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Sunday, September 9, 2007

D&H Welding-Can grow exponentially

Scripscan-D&H Welding Electrodes(India) Ltd.
BSE Code-517514
CMP Rs-40
Duration:6-9 months

Company Background:Founded in 1991 as a private limited company, D&H Welding Electrodes Ltd. (hereafter referred to as D&H) is an Indore based company into manufacturing of welding electrodes. Besides Electrodes, the company is also into the manufacturing of Fluxes and wires, Co2 wires. It has two operating plants - one at Indore and the other at Ghatbilod - wherein it produces over 250 different types of electrodes. D&H is today among the 3 listed companies in the Indian Stock Market and among the top 5 companies in the welding ind. in India.

Industry Perspective:Welding Ind is a proxy to the general economic conditions prevailing in the country. With the GDP growth recording a 7% + levels for the past three years and expected to log in similar/better rates in the immediate future, industrial activity is experiencing a quantum shift in terms of performance and prospects. This is creating a tremendous scope for growth in the welding ind., which forms a critical input into engineering and project - related inds. The total Welding Ind. is estimated to be of the order of 100,000 tonnes per annum (TPA) and is growing at high double digit rates. Esab India and Ador contribute to roughly 43 - 44% of the total capacity, the balance 55% + capacity being distributed over a large number of players. D&H, with 7,000 TPA of capacity is the third listed entity from the Ind., besides these two. The critical parameter in this ind. is the approval from the project executing giants and companies and each product requires a separate approval. Thus, the magnitude of entry barrier faced either by a new corner or by a player wanting to expand its client base is quite obvious.

Company Perspective:D&H undertook the transition from a private limited company to a public limited one in 1994, through an IPO. Salutary economic conditions for the first three years post the public issue helped the company log in a 20% CAGR upto March 1997. However, the ensuing slowdown in the economy led to stagnation for five years. The post - 2002 period has seen the company getting back into the growth mode, with CAGR of 30% over the FY2003 - 07 period. It is going for doubling of its sales force from the current figure of 15 to be stationed at its six offices and by applying for approvals for as many products by established clients in the public and private sectors. The offices are located in cities attached to prime industrial belts - Kanpur, Chandigarh, Chennai, Bilaspur, Vadodara, Hyderabad and Bangalore, besides the ones at Mumbai and Indore. The current client list includes various ordnance factories, established Central and State PSUs such as BHEL, BEML, NTPC and NHDC, Cement Plants (ACC, JP, Grasim etc.) and Project Contractors. The Company has created this client base through the replacement route - getting a foot in the door when the two established majors are not able to supply on an immediate basis - a getting repeat orders on quality approval for its products.

Financial Performance: T R A I L I N G 2 Q U A R T E R S 2 0 0 6 - 2 0 0 7 Q4 Q3 (crs.) (crs.)Sales 10.40 8.90PBT 1.58 1.09PAT 0.99 0.70 Y/E March (Rs. cr.) 2006 2007 2008E 2009ESales 23.12 32.13 46.00 58.00Growth (%) 20.10 39.00 43.20 26.00NP 1.33 2.89 4.60 6.40Growth (%) 192.70 117.40 59.16 39.13Equity 5.61 5.61 5.61 5.61EPS (Rs.) 2.37 5.15 8.20 11.40

Company has put up a splendid show for 06-07, wherein its sales have gone up by 39% and NP has zoomed by 117%. In Q4 alone company has earned PAT of 99 lakhs. Company has declared 10% maiden dividend.

Future Prospects:During the year, company increased its capacity from 4400 tonnes of electrodes to 6600 tonnes. It also set up a mill to manufacture copper coated wire with capacity of 1200 tonnes. Combined capacity now is 7800 tonnes. Company is confident of maintaining excellent growth for next 3 years. D&H is only in consumables segment and does not manufacture welding machines etc. (in case of Ador, Esab, nearly 40% turnover comes from welding equipments). In terms of quality, technology and range of welding consumables, D&H is at par with Ador and Esab.

Valuations:Company is likely to achieve sales of 46 crs. and NP of 4.60 crs. for 07-08.Stock is trading at just 5x FY08E EPS and 3.7 x FY09E EPS.This is lowest P.E. Ratio in the Ind.Bigger companies like Esab and Ador have discounting of 14-16 times.Of course,bigger companies will enjoy little higher valuations.But,considering ind. average, D&H is available extremely cheap, mainly due to low promoter profile and investor ignorance about potential of the company.

Conclusion-Due to robust industrial demand, welding ind. will continue to do well. Smaller players like D&H will have growth rate much higher than ind average. Gradually,P.E. expansion is bound to take place in case of D&H.Company will go for further expansion after 6-9 months inorder to maintain similar growth rate for next 3-5 years.Altogether a scrip worth looking at for the medium to longer term perspective.
Source-Guli and H.G


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