PINC POWER PICKS: USHA MARTIN: BUY, TP-Rs120 (33% upside)

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄


What’s the theme?
We expect Usha Martin to benefit from 38% volume CAGR over FY10-FY12E and an improved cost
structure, with completion of capacity expansion of metallics by 0.4mtpa and steel by 0.6mtpa and full
integration from mineral resources to value-added products. We estimate 30% EBITDA CAGR and 31%
EPS CAGR over FY10-FY12.
What will move the stock?
1) Volume growth on higher metallics and billet output from the recently-commissioned 0.4mntpa blast
furnace and 0.6mntpa SMS respectively; 2) Liquidation of inventory build-up in Q1FY11; 3) Stabilization of
output from the Kathuria coal mine; and 4) Improved profitability following recent increase in steel prices
and lower input cost (Q3FY11 contract prices of iron ore and coking coal declined ~7-14% QoQ).
Where are we stacked versus consensus?
Our operating profit estimates are slightly lower than consensus owing to our cautious outlook on steel
profitability and conservative volume estimates for Usha Martin (FY12E sales volume at 0.72mnt vs. guidance
of 0.8mnt).
What will challenge our target price?
1) Delay in stabilization of recently-commissioned capacity impacting volumes; 2) Weak recovery in Europe,
which contributes >10% to consolidated revenue; 3) Impact on mining operation either due to regulatory
changes or naxalite activities; and 4) Severe decline in steel profitability.