Hold: 1QFY08 Results In Line, but EBITDA Pressures Continue

Results in-line

Welspun reported strong revenue growth of 33%, but EBITDA declined 11% on margin pressures; however earnings grew 22% on higher other income – largely from gains on forex hedges (Rs.c100mn) vs. losses in 1QFY07.

EBITDA margins pressures continue

EBITDA margins fell 700 bps YoY despite strong revenue growth, due to: 1) higher overheads on bed-linen with production still ramping up (60%), 2) adverse impact of rupee appreciation; and 3) one-time write-back of earlier excise benefits of Rs180mn.

Adverse impact of rupee appreciation

With Welspun's high share of exports (95% of FY07 sales), largely dollar denominated; we see rupee appreciation adversely impacting realizations and earnings. While 1Q was largely insulated by forex hedges (Rs.45/USD), any real impact will be felt in the quarters ahead.

Earnings estimates lowered

Building for the significant margin pressures in the quarter, impact of sharp appreciation in rupee on exports (95% of FY07 revenues) and rising interest costs given the high leverage, we reduce our earnings by 28%-37% over FY08E and FY09E.

Maintain Hold with target price of Rs 68

While near-term earnings will remain under pressure; stock's 24% underperformance over past 3-months largely discounts this. With stock trading at 8x FY08E PE, at par with sector and 0.7x FY08E P/BV, we maintain Hold (2M) with lower target of Rs 68.