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Usha Martin – BUY
(Q3 FY11)
Usha Martin’s Q3 FY11 standalone revenue declined 4.8% qoq to Rs6.1bn inline with our expectations. The
decline in topline was due to a decline in sales volume as the company’s production was affected by a
breakdown of its 30MW power plant. The breakdown of its power plant led to lower availability of power for
the steel division. The situation was further aggravated as it was not able to receive power from the grid too.
Steel production for the quarter declined by 13% qoq to 112,809 tons.
Average blended realizations declined on a qoq basis due to inferior product mix. Average realizations for
wire ropes and wires rods increased marginally by 1-3% on a qoq, whereas that of bright bar and wire
strand declined by 3-4% qoq. Though captive coal production for the quarter increased from ~42,000 tons
in Q2 FY11 to ~65,000 tons, the company was able to transport only ~25,000 tons of coal to the plant
due to logistics issues.
Standalone operating profit declined 12.4% qoq to Rs1bn due to higher raw material costs. OPM during
the quarter declined 137bps qoq to 15.8% due to the consumption of external coal and increase in cost of
power. The company had to buy coal from the external market as it was not able to ship coal from its
captive mines. Raw material costs per ton remained flat at Rs21,395. Previous quarter performance was
impacted due to maintenance shutdown of its sponge iron plant. Average cost of production increased
marginally qoq to Rs43,956. Blended EBIDTA/ton declined from Rs9,010 in Q2 FY11 to Rs8,272 in Q3
FY11.
International subsidiaries continued its report subdued performance during the quarter. Revenue from
subsidiary companies increased marginally by 6% qoq to Rs1.3bn as the impact of lower sales volume was
negated by an increase in realizations. However, bottomline declined 29% qoq to Rs95mn due to high
fixed costs.
Usha Martin Ltd’s (UML) performance has been below expectations over the last three quarters. The
company’s performance has been impacted by onetime events varying from shut down of DRI, breakdown
of power plant, logistics issues related to transfer of coal and lower off-take in long products in India. The
international subsidiaries’ performance too has been subdued since the meltdown. As a result, the stock
has corrected sharply over the last one quarter. We have downgraded our estimated for FY11 and FY12
factoring the impact of higher transportation costs for iron ore and coal from mines, slower ramp up in
steel production and higher coking coal prices. Based on our revised earnings, the stock is currently
trading at a P/E of 5.3x and EV/EBIDTA of 3.9x based on FY12E. We believe that all the negatives are
priced in and the company would start delivering from Q4 FY11. Volumes are set to more than double over
the next two years while increased raw material integration adds further value. We maintain our BUY
recommendation on the stock with a revised nine month target of Rs81.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Usha Martin – BUY
(Q3 FY11)
Usha Martin’s Q3 FY11 standalone revenue declined 4.8% qoq to Rs6.1bn inline with our expectations. The
decline in topline was due to a decline in sales volume as the company’s production was affected by a
breakdown of its 30MW power plant. The breakdown of its power plant led to lower availability of power for
the steel division. The situation was further aggravated as it was not able to receive power from the grid too.
Steel production for the quarter declined by 13% qoq to 112,809 tons.
Average blended realizations declined on a qoq basis due to inferior product mix. Average realizations for
wire ropes and wires rods increased marginally by 1-3% on a qoq, whereas that of bright bar and wire
strand declined by 3-4% qoq. Though captive coal production for the quarter increased from ~42,000 tons
in Q2 FY11 to ~65,000 tons, the company was able to transport only ~25,000 tons of coal to the plant
due to logistics issues.
Standalone operating profit declined 12.4% qoq to Rs1bn due to higher raw material costs. OPM during
the quarter declined 137bps qoq to 15.8% due to the consumption of external coal and increase in cost of
power. The company had to buy coal from the external market as it was not able to ship coal from its
captive mines. Raw material costs per ton remained flat at Rs21,395. Previous quarter performance was
impacted due to maintenance shutdown of its sponge iron plant. Average cost of production increased
marginally qoq to Rs43,956. Blended EBIDTA/ton declined from Rs9,010 in Q2 FY11 to Rs8,272 in Q3
FY11.
International subsidiaries continued its report subdued performance during the quarter. Revenue from
subsidiary companies increased marginally by 6% qoq to Rs1.3bn as the impact of lower sales volume was
negated by an increase in realizations. However, bottomline declined 29% qoq to Rs95mn due to high
fixed costs.
Usha Martin Ltd’s (UML) performance has been below expectations over the last three quarters. The
company’s performance has been impacted by onetime events varying from shut down of DRI, breakdown
of power plant, logistics issues related to transfer of coal and lower off-take in long products in India. The
international subsidiaries’ performance too has been subdued since the meltdown. As a result, the stock
has corrected sharply over the last one quarter. We have downgraded our estimated for FY11 and FY12
factoring the impact of higher transportation costs for iron ore and coal from mines, slower ramp up in
steel production and higher coking coal prices. Based on our revised earnings, the stock is currently
trading at a P/E of 5.3x and EV/EBIDTA of 3.9x based on FY12E. We believe that all the negatives are
priced in and the company would start delivering from Q4 FY11. Volumes are set to more than double over
the next two years while increased raw material integration adds further value. We maintain our BUY
recommendation on the stock with a revised nine month target of Rs81.
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