, not just at market open.
Use a trailing stop-loss to protect and lock in profits.
Diversify your trading capital across our other recommended stocks to reduce risk.
Invest responsibly. Trade only with funds you can afford to lose and hedge positions where appropriate.

Analyst Summary

The research analysis is prepared by Arijit Banerjee, CMT, CFTe. He is a veteran trader and an active investor having in-depth knowledge in financial market research, advanced technical analysis, market cycle, algorithmic trading and portfolio management. Arijit is a Chartered Market Technician (CMT) accredited by CMT Association USA, the leading global authority of Technical Analysis and has been honoured by Certified Financial Technician (CFTe) from the International Federation of Technical Analysts, USA. SEBI, the regulatory body of Indian financial market also recognizes him as a Research Analyst (INH300006582)

The views expressed herein are based solely on information available publicly/internal data/other sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed as to accuracy. The recommendations provided herein is solely for informational purposes and are not intended to be and must not be taken alone as the basis for an investment/trading decision. Trading and investing are subject to market risk and the securities discussed and opinions expressed herein may not be suitable for all investors. To read the full disclosure, please click here.

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