>WELSPUN GUJARAT (HSBC)

OW(V): Diversification through MSK Projects acquisition

■ Welspun’s offer of cINR8bn to acquire MSK Projects implies FY11e EV/EBITDA of 6.2x, which we find reasonable; deal will be EPS accretive, we believe

■ Possible synergies – diversification into infrastructure sector for Welspun while Welspun’s balance sheet will provide support for MSK to bid for large-size projects

■ Maintain OW (V) with target price of INR335; new order flow will be likely trigger

MSK Projects acquisition at a reasonable valuation. Welspun Gujarat, India’s leading pipe manufacturing company has announced the acquisition of MSK Projects (MSKP IN, not rated) – a construction company – for a consideration of INR8bn (75% stake). This implies FY11e EV/EBITDA of 6.2x, an 18% discount to peers, which we believe is reasonable given the lower RoE generated by MSK (14% for FY11e) compared with peers (17%). Note that the acquisition is subject to all necessary approvals.

Deal is EPS accretive. We believe that the deal could be funded through the internal accruals of Welspun Gujarat. Thus, MSK could increase FY11e Welspun’s EPS by 7%.

Possible synergies. We believe synergies from this acquisition may include (1) diversification into the infrastructure sector, enhancing Welspun’s ability to provide its customers with end-to-end solutions to plate-pipe-pipeline laying; and (2) MSK Projects through Welpsun’s balance sheet support likely to bid for large infrastructure projects specifically into the road sector. MSK’s current order book of INR5bn constitutes 40% road projects.

New pipe orders of INR10bn likely to be announced. Bloomberg reports that Welpsun is likely to receive pipe orders of INR10bn. This will increase order book by 14% to INR82bn (revenue visibility of five to six quarters).

Maintain Overweight (V) with target price of INR335. We are positive on the stock, as the company has a strong order book – the largest among peers – and a sound customer base with committed capex plans; and given the rise in crude prices, which has improved the new order book outlook. Based our target PE of 13.5x and September 2011e earnings, we arrive at target price of INR335.


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