Stock Review: Usha Martin

Reduced Debt Burden, New Capacities Make Company's Outlook Promising

 

THE stock of steel manufacturer Usha Martin has not beaten the return of the benchmark indices in the past three months. Its return over the one-year period has also lagged behind the gains in the major indices. The stock's performance is mainly marred by the delay in commissioning new capacities and concern surrounding its highly leveraged balance sheet.

   The stock is likely to see renewed investor interest given the fact that the company has repaid over onethird of its loans and it expects to complete capacity expansion by the end of FY 11. Further, steps taken for backward integration will boost its performance going forward.

   The Kolkata-based Usha Martin is a leading producer of specialty steel and is one of the largest wire rope manufacturers globally. It reported an 18% increase in its consolidated sales during the September 2010 quarter; the net profit surged 40% on a year-on-year basis. The company's operating margin expanded by 410 basis points following a strong volume growth and due to the benefits from production of 42,000 tonnes of thermal coal from its captives mines.

   The company saw an 86% increase in y-o-y production on account of new DRI (direct reduced iron) plant and hot metal capacity added by the company. Volumes could have been even better but for the shutdown at its DRI plant, due to which the company lost about 20,000 tonnes of production. The company is expected to report higher production numbers in the coming quarter as its newly commissioned blast furnace stabilises and due to the availability of feed from the recently commissioned sinter plant.

   Over the past three years, the company has managed to increase both its steel-making and iron ore capacity. Its massive 2,100-crore capex ends this year, which will increase its crude steel and ore capacity three-fold. The company recently commissioned its second blast furnace of 4 lakh tonnes, taking the total metallic capacity to nine lakh tonnes. This is sufficient to meet a significant share of the company's iron ore requirement to produce one million tonnes of steel.

   Usha Martin also met its iron ore and coal requirement in FY10 through captive operations. These overall integration steps should support its profitability in future. Further, with debt of 600 crore repaid, the company's debt-equity ratio has reduced from 1.4 a year ago to just about one. This offers financial flexibility for further capex opportunities.

   The scrip is trading about 20 times its trailing 12-month earnings per share. The scrip is trading at a premium compared with its peers such as Surya Roshni and Apl Apollo due to Usha Martin's better margins.

   With the addition of new capacities and backward integration initiatives, the company's outlook looks promising.