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(exploration and production) activities may slow down.

However, it is unlikely to affect the expansion already undertaken by oil and gas majors.

Spends on pipelines happen only in the last leg of the entire capex and, thus, order flows fromongoing capex, may last a while. This does away with concerns that there may be any significantslowdown in demand for pipes in the foreseeable future.

Besides, demand may also get a lift from the need to replace some of the existing pipe networks inthe US. That over 60 per cent of the existing line pipe network (over 1.5 million miles) in the US isover 30 years old and would soon be due for replacement, also lends replacement market potential.

Strong presence in the export market and established relationships with many global oil and gasmajors (in the US as well) reflect well on Welspuns ability to grow its revenues, albeit at a slowerpace.

The companys order book, pegged at about Rs 9,500 crore (2.4 times FY-08 revenues), reinforcesits stable prospects.

Financials

For the quarter ended September 2008, the company registered a 60 per cent growth in sales. Pipevolumes remained robust, witnessing a 34 per cent increase, while realisations grew by 12 per cent.

But the high sales volumes in Q2 were partly due to the deferment of shipments from first quarterwhen the government had imposed export tax on steel pipes. Blended pipe realisations that were up4 per cent on a year-on-year basis registered a fall of over 7 per cent sequentially.

Operating margins, owing to higher raw material cost declined by 6 percentage points to 10.5 percent.

Profits however declined by over 21 per cent due to forex losses (on account of realignment of net

foreign currency exposure and ECB) of over Rs 88 crore during the quarter. If not for the forex loss,the companys performance was commendable.

Concerns

The companys steel plate facility, which was initially intended for both captive use and commercialpurposes, however, may prove to be less of a money-spinner than expected.

After the recent fall in steel prices, which has made the commercial sale of steel plates lessprofitable, the management has reduced its plate production guidance to 340,000 tonnes (for thisyear) from 600,000 tonnes in the beginning of the year.

Instead, it plans to focus on using its plate facility for captive consumption and for upgrading it tomanufacture pipes for critical applications such as the for the power sector.

While for now the companys dependence on the US (45 per cent of its revenues) does not ring anyalarm bell, given the possibility that the capex on pipeline network will continue, it may backfire if theUS economy remains in recession for more than a couple of years.

In such a scenario, Welspuns spiral pipe manufacturing facility (expected to be commissioned by Q3

FY-09) in the US may also prove counterproductive. The company may then need to increase itsrevenue share from countries in West Asia and South America and even India.

Till such time, trends in order inflows for the company over the next two-three quarters may bear aclose watch.

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