Usha Martin - Coal deallocation impact:: ICICI Securities, pdf link

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Usha Martin’s Kathautia coal block has extracted coal output to the tune
of ~2.0 Million tones till date from the date of commencement of mine.
Hence as per the recent SC ruling for the Kathautia coal block Usha
Martin’s outgo with respect to the penalty will be to the tune of ~| 60
crore .
Elevated debt levels an area of concern
Usha Martin’s debt levels have notably increased over the last couple of
years. UML’s gross debt has increased from | 2959.4 crore in FY12 to
| 3694.3 crore in FY13 and further to | 3743.3 crore in FY14. On account
of an increase in debt levels, UML’s debt-equity ratio has worsened over
the last couple of years. The D/E ratio of UML has increased from 1.6x
during FY12 to ~1.9x during FY14E. As on 30th June 2014 Gross Debt and
Net Debt on a consolidated basis stands at | 4057 and | 3910 crore
respectively. As on 30th June 2014 Gross Debt and Net Debt on a
standalone basis stands at | 3753 and | 3648 crore respectively.
Subdued capacity utilisation level
Over the last couple of years sub-optimal business conditions like
continuing slowdown in the domestic auto sector (specifically in medium
and heavy commercial vehicle segment) has kept sales volumes of UML
under pressure. Subsequently, a muted demand scenario has led to
subdued capacity utilisations levels. During FY14, UML operated its billet
capacity at ~64% on account of the slowdown in demand from the key
user industry segment.
Dropping coverage….
We have a cautious view on UML on the back of de-allocation of coal
block and elevated debt levels. Post de-allocation, the Company will meet
its requirement of coal from alternative sources which will impact UML’s
cost of production and profitability. Furthermore, going forward we
expect interest and depreciation cost to stay on elevated levels which is
likely to weigh on bottomline. Hence we are dropping coverage on the
stock.


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Usha Martin, Change of mix to lead to margin expansion:: SPA Securities,

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Usha Martin is the largest producer of speciality steel long products in India and is the world's 2nd largest wire rope
manufacturer. The company is fully integrated backed by captive iron ore mine (~80 mnt reserves), non-coking coal mine (~40
mnt reserves) and captive power plant (93.3 MW). We recently met with the management of the Company to get some color
on its recent initiatives to further enhance its capacity and improve margins. We summarize the key takeaways below:

Hold Usha Martin; Target : Rs 29 ::ICICI Securities

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D i s a p p o i n t i n g   p e r f o r m a n c e …
Usha Martin’s (UML) performance in Q3FY12 was significantly below our
expectations on the back of higher operating costs. The topline came at
| 817.5 crore (our estimate: | 840.8 crore), which was 9.6% higher YoY
but lower by 1.3% QoQ. However, on the back of higher input costs, the
EBITDA margin declined 950 bps QoQ and 640 bps YoY to 9.4%. Higher
cost of coke coupled with coal purchases from the market at higher rates
(due to non-availability of linkage coal) led to a sharp decline in the
EBITDA margin. The subsequent EBITDA stood at | 77.2 crore (our
estimate: | 128.7 crore). However, reported PAT increased ~96% YoY to
| 25.7 crore on reversal of | 90.1 crore forex losses. For the period under
review, the consolidated adjusted net loss at PAT level was at ~| 35
crore.
ƒ EBITDA margin halves on a QoQ basis
UML’s performance during the quarter under review was impacted
by higher input costs. As a result, the EBITDA margin halved, on a
QoQ basis, to 9.4%. Sequentially at the EBITDA level, higher coke
prices had a negative impact of | 31 crore. In Q3FY12, on account of
non-availability of linkage coal  and lower production from captive
mines, the company had to buy coal through the e-auction route. As
a result, there was a negative impact of ~| 15 crore at the EBITDA
level (on a QoQ basis). However, at the EBITDA level, there was a
positive impact of ~| 16 crore QoQ due to higher realisation and a
better product mix.
V a l u a t i o n
At the CMP of | 31, the stock is discounting FY13E EV/EBITDA by 5.1x
and P/E by 8.8x. Going forward, we believe the EBITDA margin would be
under pressure on the back of higher raw material costs and muted
demand. Hence, we believe the company’s performance would remain
subdued over the next few quarters. We have valued the stock at a 10%
discount to domestic blue chip companies, arriving at an EV/EBITDA
multiple of 5x and target price of | 29and assigned a HOLD rating

Hold Usha Martin; Target : Rs 34 ::ICICI Securities

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O p e r a t i n g   m a r g i n s   t o   r e m a i n   u n d e r   p r e s s u r e …
Usha Martin’s (UML) performance in Q2FY11 was broadly in line with our
expectations. The topline came at | 828.4 crore (our estimate: | 772.8
crore), which was 8.5% higher both YoY as well as QoQ. However, on the
back of higher input costs, the EBITDA margin declined 320 bps YoY and
130 bps QoQ to 17.6%. The subsequent EBITDA stood at | 145.4 crore
(our estimate: | 131.3 crore), which was 8.5% lower YoY and flattish
QoQ. The consolidated adjusted PAT during the quarter under review
stood at ~| 21.2 crore (our estimate: | 20.8 crore), which was lower by
53.8% YoY and 17.3% QoQ). Due to depreciation of the rupee against the
US$, there was net notional exchange loss to the tune of ~| 120 crore
arising out of restatement of outstanding foreign currency loans and
acceptances. As a result, the ensuing reported loss during the quarter
under review stood at | 62.7 crore.
ƒ Excessive monsoon leads to constraint in supply of captive minerals
UML’s performance during the quarter under review was impacted
on account of excessive monsoon and rainfall in the mining areas.
As a result, the iron ore and coal output from the mining areas was
impacted. During the quarter under review, the company achieved
iron ore output of 2.66 lakh tonnes (lower by 23% YoY and 29%
QoQ) while the coal output was 0.24 lakh tonnes (lower by 42% YoY
and 73% QoQ). As a result, the company had to buy metallic to
make up for lower availability of captive minerals. Furthermore,
higher cost of coking coal pushed up the cost of production, which
could not be passed on in full due to a slowdown in the economy
and auto sector in particular.
V a l u a t i o n
At the CMP of | 32, the stock is discounting FY13E EV/EBITDA by 4.3x
and P/E by 5.7x. Going forward, we believe the EBITDA margin would be
under pressure on the back of higher raw material costs and muted
demand. Hence, we believe the company’s performance would remain
subdued over the next few quarters. We have valued the stock at a 20%
discount to domestic blue chip companies, arriving at an EV/EBITDA
multiple of 4.4x and target price of | 34 and assigned a HOLD.

USHA MARTIN: Volume delivered, but margin disappoints; Downgrade :PINC

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Volume delivered, but margin disappoints;
Downgrade to ‘HOLD’
Despite 34% YoY growth in consol. revenue to Rs8.7bn on
volume growth and better realisation, Usha Martin's (USM)
EBITDA grew at a subdued 16% YoY to Rs1.6bn as OPM
contracted by 283bps to 18.5%. Net profit declined 48% YoY to
Rs362mn on increased interest, depreciation expenses and
higher tax rate. EPS for FY11 at Rs4.5 declined 18.7% YoY.
Volume delivered: USM’s Q4 sales volume grew 29% YoY to 142kt
(incl. 12kt from Agra) on higher billet output (up 30% YoY to 137kt).
... however, margin disappoints: Despite volume growth, increased
blended realisation (up 7% YoY to Rs51/kg) and captive power &
coal benefits, USM’s standalone OPM contracted 85bps YoY to
17.7%. Sequential expansion of 184bps is also lower than our
estimates on increased RM cost (despite higher usage of captive
coal) & higher other expenses (19.3% of sales vs 16.9% in Q3FY11).
Captive resources: USM mined 108kt of captive coal (120kt in Q1,
60kt in Q3), while shipping to the plant increased to 100kt vs 25kt in
Q3. Iron ore output declined 21% YoY to 420kt.
Performance of overseas subsidiaries: EBITDA of overseas subs.
at Rs326mn declined 22% YoY, but grew 57% QoQ on higher volume
despite lower realisation. OPM expanded 730bps QoQ to 22.9%.
Leverage: USM has net debt of Rs20bn with net D/E of 1.1x.
Capex status: USM is incurring a capex of Rs12bn (financial closure
achieved) over 3yrs for further integration and value-addition.
VALUATIONS AND RECOMMENDATION
Despite integration from captive resources to value-added products,
USM’s OPM has not expanded over years and at 19% for FY11, is
lower than even a few non-integrated steelmakers in India. FY12E
volume guidance of 680kt (68% CU) also leaves a lot to desire on
the asset utilisation front and may surprise on the downside if the
one-offs continue to impact performance. We revise our FY12E to
factor in lower volume and margin & introduce FY13 estimates.
At 4.1x FY12E EV/EBITDA, there is little margin for operational
underperformance to continue. We downgrade the stock to ‘HOLD’
with a revised target price of Rs69 (4.5x FY12E EV/EBITDA)

52-WEEK FLOP: USHA MARTIN: Business Line

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The share price of steel wire maker Usha Martin has been on a downward spiral, on rising raw material costs and high interest expenditure , while realisations failed to keep pace. Further, there is a surfeit of domestic capacity for the production of billets and wire rods where the company is present.

Usha Martin produces wire rods and steel products used in the construction and automotive segments. While both segments have grown at a good pace over the last year, the company continues to operate several product lines at utilisation levels which are well below 50 per cent.

The low utilisation rate resulted in rising fixed costs with little gain in revenues or profits.

The nine-month period ending December 2010 saw flat net profits even as net sales grew 17 per cent. This was due to higher raw material and power bills which were up seven and 54 per cent respectively.

Interest costs ballooned to 42 per cent during the same period as the company is expanding its steel capacity and product line.

All of the above, in addition to higher depreciation, took their toll on the company's after-tax margins which were down to 4.6 per cent from 5.3 per cent for the nine month period ended December 2010

USHA MARTIN: BUY, TP-Rs82 (56% upside) PINC Power Picks: March 2011

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What’s the theme?
We expect Usha Martin to benefit from 32% volume CAGR over FY10-FY12E and an improved cost
structure; expansion of metallics and steel capacities and commencement of captive coal make the company
fully integrated from mineral resources to value-added products. On a consolidated level, we estimate
29% EBITDA CAGR and 26% EPS CAGR over FY10-FY12. Further, FY12E EV/EBITDA of 3.4x adequately
factors-in concerns of disappointing results; the risk-reward seems favorable.
What will move the stock?
1) Sequential improvement in Q4FY11 results, on resumed operation of 30MW captive power; transportation
of captive coal could ease concerns of disappointing results and revive investor confidence; 2) Volume
would grow on higher metallics and billet output from recently-commissioned capacities; and 3) Foreign
subsidiaries are expected to perform better.
Where are we stacked versus consensus?
Our earnings estimates are almost in line with consensus estimates.
What will challenge our target price?
1) Continued under-performance and inability to grow volumes and expand margins despite integrated
operations; 2) Weak recovery in Europe, which contributes >10% to consolidated revenue; 3) Impact on
mining operations either due to regulatory changes or naxalite activities; and 4) Severe decline in steel
profitability.

USHA MARTIN LTD: Promising Q4FY11; Can it revive confidence? PINC

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USHA MARTIN LTD: Promising Q4FY11; Can it revive confidence?
We interacted with the management of Usha Martin to get an
update on company’s operations. Following are the key
takeaways from our interaction:
Operations normalised: The company has resumed operation of
the 30MW CPP (90% PLF) impacted by blade failure in Q3. Further,
transportation of captive coal from Kathuria mine has been resumed
to normal level of 40kt/mth, although freight cost has increased by
Rs350/t, raising the landed cost of captive coal to Rs1,850/t. The
company is confident of increasing DRI and billet output for Q4 to
~70kt (52kt in Q3) & 150kt (113kt in Q3) respectively.

USHA MARTIN: BUY, TP-Rs82 (41% upside): PINC Top Picks

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USHA MARTIN: BUY, TP-Rs82 (41% upside)


What’s the theme?
We expect Usha Martin to benefit from 32% volume CAGR over FY10-FY12E and 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. Though there are concerns over execution of volumes
mainly due to one-time events (breakdown of a 30MW CPP, inadequate power from the grid and captive
coal logistics issues) in Q3FY11, we believe that these are factored-in the price. At CMP of Rs58 we find
the risk-reward favorable. On a consolidated level we estimate 29% EBITDA CAGR and 26% EPS CAGR
over FY10-FY12.

Add Usha Martin: Yet another disappointing performance… ICICI Sec

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Usha Martin -Yet another disappointing performance… 
Usha Martin (UML) reported subdued numbers for Q3FY11.
Consolidated revenues almost came in line at  | 745 crore against our
estimate of  |  763 crore (up ~10% QoQ and ~26% YoY). Revenue
growth was primarily led by an improvement in realisations (blended
realisations for Q3FY11 at ~  |  57,777/tonne) across all segments
despite muted volume growth (down ~ 4% QoQ). EBITDA margins
remained under pressure (down ~600 bps both QoQ and YoY) led by
raw material cost push denting margins (up ~26% YoY and ~14%
QoQ). Operational margins were also  hit due to a substantial rise in
power & fuel cost (up ~48% YoY) due to power plant shutdown for ~82
days and employee cost (up ~24% YoY) due to higher provisioning. PAT
also got impacted due to higher depreciation (up ~60% YoY) and
interest outgo (up ~35% YoY), thereby leading to a substantial dip in
margins. Going forward, we can expect a stable performance on
account of a 1.2 million pellet plant coming on stream by FY12. This will
lead to an improvement in DRI production post plant optimisation. The
beneficiation plant start-up would improve operational margins to some
extent, thereby improving the ore quality to the furnace.

Buy USHA MARTIN Hit by increased costs and capital charges: Edelweiss

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􀂃 Volume and realisations below expectation
Usha Martin (UML) reported Q3FY11 consolidated net revenue of INR 7.5 bn,
below our expectation of INR 7.9 bn, partly due to low sales volume at
standalone level of 117 kt (our estimate: 123 kt). Blended realisations, at INR
52,200/t, were also below our estimates. Billet production is down 13% Q-o-Q,
due to breakdown in 30 MW CPP and inadequate power supply from JSEB; the
CPP has resumed operations post repairs last month.

Usha Martin – BUY (Q3 FY11 review) IIFL

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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.

Edelweiss: Usha Martin - operational issues hit earnings; Buy

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n  Breakdown at power plant to hit Q3FY11 production

Usha Martin’s (UML) 30 MW captive power plant (total: 73 MW) is shut down since last month due to a breakdown in the turbine. Management expects to restart operations post repairs in the next 7 days. However, since the company failed to procure adequate power from a local power plant in the interim, Q3FY11 production could be hit. Management has reduced its guidance for FY11 billet production to 540 kt from 575-600 kt earlier, while it has maintained its FY12 guidance at 800 kt. We are, however, cutting our volume estimates from 547 kt to 519 kt for FY11 and from 750 kt to 700 kt for FY12.

Usha Martin BUY-Growth around the corner :: ICICI Sec

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Usha Martin BUY
Maintained
Growth around the corner 
Reason for report: Q2FY11 results review



Usha Martin’s (UML) reported Q2FY11 results were in line, with consolidated
revenues and PAT at Rs6,767mn (up 14% YoY) and Rs549mn (up 41% YoY)
respectively. Standalone PAT increased 122% YoY and 7% QoQ to Rs325mn
(I-Sec: Rs351mn). Margins were partly suppressed on account of de-stocking in a
price declining environment. Also, UML continues to refrain from selling iron ore
despite having >1mnte fine inventory. Bucking the trend, foreign subsidiaries
showed higher rupee realisations and margins QoQ. Low capex incurred in
H1FY11 might lead to possible downward revision of FY11 capex guidance. We
maintain BUY with a target price of Rs115/share.
􀁦 Standalone Q2FY11 EBITDA at Rs10,563/te (down 4.7% QoQ)… Despite having
all the margin levers in place, UML continues to find it tough to elevate its
standalone business EBITDA/te to >Rs11,000/te. De-stocking in a declining price
environment (blended prices were down 3.5% QoQ) suppressed the margins higher
than normal (raw material cost per te of sales is ~Rs3,000, higher than raw material
costs per te of production). Also power costs/te of sales though having declined 6%
QoQ to Rs6,630/te, were higher than expected.
􀁦 …. target EBITDA/te of Rs13,000/te achievable in H2FY11. UML commissioned
its 400,000tpa blast furnace on June 15, ’10. The sinter plant was commissioned in
August. With captive iron ore, significant coking coal inventory booked at US$200/te
and captive production of high calorific value coal to more than make up for DRI
production and cut power production costs, standalone EBITDA can be increased to
Rs13,000/te in H2FY11.
􀁦 First half capex at very low level, full-year guidance of Rs8-9bn looks
farfetched. Our calculation shows that during H1FY11, change in capital employed
for the standalone entity came in at ~7,217mn, out of which working capital outflow
accounts for Rs6,440mn; this leaves only Rs1,776mn for capex-related cash
outflows (similar figure for H2FY10 comes in at Rs4,444mn). We believe if this
indeed is the case, the management eventually will have to revise downward FY11
capex guidance. We will look at any downward revision of capex guidance in a
positive light.
􀁦 Inventory days still higher at 239 days. Higher raw material and finished steel
inventory kept inventory days at end-Q2FY11 high at 239 days vis-à-vis 170 days at
end-Q2FY10 and 183 days in FY10. Though de-stocking happened in Q2, as
inventory days on Q2FY11 COGS comes in at 200days vis-à-vis 239 days
calculated on H1FY11 COGS, we believe that majority of de-stocking happened on
raw materials inventory that the company was carrying at the end of Q1FY11.

JM Financial: Usha Martin :2Q in-line; 2H volume remains key monitorable

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Usha Martin :2Q in-line; 2H volume remains key monitorable


�� Net profit in-line with estimates: Consolidated net profit grew 41% YoY to
`459mn. Standalone net profit of `325mn was in-line with JMFe `316mn.
�� Strong YoY volume growth boosts revenues: Standalone net sales grew
c.33% YoY to `6.4bn. This was primarily due to a 62% YoY increase in steel
segment revenue to `3.5bn on a 76% increase in volumes, partly cushioned by
an 8% decline in blended steel realisations to `37,846/ton. Wire segment
revenues grew 11% YoY to `3bn due to a 7% increase in volumes and 4%
increase in realisation to `71,306/ton. With stabilisation of the newly
commissioned blast furnace and availability of feed from the recently
commissioned sinter plant, we expect steel volumes to ramp up in 2HFY11.
�� Captive iron ore and coal production lower due to monsoon: 2QFY11
standalone EBITDA increased 66% YoY to `1.3bn (JMFe `1.2bn) and margins
improved 408bps to 20.2% due to strong volume growth and integration
benefits from production of 42,013 tons of thermal coal from captive mines.
However, production of captive coal was significantly lower than 1QFY11
levels of 120ktons due to seasonal factors. Consolidated EBITDA grew c.42%
YoY to `1.6bn. Iron ore mines continue to meet 100% of the company’s
requirements.
�� Volumes expected to ramp up in 2HFY11; scale fully backed by
integration to drive earnings; re-iterate BUY: The company recently
commissioned its second blast furnace of 400ktpa, taking the total metallic
capacity to 900ktpa, sufficient to meet significant share of the company’s
metallic requirements for the 1mtpa steel making capacity. We believe captive
iron ore (100% integration) and increased thermal coal production (a return to
Q1FY11 production level of 120ktons meeting 100% requirements) along with
an increase in steel sales volume would drive earnings growth. Volume ramp
up in 2HFY11 remains a key monitorable, in our view. We introduce FY13E
numbers. We roll-forward to Sept’11 and revise our target price to `106/share
(`101/share earlier) based on 4.5x average FY12/13E EV/EBITDA and a capex
value of `17/share. Re-iterate BUY.

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

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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.

IIFL recommendations: top Buys and Sells