USHA MARTIN Volumes disappoint, interest rises :buy : Edelweiss

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􀂃 Q2FY11 volumes lower than estimates
Usha Martin (UML) reported Q2FY11 consolidated net revenue of INR 7.7 bn,
below our expectation of INR 8.6 bn, partly due to lower sales volume of 123 kt
at the standalone level (our estimate: 138 kt). Blended realisations, at INR
52,200/t, also came slightly below our estimate of INR 53,000/t. The DRI plant
was shut down for 15-20 days in Q2FY11 on account of monsoons. This led to
lower availability of metallics, which, in turn, adversely affected billet production.
􀂃 EBITDA in line, PAT below estimates
In spite of lower volumes, consolidated EBITDA was in line with estimates at INR
1.6 bn, as other expenses declined 37% Q-o-Q and all other costs remained
under control, including raw material. The company benefited from a forex gain
of INR 193 mn during the quarter, which reduced other expenses. PAT came in
at INR 459 mn against our estimate of 527 mn, led by higher-than-expected
interest cost.
􀂃 Debt up INR 4.2 bn from March 2010 level
Total debt (including capex L/Cs) has increased by INR 4.2 bn from the March
31, 2010 levels, to INR 19.8 bn currently. We had expected such increase only
by end of FY11. Of this rise, INR 2 bn is on account of working capital debt and
the balance INR 2.2 bn is capex related debt, primarily final draw-downs for the
completion of its expansion plan. We note that net working capital has increased
by INR 3.9 bn currently against the March 2010 levels.
􀂃 Volume guidance maintained at 600 kt in FY11
Management has maintained guidance of 600 kt and 800 kt billet production for
FY11 and FY12, respectively. However, we are cutting our FY11 assumption from
575kt to 547kt while retaining our FY12 assumption at 750kt.
􀂃 Outlook and valuations: Volumes to drive growth; maintain ‘BUY’
With volumes ramping up, recently set up sinter plant already operating at 90%
capacity and thermal coal injection reducing coke consumption, management
expects cost reduction of INR 1,600-2,000/t in H2FY11. Our revised volume
assumption leads to cut in FY11 EBITDA by 6% and an unchanged FY12 EBITDA.
However, higher interest cost causes FY11 and FY12 PAT to be cut by 14% and
6% respectively. We maintain ‘BUY/Sector Outperformer’ on UML but lower
our fair valuation from INR 132/share to INR 125/share.