Welspun Corp Q4 FY23 Earnings Call Summary

Earnings Call Transcript can be found here

Key Takeaways from Management Presentation

Positives:

1. Consolidated Performance: The company achieved a coveted 1 million ton global line pipe sales in FY ’23, the eighth time in the last 10 years, reflecting stable and consistent performance in the line pipe business.
2. Revenue Growth: The revenue from operations grew by more than 50% on a year-on-year basis.
3. Strong Order Book: The company has a robust global order book of 1.1 million tons valued at INR 14,600 crores.
4. Favorable Market Environment: The oil and gas capex environment is favorable globally, and there are strong tailwinds in the energy sector, which bodes well for the company’s line pipe business.
5. Diversification: The company has diversified interests in various sectors, including line pipes, steel, shipyards, and stainless steel.
6. Sustainability Ranking: The company has been ranked in the top 7% in the steel industry in the DJSI Corporate Sustainability Index, reflecting a strong emphasis on sustainability and governance.
7. Debt Reduction: The company has significantly reduced its net debt by INR 700 crores during the quarter, and there is a focus on further reducing debt using free cash flow.
8. Growth Guidance: The company has provided a positive growth guidance for FY ’24, with expectations of a 50% increase in top line and a 90% to 100% increase in EBITDA compared to current levels.

Negatives:

1. Uncertain Shipyard Business: The recent acquisition of the Nauyaan Shipyard (formerly ABG Shipyard) poses uncertainties as the company is still exploring options for the business, and there is a focus on liquidating scrap to generate cash flow.
2. Ramp-up in New Businesses: The newly acquired businesses, such as Sintex BAPL and Welspun Specialty Steels, require effort to scale up operations and improve cost efficiency.
3. Market Competition: The company faces competition in the water tank market, and efforts will be required to increase market share and re-energize the distribution network.
4. Market Demand Challenges: Despite positive market outlooks for various businesses, there may be challenges in penetrating new markets and dealing with changing dynamics.

Overall, the presentation highlights several positives, such as strong performance in line pipes, revenue growth, favorable market conditions, and a focus on sustainability. However, there are also challenges with newly acquired businesses and uncertain prospects for the shipyard business. As an investor, one would carefully consider these factors before making investment decisions.

Key Takeaways from Q&A

1. Inventory Management: The company has seen an increase in inventory due to growth in all businesses, particularly in the U.S. However, the increase is mainly related to executing a large order and will gradually reduce as orders are executed quarter-on-quarter. The management is actively working on reducing inventory, including selling scrap and fulfilling orders, to improve the working capital situation.
2. Focus on Debt Reduction: The company aims to generate healthy cash flow over the next three years and achieve a net debt-free status. The management has historically focused on leveraging the balance sheet correctly and aims to keep net debt at a minimalistic level. Cash flow generated will be utilized to reduce gross debt at the company level.
3. Strong Order Book: The company has a strong order book, with significant orders from Southeast Asia, the Middle East, and the U.S. The Saudi order book is particularly robust, and the company expects a steady business continuity in the region for at least the next 2 to 3 years.
4. Market Shifts: The company is witnessing a fundamental shift in the U.S. energy sector, with both Republicans and Democrats prioritizing oil and gas as a key sector. This shift has reduced the impact of election cycles on the energy industry. Additionally, the company anticipates a demand increase in the European market for new energy projects, such as carbon capture and hydrogen, while expecting muted demand in traditional oil and gas pipelines due to alternative supplies.
5. Robust Supply Chain and Sourcing Strategies: The company has a strong and efficient supply chain and sourcing strategy in place for its line pipe business, which is one of the largest in the world. It has established relationships with steel mills globally, making it a niche player in a segment with difficult approvals and accreditations. Additionally, the company has a well-established supply chain for commodities like iron ore, coal, and scrap.
6. Positive Market Outlook for Water Projects: The company expects sustained growth in its domestic Ductile Iron Pipe (DIP) business due to the Jal Jeevan Mission, a government initiative in India focusing on water supply to rural households. The demand for water projects is expected to remain strong for the next 5 to 7 years. However, as a project-based business, the company’s margin profile may vary depending on the project mix on a quarter-on-quarter basis.
7. Growth Guidance: The company has set a target of achieving INR 15,000 crores in top-line revenue and INR 1,500 crores in EBITDA. While these numbers are a reflection of the management’s intent and direction for the business, they should not be taken as fixed predictions. The management is focused on quarterly and yearly performance, and the goal is to exceed the guidance if possible, given the favorable tailwinds in various business segments.
8. Strong Order Book and Capacity Utilization: The Ductile Iron Pipe (DIP) segment has a healthy order book of around 140,000 tons, and the company’s total capacity for DIP is 400,000 tons. The strong tailwinds in the market, coupled with favorable commodity prices, may potentially lead to improved margins in the DIP segment. Additionally, the Saudi entity is a significant contributor to the company’s share of profit and loss from joint ventures and associates, given its robust order book and profitability.
9. Revenue Skew: The company expects the revenue to be more skewed towards the second half of the year, with Q3 and Q4 likely to see higher execution and revenue generation. This is typical for project-based businesses like theirs, where execution picks up momentum as the year progresses.
10. Optimistic Growth Outlook: The company’s management is confident about the growth prospects of all their businesses, including line pipes, steel, Sintex, and Welspun Specialty Steel. They believe that the strong performance in the last quarter is a testament to their growth potential and the favorable market conditions. They are optimistic about delivering superlative performance in subsequent quarters and look forward to investor support.

Quarterly Track

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Technicals: 200 DMA, 50 WMA

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Price Action

• +36% since results 23rd May 2023
• +37% YTD
• +44% 1 Year