Stock Review: USHA MARTIN

 

The underperformance of the Usha Martin stock since January 2011 is a reflection of the company's difficulty in running operations efficiently over the past two quarters. Though on a sequential basis, its performance has improved, higher input costs continue to put a strain on the margins.

Over the past two quarters, Usha Martin has witnessed reasonable sales growth, but higher cost of raw materials has impacted its profitability. Besides, the company also had to bear the brunt of a power plant breakdown and temporary shutdown of its DRI plant along with certain logistics related issues. The unexpected delay in orders from markets in the West only worsened the situation.

On a consolidated basis, the company reported a 34% sales growth during the March 2011 quarter. But over 30% rise in cost of raw materials, which make up half the company's total expenditure, resulted in a 300-bp decline in the company's operating profit margin. Higher interest and depreciation charges cost the company a 48% decline in net profit to . 36.15 crore. This has resulted in erosion of earnings per share of nearly 50% — from . 2.3 last year to . 1.2 in Q4 FY11.

As part of its . 1,200 crore expansion plan, the company recently raised $125 million via the external commercial borrowing route. Post-fund raising, the company's debt as on March 2011 was . 1,753.8 crore. Its interest coverage ratio, which determines the ease or difficulty with which a company can pay interest on outstanding debt, is two. It is lower than its peers and hence a cause for concern.

Despite having the largest market share in the steel ropes industry — both domestically and globally — Usha Martin has been battered down over the past two quarters. Due to unfavourable market conditions, the benchmark Sensex is 8% lower than what it was six months ago, whereas Usha Martin has lost over 20%. At . 54.8, the stock quotes at 12.2 times its 12-month trailing earnings per share and looks expensive.