Dalal Street Low Priced Scrip: Welspun India Ltd
Welspun India
CMP: Rs 77
Target: 20-25% Appreciation
Investment: 12-18 months
Welspun India (WIL) part of USD 3 billion Welspun group and among Asia’s largest terry towels manufacturers is one of the few companies consistently beating the street expectation since last few quarters. This commendable performance is on the backdrop of US reeling under the recession, which is company’s largest market. WIL managed to post net profit of Rs 207 crore in quarter ending December 2009. This is almost four and half times more than what company recorded same period last year. This profit was posted against sales of Rs 505.6 crore, which was 40 per cent higher than last year same quarter when it posted Rs 359.9 crore. It was sales of bed sheets which grew by 65 per cent that boosted the sales. The company that exports more than 90 per cent of their products to places like US and UK maintained its momentum because some of innovative strategies adopted by company like introduction of new product categories like bath rugs, licensed new brands like UK’s Christy and introduced new channels like sales through internet which alone generated USD 4 million of revenues for the company last quarter. What is more interesting is that shares of company are available at very attractive valuation. The current market price of company’s share discounts its last twelve-month earnings by mere 4.4 times. Looking after the growth that company is exhibiting quarter on quarter, we find it cheaply valued. Even if we look at the market cap to sales of the company, it is again on lower side at just 0.31 times.
WIL engages primarily in the manufacture, sale, and export of terry towels in India and internationally. It also offers bed sheets, blankets, bed linen and bath rugs. WIL has its manufacturing capacities located at Vapi and Anjar in India with capacity of 11500 mts and 13000 mts of towel per day. Internationally, they have manufacturing facilities in Mexico, Portugal and in UK. To further augment its production capacity, company has planned to add 4500 tonnes of towels per day, bed sheets by 7.5 million meters per annum and bath rugs by 2 million units by FY11 at total capex of Rs 360 crore. Going forward, we feel that company will continue its performance because notwithstanding the rise in cost of raw material the company was able to improve its EBIDTA margins. This was primarily due to decline of overheads from 31.9 per cent of sales to 21.9 per cent. It is expected that EBITDA margins will improve further if prices of cotton yarn that have shown some sign of slump in last one month continues to fall in future too. In its latest financial results company was able to improve its performance at all levels, its operating, gross and net profit margins improved by almost 200 to 400 bps. One important step that company took to strengthen its balance sheet is that it retired Rs 40 crore of long term debt, which resulted in cost of interest coming down from 6.3 per cent of sales (Q3FY09) to 3.9 per cent of sales in Q3FY10. With the improvement in economic conditions in company’s main market that is US and Europe and better operating efficiencies with strong balance sheet, we feel that company will be able to continue its good performance. Therefore, we advise our readers to take exposure on the counter with time horizon of 12-18 months and expected appreciation of 20-25 per cent.
*To get the password for buy calls, please subscribe to this blog. You will receive the password in next email to you*If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment