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.