27 JANUARY, 2010

QUARTERLY UPDATE

Welspun Gujarat Stahl Rohren Ltd.

CMP : Rs. 256.00

RESEARCH
RECOMMENDATION Accumulate on dips

COMPANY DETAILS
Welspun Gujarat Stahl Rohren Ltd has declared its Q3FY10 quarterly results and BSE Code 532144
the company has clocked a sales of Rs. 1639.5 crore on consolidated basis NSE SYMBOL WELGUJ
compared to 1456.6 crore in the same quarter last year signifying a growth of 13% Bloomberg code WGS IN
on YoY basis. The numbers are not comparable with corresponding quarter last Market cap(Rs crore) 5219
year as the company added pipe capacity in USA during the year. However, on QoQ Free Float(%) 60%
basis the company's revenue has dropped by 16.28% on considering the 52-wk H/L(Rs) 296/48
standalone figure. On a standalone basis, the company reported an EBITDA and Dividend yield-% 2.01%
PAT of Rs.346.8 crore and Rs.166.8 crore respectively in the quarter under review Beta(Nifty) 1.25
compared to Rs.142.9 crore and Rs.45.3 crore in the corresponding quarter last
year. This signifies an increase of 144% on EBITDA level and 268% on PAT level on SHAREHOLDING PATTERN
YoY basis. Promoter 40.46%
FII 19.07%
The company has been able to improve its EBITDA (21%), EBIT (18%), and PAT Other Institutions 13.82%
(10%) margin significantly in the quarter under review. Excluding the forex Others 26.65%
recovery included in other income of about Rs. 60 crore, the margins would be
18%, 14% and 7% respectively. This improvement in the profitability can be
attributed to factors like:

1. commissioning of the plate cum coil mill which is enabling the company to
enhance its external sales in both API and non API categories and hence
contributing to its bottomline

2. commissioning of double jointing and coating facilities in Arkansas USA, which

is doing the coating and jointing jobs of the bare pipes which were previously
done by other players previously

3. replacement of high cost debt with low cost debt and QIP money.

Result at a glance on Consolidated Basis as reported by the company.

Particulars Q3FY10 Q3FY09

Sales 1639.5 1456.6
EBITDA 348.6 142.9
EBITDA Margin 21% 10%
Depreciation 51.1 31.6
EBIT 297.5 111.3
EBIT Margin 18% 8%
Interest 42.8 48
EBT 254.7 63.3
EBT Margin 16% 4%
PAT 166.8 45.3
PAT Margin 10% 3%

ANALYST
Kinshuk Acharya
kinshuk@eurekasecurities.com
91-33-3918 0386 - 87
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Welspun Gujarat Stahl Rohren Ltd.
27 JANUARY, 2010

Operational Highlights

During the quarter under review, the company's sales and production is as follows
Sales Volume (in tons) Q3FY10 Q3FY09 YoY%
Total Pipe (Cons) 170216 155144 10%
Plate External 103151 13110 687%
Plate internal 9178 31280 -71%
Total plate 112329 44390 153%
Production Volume (in tons)
Total Pipes Consolidated 156679 179980 -13%
Plates 93586 56796 65%
Source: Company

Out of total pipe sales of ~170216 tons, ~5000 tons is contributed by LSAW pipes, ~ 148000 tons of HSAW and ~17000 tons of ERW pipes.
The company, on the other hand, produced 26000 tons of LSAW, 112000 tons of HSAW and 19000 tons to ERW pipes. On quarterly basis
the company's capacity utilization has been around 30% for LSAW, 50% for HSAW and again 30% on ERW pipe segment respectively. Plate
division's utilization rate has been 24%, however, this division has newly been operational and we expect the utilization rate to go up
significantly in FY11.

The company's order book position stands at Rs. 6600 crores, the breakup of the same is presented in the following chart:

Order Book Composition

External
Plates
1%

Coating LSW
ERW 8% 14%
2%
HSAW
75%

Source: Company

In terms of value, HSAW pipe order book stands at Rs. 5000 crore, LSAW at Rs. 900 crore, ERW at Rs. 160 crore, Rs. 100 crore in external
plate, Rs. 500 crore for coating.

In terms of volume, the current order book of Rs. 6600 crore constitutes of 7,60,000 tons of pipes and 1,00,000 tons of plates.
Order Book Composition (in tons)

Coating, 60000

LSW, 100000

External
Plates, 40000

ERW, 25000

HSAW, 640000

Source: Company

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Welspun Gujarat Stahl Rohren Ltd.
27 JANUARY, 2010

In terms of geographical distribution of the order book position, 78% of the order book is from North America, rest is from India, Middle
East, etc.

The breakup of the consolidated EBITDA is as follows

EBITDA Contribution (In Rs. Cr)

Forex Recovery
60
Coating
17%
20
6%

Pipe
196
56%
Plate
73
21%

Source: Company

During the quarter under review the company's EBITDA per ton of pipes stood at Rs. 11500 and the same for the plates stood at Rs. 6,500
per ton.

As it has been depicted in the graph above the company has recorded a forex recovery of Rs. 60 crore, which has been included in the
'other income'.

For the quarter under review the production and sales volume of US operations stood at 33000 tons and 31000 tons respectively. For the
nine months under review the production and sales volume of US operations stood at 82000 tons and 83000 tons respectively.

Slab inventory has come down significantly from 80000 tons to 28000 tons in the quarter under review. There has been 62000 tones of
unsold finished goods inventory out of HSAW comprised of 45,000 tons could not be shipped in the quarter under review and as such it
will be sold in the current quarter.

The company has reported lower interest cost because it has prepaid approx. Rs 500 crore high cost debt during the quarter. Presently,
the cost of debt including the forex premium comes to 8.5% and excluding forex premium on weighted basis it is 5.16%. Its total debt at
the end of December 31st 2009 stood at Rs. 2300 crore out of which Rs. 1400 crore pertains to foreign loan (ECB and FCCB) and Rs. 900
crore of domestic loan

Higher depreciation with respect to Q3 FY10 due to commissioning of 150K MT Spiral III Plant in Anjar and 350K MT Spiral Plant in US

Cash balance on 31st December stood at Rs. 1300 crore, which also includes some part of the proceeds of QIP and FCCB

Concall Highlight

On YoY basis the sales volume have gone up, however on QoQ basis the sales volume has been considerably lower. This is attributable to
the fact that a significant amount of shipment that was supposed to be made during the last quarter could not be made, mainly because
of the holiday seasons where most of the liners do not operate. However, these consignments have already been shipped and the
revenue will be recognized in the 4th quarter. In addition to this the production volume has also been on the lower side on account of
LSAW mill was shut down for 2 weeks for planned maintenance.

The management has been optimistic about Q4FY10 and FY11 as a significant amount of order flows are expected to take place both from
the domestic and international front. It is expected that crude oil would continue to remain stable in $75-80 range and as such enhanced
activities in the oil and gas exploration front is becoming visible all over the world and especially in the US. This is evident from the
improving trend of rig counts all over the world and in the US. With the plant in US expected to be fully operational by the next fiscal, the
company is expecting good order in the US based plant from the region. The management has indicated that inquiries from Iran, Middle

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Welspun Gujarat Stahl Rohren Ltd.
27 JANUARY, 2010

East and Australia has already started to come in and it is expected that those inquiries would translate into real demand by the end of the
1st quarter of FY11.

In the domestic front as well there is a possibility of tenders being floated by GAIL for its Dhabol Kochi Bangalore pipeline and Haldia
Jagdishpur pipeline. In addition to these there are certain tenders to be floated by private players. Overall there is going to be 4000 Km of
pipeline laying that is suppose to take place translating into 0.5 million tones of pipe requirement. In addition to this there is going to be
significant demand of pipes to come from city gas distribution side as feeder and spur lines.

Considering the favorable developments both in the domestic and international front the management has given optimistic volume
guidance for pipes and plates for FY11. The company targets to produce 1 million tones of pipes and 600000-650000 tons of plates, which
would also include 50000-75000 tons of coils.

Capex for the whole year FY10 would be in the vicinity of Rs. 300 crores and a similar figure of Rs. 300 crore is also earmarked for capex in
the FY11. The projects for which these capex has been earmarked for, has been given below:

! 100,000 MTPA (Including fabrication) Spiral Pipe mill project in Bangalore, India, to cater to pipe demand in water segment shall be
ready in the first half of FY 2011. Another 200,000 MTPA (Including fabrication) Spiral Pipe mill projects in other parts of India are
being planned to cater to pipe demand in Oil and water segments, which will be ready over next 15 months and shall entail an
investment of about Rs.150 crore.

! 300,000 MTPA LSAW Pipe mill project at Anjar, India is likely to be completed in second half of FY 2011.
! Coil mill in Anjar, India, likely to be commissioned in Q4 FY 2010.
By the end of FY11 the company will be able to commission its entire expansion project on the pipe side and the total capacity will
become 2.1 million tons per annum, hence there is going to be a significant amount of ramp up in revenue to take place by the end of
FY11.

Fund raising and Utilisation:

The Company completed fund raising worth $250 million through Foreign Currency Convertible Bonds (FCCB) and Qualified Institutional
Placements (QIP) issues. The QIP issue has raised the share capital by Rs.8.34 crs implying a dilution of 1.67 crs (9%). QIP proceeds have
been primarily utilized for retiring high cost rupee loans, thereby de-leveraging the balance-sheet considerably. Balance funds out QIP
and proceeds out of FCCB issue shall be utilized for capital and other corporate expenditure.

Valuation & Recommendation

Though the result for the 3rd quarter of FY10 has come a little lower compared to our expectations, improving industry outlook would
enhance utilization rate leading to improved margins and return ratios for the company. We continue to be positive about the order flow
for the company arising from pipeline addition by domestic players like GAIL, GSPL etc. At current price of Rs. 256, the stock is trading at
12.19x its FY10E and 7.75x its FY11E earnings. Based on market developments and management guidance, we increase our FY11 EPS
estimate from RS 31 to Rs. 33 per share. Hence we increase our target price to Rs. 344 (12x FY11E EPS) from Rs. 323 earlier suggested by
our initiating coverage report on the company released on 9th September, 2009. Therefore, we assign “Accumulate on dips” rating on the
stock, with a holding period of 12-18 months.

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Welspun Gujarat Stahl Rohren Ltd.
27 JANUARY, 2010

Reported Quarterly Result (Standalone) (in Rs. Crore)

Particular 3rd Qtr 200912 3rd Qtr 200812 YoY % 2nd Qtr 200909 QoQ %
Gross Sales 1566.93 1545.73 1% 1871.61 -16%
Excise Duty 46.55 89.1 -48% 58.44 -20%
Net Sales 1520.38 1456.63 4% 1813.17 -16%
Other Income 4.25 5.03 -16% 3.17 34%
Other Misc. Income 4.25 5.03 3.17
Total Income 1524.63 1461.66 4% 1816.34 -16%
Raw Material Consumed 841.86 1262.46 -33% 949.19 -11%
Stock Adjustment 53.46 -244.65 -122% 276.32 -81%
Purchase of Finished Goods 132.82 50.16 165% 39.31 238%
Employee Expenses 34.78 30.16 15% 35.87 -3%
Loss on Forex Transaction 0 41.95 0
Other Expenses 199.43 173.67 15% 219.02 -9%
Total Expenditure 1262.35 1313.75 -4% 1519.71 -17%
EBITDA 262.28 147.91 77% 296.63 -12%
EBITDA Margin 17.3% 10.2% 16.4%
Interest 32.34 47.96 -33% 47.99 -33%
Interest to Sales 2.1% 3.3% 2.6%
EBDT 229.94 99.95 130% 248.64 -8%
EBIT Margin
Depreciation 37.44 31.56 19% 37.58 0%
EBT 192.5 68.39 181% 211.06 -9%
EBT Margin 12.7% 4.7% 11.6%
Tax 64.79 23.08 181% 70.84 -9%
Reported Profit After Tax 127.71 45.31 182% 140.22 -9%
PAT Margin 8.4% 3.1% 7.7%

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Welspun Gujarat Stahl Rohren Ltd.
27 JANUARY, 2010

Financial (Consolidated) (in Rs. Crore)

FY07 FY08 FY09 FY10E FY11E

INCOME :
Sales Turnover 2733.91 4021.97 5840.08 7500 8174
Excise Duty 173.61 180.06 263.72 339 369
Net Sales 2560.3 3841.91 5576.36 7161 7805
Other Income 139.63 195.13 296.52 300 300
Stock Adjustments -4.07 137.89 472.69 607 662
Total Income 2695.86 4174.93 6345.57 8068 8766
EXPENDITURE :
Raw Materials 2028.18 2749.36 4443 5547 5708
Power & Fuel Cost 21.57 35.01 133.21 166 171
Employee Cost 59.54 77.34 125.27 156 161
Other Manufacturing Expenses 173.11 463.55 727.79 909 935
Selling and Administration Expenses 64.42 98.66 133.5 167 171
Miscellaneous Expenses 4.52 43.37 27.22 34 35
Total Expenditure 2351.34 3467.29 5589.99 6979 7181
Operating Profit 344.52 707.64 755.58 1089 1585
Interest 77.94 123.2 278.74 296.74 311.74
Gross Profit 266.58 584.44 476.84 792 1273
Depreciation 47.55 60.88 143.27 191 235
Minority Interest (before tax) 0 0 0 0 0
Profit Before Tax 219.03 523.56 334 602 1038
Tax 76.52 182.78 120 217 374
Net Profit 142.51 340.78 214 385 665
Share Outstanding 19 19 20
EPS 11 21 33
Forward P/E 12.19 7.75

DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, but
we do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute our
judgement as of this date and are subject to change without notice. Eureka Research will not be responsible for the consequence
of reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID.

Analyst : Kinshuk Acharya

Email : kinshuk@eurekasecurities.com
Phone : 91-33-3918 0386 - 87
Registered Office : 7 Lyons Range, 2nd Floor, Room No. 1, Kolkata - 700001
Corporate Office : B3/4, Gillander House, 8 N S Road, 3rd Floor, Kolkata - 700001
Phone : 91-33-2210 7500 / 01 / 02, Fax: 91-33-2210 5184
AKP - 9830005273

e: helpdesk@eurekasecurities.com
Mumbai Office : 909 Raheja Chamber, 213 Nariman Point, Mumbai-400021
Phone : 91-22-2202 5941 / 5942
e: mumbai@eurekasecurities.com

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