Demerger of facility may lift sentiment for Welspun

Industry:    April, 2016

Steel pipe-maker Welspun Gujarat Stahl Rohren’s decision to de-merge its plate-cum-coil mill into a 100 per cent subsidiary may help improve the market valuation for the parent company.

The market value of the company had collapsed significantly following the fall in the steel and oil prices, as that was believed to be a double whammy for Welspun Gujarat.

The fall in oil price was seen as something that would slow down oil sector capex and lower demand for pipes.

The fall in steel prices had led to concerns regarding the commercial viability and demand scenario for the company’s plate facility. When seen in this light, the move to carve out the plate-cum-coil facility may help the parent company command better valuations.

The de-merger may be seen as a precursor to sale of stake in the subsidiary by inducting an investor (though there hasn’t been any decision on this yet). That may help the company focus better and dedicate resources to its plate mill subsidiary, which has an order book of Rs 500 crore.

The plate mill facility was initially set up to backward integrate the steel pipe manufacturing business of the company. While this had appeared promising then, with the high steel plate prices, the fall in price and demand for steel plates following the global economic slowdown had led to concerns of excess capacity.

In keeping with this view, the management had cut the production guidance for its plate facility to about 500,000 tonnes for the current fiscal.

Currently, the facility is making only steel plates, though it is likely to soon start producing coils too. That said, lower demand and the challenges pertaining to procuring business for the plate division may still remain.