Welspun (WLSP IN, INR 70, downgrade to Reduce)

Welspun India's (WLSI's) Q4FY07 results were below expectations. Though net revenues increased 21% Y-o-Y to INR 2.49 bn, they were below our expectations of INR 2.73 bn. PAT decreased 4% Y-o-Y to INR 103 mn as against the expected increase to INR 167 mn. EBITDA margin decreased 110bps Y-o-Y to 14.2%, driven partially by slower-than-anticipated capacity ramp-up in the bed linen business. EBITDA grew 12% Y-o-Y to INR 352 mn.

WLSI announced an extension of the ongoing phase II expansion, to add another 10,000 tpa to its existing towels capacity addition, taking it to 41,000 TPA post expansion. It has also reduced the size of its proposed decorative bedding capacity in India to 0.72 mn sets from 1.44 mn sets annually and intends to set up 1.04 mn sets annually in Mexico instead.

For FY07, WLSI's standalone revenues were INR 9.74 bn (up 49% Y-o-Y), EBITDA was INR 1.58 bn (up 28.2% Y-o-Y), and PAT was INR 528 mn (up 27.2% Y-o-Y). Consolidated revenues (including Christy) was INR 12.41 bn and PAT was 456 mn (including a one time expense of INR 130 mn on account of winding-up of some of Christy's facilities in the UK).

We expect WLSI's revenue growth to dampen due to ramp-up in its bed-linen business, INR appreciation, and the resultant pressure on realisations in the coming quarters. Higher interest costs and greater capex are likely to dampen earnings and return ratios further in the coming quarters. At INR 70, WLSI trades at P/E of 7.2x and EV/EBITDA of 7.6x our revised FY08E. We are downgrading our recommendation to 'REDUCE', given the INR appreciation hangover. Any sustained depreciation of the INR from current level would be a key risk to our recommendation.