production (a return to Q1FY11 production level of 120ktons meeting ( ) E mail:

Transcription

1 Recommendation BUY Investment Rationale CMP (23/12/2010) Sector Stock Details BSE Code NSE Code Market Cap (Rs. cr) Free Float (%) 52 wk HI/Lo Avg. volume BSE (Monthly) Dividend Shares o/s (Crs) Rs.70 Steel USHAMART % / % Relative Performance 1Mth 3Mth 1Yr UML 19.3% 24.7% 6.8% Sensex 1.5% 0.1% 19.8% Shareholding Pattern as of 30/09/2010 Promoters Holding 27.44% Foreign Promoter Holding 10.94% FII, banks & Institutions 51.74% Usha Martin s massive capex program of Rs 2100 crores would conclude in FY11E which will increase its capacity threefold. The company has recently commissioned trial production from new miniblast furnace with a capacity of 0.4mtpa, taking total metallic capacity to 0.9mtpa and sinter plant with a capacity of 0.8mn tons in Q2FY11 and would stabilize in Q3FY11. Captive power capacity is slated to increase by 20MW to 93.3MW in FY11E. The entire benefits of the increased capacities would accrue from FY12E and hence, we expect the revenues and margins to improve going forward. The company has chalked out additional capex plan of Rs crores which will be spent over a period of 30 months. The company plans to set up 0.4MTPA coke oven plant, 1.2MTPA pellet plant, 2x350TPD DRI plant, 60MW power plant and ore beneficiation facilities, which will further reduce the cost of production eventually. Captive iron ore and thermal coal mines are fully operational and are yielding optimum production results. The company also enjoys the merchandising rights in iron ore mines. The coal mine commenced production in Q1FY11. The company extracted less coal in Q2FY11 due to the monsoon season which has reverted back to normal level in Q3FY11. In next monsoon, UML will not face any coal shortage as it will have three consecutive quarters of full production from its coal mine which will help the company to accumulate enough coal stock and hence the company's operations will not get disturbed in the next monsoon. Backward integration will provide much needed cushion from the volatility in raw material prices and will help UML in maintaining its margins. UML has increased its steel capacity to 0.9MTPA which is a base for the value added products (VAP). We feel going forward, the market for VAP will improve, thus benefitting the company through increased production of VAP without much investment. This will improve blended realization and margins for the company. Valuation & Recommendation Corporate Bodies Public & others 3.71% 6.17% At CMP of Rs 70, the stock is trading at a P/E of 11.1x FY11E & 6.8x FY12E and on EV/EBIDTA of 6.3x and 4.6x for FY11E and FY12E respectively. We believe captive iron ore (100% integration) and increased thermal coal Ruchita Maheshwari, Research Analyst production (a return to Q1FY11 production level of 120ktons meeting ( ) E mail: ruchita.maheshwari@nirmalbang.com 100% requirements) along with an increase in steel sales volume would drive earnings growth. We Re initiate a BUY rating on the stock with a Target Price of Rs. 95 per share on an EV/EBIDTA of 5.5x for FY12E. EBIDTAM PATM Year Net Sales Growth % EBIDTA (%) PAT (%) EPS (Rs.) P/E(x) P/BV FY % % % FY % % % FY11E % % % FY12E % % %

2 Company Background UML is one among world s largest steel wire rope manufacturer. UML is engaged in the manufacturing of specialty steel including wire rods, bar rods, blooms and value added products including steel wires, wire ropes, strands, bright bars, conveyor cord, wire drawing machinery and jelly filled telecom cables. Q2FY11 Result Analysis The Consolidated Net Sales was up by 14% to Rs crores in Q2FY11 from Rs crores in Q2FY10; and was up by 13.4% from Rs crores in Q1FY11. Standalone Net Sales for Q2FY11 was up by 32.6% to Rs crores as compared to Rs crores in Q2FY10 and was up by 16.3% from Rs crores in Q1FY11. The standalone net sales was up because of the strong volume growth and recent commissioning of DRI and Sinter plant. The company s DRI plant was shut down in Q2FY11, resulting into the loss of production of tons of sponge iron on q o q basis. The blended sales realization was 8% down as compared to Q1FY11. 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. The Consolidated EBIDTA was Rs crores in Q2FY11, an increase by 42.8% from Rs crores on y o y basis, whereas it was up by 9.6% from Rs crores in Q1FY11. Standalone EBITDA increased by 66.2% to Rs crores in Q2FY11 compared to Rs crores in Q2FY10 and increased by 8.2% from Rs crores in Q1FY11. The Company reported Standalone EBITDA margins of 20.4% in Q2FY11, as compared to 16.3% in Q2FY10 and 21.9% in Q1FY11. The EBIDTA margin improved on y o y basis due to the increase in volume growth and integration benefits from the production of tons of thermal coal from captive mines. Though the production of thermal coal was significantly lower in Q2FY11 as compared to Q1FY11 of tons due to seasonal factors. Standalone Raw material cost increased by 14.8% to Rs crores in Q2FY11 as compared to Rs crores in Q2FY10 and was down by 2.5% from Rs crores in Q1FY11. The Consolidated PAT was up by 40.8% to Rs crores in Q2FY11 from Rs crores in Q2FY10 and was up by 9.7% from Rs crores in Q1FY11. Standalone Net Profit for Q2FY11 was up by 121.8% to Rs crores as compared to Rs crores in Q2FY10 and increased by 6.8% from Rs crores in Q1FY11. UML reported a PAT margin of 5.1% in Q2FY11 as compared to 3% in Q2FY10 and 5.5% in Q1FY11.

3 The company reported a consolidated EPS of Rs. 1.5 in Q2FY11 as compared to Rs. 1.3 in Q2FY10 and Rs in Q1FY11. The Company reported a standalone EPS of Rs in Q2FY11 as compared to Rs in Q2FY10 and Re in Q1FY11. The management has lowered its guidance for FY11E billet production from KT to 540KT while it has maintained its guidance of 800KT for FY12E. Q2FY11 Result Analysis Production Data (tons) Sponge Iron % % Hot Metal % % Billets % % Wire Rods & Bars including Blooms % % Wire Ropes % % Wire & Strand % % Bright Bar % % Source: Company & Nirmal Bang Research Sales Data (tons) Rolled Products % % Value Added products % % Source: Company & Nirmal Bang Research Sales Realization Trend (Rs. / ton) Steel products % % Wire ropes % % Wire & Strands % % Bright Bar % % Source: Company & Nirmal Bang Research

4 Standalone Q2FY11 (Rs. in crores) Net Sales % % Other Operating income % 0.00 Total Income % % Increase/decrease in stocks % % Consumption of raw materials % % Purchase of traded goods % % Power & Fuel % % Consumption of stores and spare parts % % Employee Cost % % Other Exp % % Total Expenditure % % EBIDTA % % Depreciation % % EBIT % % Interest % % PBT & OI % % Other Income % % PBT % % Tax % % Fringe Benefit Tax Deferred Tax Reported Profit After Tax % % Extra ordinary Items Adjusted Profit After Extra ordinary item % % EPS (Unit Curr.) Equity Face Value EBIDTA(%) 20.4% 16.3% 21.9% PBT(%) 7.8% 6.7% 8.0% PAT(%) 5.1% 3.0% 5.5%

5 Consolidated Q2FY11 (Rs. in Cr.) Net Sales including operating income % % Other Operating income % % Total Income % % Increase/decrease in stocks % % Consumption of raw materials % % Purchase of traded goods % % Power & Fuel % % Consumption of stores and spare parts % % Employee Cost % % Other Exp % % Total Expenditure % % EBIDTA % % Depreciation % % EBIT % % Interest % % PBT & OI % % Other Income % % PBT % % Tax % % Fringe Benefit Tax Deferred Tax Reported Profit After Tax % % Minority Interest Extra ordinary Items Adjusted Profit After Extra ordinary item % % EPS (Unit Curr.) Equity Face Value EBIDTA(%) 20.8% 16.6% 21.5% PBT(%) 8.9% 8.5% 9.0% PAT(%) 6.0% 4.9% 6.2%

6 Consolidated Income Statement (Rs. in crores) E 2012E Sales 2, , , , ,864.1 Excise Net Sales 2, , , , ,670.9 Other Income Total Income 2, , , , ,695.9 Cost Of Raw Material 1, , , , ,508.3 Stock Adjustment (66.6) (49.7) (81.6) Employee Expenses Power, Oil & Fuel Selling & Administrative Expenses Other Operating expenses Misc. Expenses Total Expenditure 1, , , , ,841.4 EBITDA Interest Depreciation & Amortization Profit Before Tax Total Taxes Net Income After Taxes Minority Interest in Income Extraordinary Items Adjusted Net Profit Net Income Available to EqSh holders Earnings Per Share (Rs) Total Common Dividends Shares Outstanding (Diluted) Retained Earnings

7 Consolidated Balance Sheet (Rs. in crores) E 2012E Sources of Funds Shareholders' Equity Reserves Share Holders Funds Minority Interest Secured Loans Unsecured Loans Total Debt Net Deferred Tax Total Liabilities and Equity Application Of Funds Gross Fixed Assets Less:Depreciation Less : Impairment of Assets Net Fixed Assets Investments Misc Exps Not W/off WIP Current Assets, Loans & Adv Cash Receivables Inventories Loans and Advances Total Current Assets Current Liabilities & Prov Current Liabilities Provisions Total Curr.Liabs & Prov Net Current Assets Total Assets

8 NOTE Disclaimer This Document has been prepared by N.B.Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimates contained herein are based on N.B.Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents N.B.Research opinion and is meant for general information only. N.B.Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. N.B.Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell, or a solicitation to buy any securities. N.B.Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. N.B.Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.