Company Overview. Integrated steel. Key Business Highlights Flexibility to maximise realisation at different product points

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1 Integrated steel CMP Rs. 85 June 25, 2010 BSE Code BSE ID USHAMARTIN High/Low 1Y (Rs.) 107 / 38 Avg. vol (3m) 160,322 Market Cap (Rs Cr) 2,582 Net IB Debt (Rs Cr) 948 Enterprise value(rs Cr) 3,530 Shareholding % Dec-09 Mar-10 Promoters MFs/ Fis/ Banks FIIs Public & Others Stock Chart ( Relative to Sensex) Jun Dec Jun-10 USHAMARTIN Stock Perfm.(%) 1M 6M 1Yr Absolute Rel. to Sensex Financials (Rs.Cr) 03/08 03/09 03/10 Revenue 2,326 2,967 2,540 y-o-y 17.4% 27.6% -14.4% EBITDA y-o-y 20.9% 19.4% -6.8% PAT EPS (Dil.) y-o-y 15.0% 6.3% -12.8% EBITDA Margin 19.1% 17.9% 19.5% PAT Margin 7.6% 6.3% 6.8% D/E(x) P/E(x) 12.1x 11.4x 13.1x EV/EBITDA(x) 7.9x 6.6x 7.1x ROCE 16.5% 15.1% 13.6% ROE 18.1% 16.3% 10.0% Financial Year ends at March 31 Sensex Qtry Fin 06/09 09/09 12/09 03/10 Revenue PAT EPS All figures in Rs. crores except for per share data Qtry fig. shows standalone results Usha Martin Limited Company Overview Usha Martin Limited (UML) is a global conglomerate, manufacturing speciality steel and is a leader in the wire rope segment. The company operates end to end integrated facilities to produce value added speciality steel from iron ore, which enables better end product pricing. Incorporated as a wire rope manufacturing company in 1961, it has redefined the standards of value added specialty steel products rolled out of its state-of-art manufacturing modules in India, U.K., Dubai and Thailand which are certified for their respective quality management systems as per ISO9000 and T.S from BVQI. Key Business Highlights Flexibility to maximise realisation at different product points UML offers a diversified steel product mix with increasing proportion of value addition through various modules; the product range includes pig iron, billets, wire rods and bars, bright bar, wire ropes and strands. UML aligns its production strategy depending upon the demand and realisations at different product points. Forward and backward integration and capacity building UML is one of the select integrated steel and wire rope manufacturers in the world which has full forward and backward integration facilities from speciality wire rope solution to mining iron ore and coal. Its expansion strategy has been one of synergic integration of both forward and backward manufacturing modules, organically and through acquisitions. Currently, UML is in the process of expanding its backward integration modules in mining, power generation, DRI, blast furnaces, steel melting and rolling with an outlay of Rs. 2,434 crores to further improve cost competitiveness and self sufficiency. Consumer diversity effective hedge against industry specific risk Through its diverse product base, UML caters to a large number of industries especially in General Engineering, Oil & Gas, Mining and infrastructure sectors. Worldwide marketing and distribution network UML has world wide distribution, service and marketing network spread across USA, U.K., Europe, Africa, Middle-East, South-East Asia and Australia. Key Risks Economic slowdown severely affects the steel sector and capital intensive nature of the business requires larger volume to breakeven. Imposition of anti dumping duties may restrict the growth of top line. Availability and price fluctuations of key inputs like Coke/Coking coal may put pressure on the margins. Valuations The stock is currently trading at a P/E multiple of 13.1x on its FY10 EPS of Rs. 6.5 and 7.1x EV/EBITDA multiple based on FY10 EBITDA of Rs. 495 crores.

2 Strategy has been to expand by synergic integration of forward and backward manufacturing modules Plans for setting up captive facilities has been undertaken at an estimated project outlay of Rs 1,200 crores Business Description Usha Martin Limited (UML) is a global conglomerate and one of the leading manufacturers of steel products, and a global leader in the wire rope segment. UML started its operations in 1961 with a wire rope manufacturing unit in Ranchi, set-up in collaboration with Martin Black (UK). Over the years, its strategy has been to expand through synergic integration of both forward and backward manufacturing modules, organically and through acquisitions. Currently, UML offers an assorted mix of steel products rolled out of its four manufacturing units in India located at Jamshedpur, Ranchi, Hoshiarpur and Agra. Additionally, three manufacturing facilities are located outside India in Bangkok, Dubai and the United Kingdom. The company has redefined the standards of value added specialty steel products and has been certified for its quality management systems as per ISO9000 and T.S from BVQI. UML has a wide distribution network in India as well as in countries like United Kingdom, Netherlands, United States, Singapore, Australia, Indonesia, Vietnam and Bangladesh. Capacity expansions Currently, UML is in the process of expanding backward integration modules to achieve volume growth in Steel and Mining business which will help in reducing costs of inputs used in Wire ropes and speciality products business. The manufacturing modules which are on their last leg of completion are as under: Sinter Plant- Fine grains of iron ore are processed into coarse grained sinter for charging into the blast furnace. Mini Blast Furnace II- Used to chemically reduce and physically convert iron oxides into liquid iron called hot metal. Captive Thermal Power Plant of 20 MW. Coal mines which are fully operational. The cost of the projects commissioned were Rs 1,234 crores. Further plans for setting up captive facilities such as a pellet plant, a coke oven plant, additional DRI and power plants, as well as some balancing facilities in Steel and Wire & Wire Rope Divisions has been undertaken at an estimated project outlay of Rs 1,200 crores, to be funded by debt and internal accruals over a period of 36 months. Captive capacities expanded to achieve self sufficiency and cost insulation from erratic raw material prices. Revised capacities Sinter and MBFII would increase iron making capacity from 0.4 million tonnes (mmt) to 0.9 mmt. Steel Melting Shop III and Bloom Mill would increase steel making capacity from current 0.9 mmt to 1.8 mmt of which billet making capacity will significantly increase from current 0.4 to 1 mmt. Expansion plans to increase iron ore mining capacity from 2.5 to 4 MTPA have been undertaken to achieve self sufficiency and cost insulation from erratic raw material prices. The captive thermal power plant would provide self sufficiency in power consumption. The increased capacity would be 93.3MW, up from the current 73 MW. The captive coal block has an estimated reserve of 40 mmt. UML commissioned balancing facilities and modernisation of coal handling units -2-

3 and a third internal line in Jamshedpur in FY10 to support capacity expansion. Further, non coking coal mine was commissioned from the last quarter of FY10 to produce B-grade coal (5700 cal) used in power and DRI plants, thereby, reducing cost and enhancing quality. Post implementation of capacity expansions, UML will be able to save substantial sums in power and raw material costs The strength of the company s business model is derived from the application of produced steel for the manufacture of value added products Post implementation of capacity expansions, UML will be able to save substantial sums in power and raw material costs, which will lead to better margins going forward. On the forward integration side the addition of 0.05 mmt capacities in wire rope and bright bars over existing levels of 0.32 mmt is underway. Production Volume (In Tonnes) UML s production volumes have increased during FY10 over FY09. Products Product platform FY10 FY09 Billets Steel 357, ,311 Rolled products Steel 372, ,162 Bright Bars Wire and wire ropes 13,139 11,327 Wires & Strands Wire and wire ropes 118, ,130 Wire Ropes Wire and wire ropes 93, ,543 Source: Company Investor Presentation-Q4-FY10 UML enjoys significant international presence, steel exports to third parties accounted for 46 per cent, mostly concentrated around ASEAN and the Middle East. Nearly 54 per cent of the sales are made within the company to feed downstream production lines (domestic and abroad). The strength of the company s business model is derived from its ability to consume a significant part of its steel production for the onward manufacture of wire, wire ropes, bright bars and other products. Value added products cover a wide range of industrial applications Value added products Applications Wires Needle wires, Watch springs, Automobile components Wire ropes Oil rigs, Cranes, Elevators, Mines, Shipping, Ropeways, Bridges, Other construction purposes. Strands Power transmission, Bridge, Flyovers, Buildings (LRPC), Fishing ropes Conveyer Cords Mining, Other heavy industries Source: Company Annual Report FY10-3-

4 UML s subsidiaries contributed 29.5 per cent to its consolidated revenue in FY10 Corporate Structure The Company continues to garner significant synergy and support from its overseas subsidiaries in manufacturing as well as distribution, resulting in impressive growth in turnover and financial performance. UML s subsidiaries contributed 29.5 per cent to its consolidated revenue in FY10. Functional category Companies Holding Company Manufacturing Distribution Usha Martin Limited Usha Siam Steel Ind. Plc (97.9%), Usha Martin Americas Inc.(100%), Usha Martin UK Ltd.(100%), Brunton Wolf Wire Ropes FZCo. (60%), U M Cables Ltd. (100%), Brunton Shaw UK Usha Martin UK Distribution, Usha Martin Singapore Pty Ltd. (100%), De Ruiter Staalkabel B.V. (100%), Usha Martin Vietnam Co. Ltd. (100%), Usha Martin Australia Pty Ltd. (100%), Usha Martin West Coast, PT Usha Martin Indonesia Ltd (100%) Others Source: Company Corporate Presentation - 30 Dec 09 Usha Martin Int l Ltd.(100%), European Mgmt & Marine Corp., Key Joint Ventures: Gustav Wolf Specialty Cords Ltd (49% stake), Pengg Usha Martin Wires Private Ltd (40%) Revenues distribution Over the years FY06-10, nearly 40 per cent of the UML s consolidated revenues came from overseas market, which underlines its strong presence as a global player. Revenue distribution across geographies Nearly 40 per cent revenues derived from international market 40% 39% 38% 43% 42% FY06 FY07 FY08 FY09 FY10 Within India Source: Company Annual Reports (FY07 FY10) Outside India -4-

5 Revenue Composition During FY10, UML earned a PAT of Rs.169 crores, on total operating revenues of Rs. 2,540 crores, a decline of per cent over its FY09 total revenues, primarily due to lower prices during FY10 as compared to FY09. Total revenue of Usha Martin grew at a CAGR of 8.85 per cent during FY06-FY10. UML derives revenues from different products and services delivered at different points in the deep backward integrated value chain starting from off-shore oil field anchoring and lifting solutions to mining ore and coal. FY10 Revenue distribution FY10 revenues mainly derived from Steel and Value added manufactured products Others Value added services Value added distribution 4% 5% 10% Steel Value added manufacturing 40% 41% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Source: Company Investor Presentation-Q4-FY10 UML s well diversified product mix is categorized under three broad product platforms: 1. Steel: Steel wire rods, Rolled products, Billets, Pig iron and allied products. 2. Wire and wire ropes: Steel wires, Strands, Wire ropes, Cord, Bright bar, related accessories including Wire drawing and allied machineries etc. 3. Others: Jelly filled telecommunication cables etc. Of these segments, Steel and Wire and Wire Ropes segments accounted for nearly 90 per cent of the total revenues. During FY06-10, Steel segment s external sales grew at a CAGR of 8.79 per cent and Wire and Wire Ropes segment s external sales grew at a CAGR of per cent, while other revenues de-grew at a CAGR of 8.14 per cent. -5-

6 Y-o-Y performance of product segments Y-o-Y performance graph underlines importance of value added products Revenues in Rs. Crores 2,000 1,500 1, ,844 1,622 1,437 1,224 1, FY06 FY07 FY08 FY09 FY10 Steel Revenues Wire and Wire Ropes Revenues Other Source: Company Annual Report (FY07-FY10) Y-o-Y performance graph underlines importance of value added products Growth Drivers UML through its diverse product base caters to large number of sectors especially General Engineering, Oil & Gas, Mining and infrastructure. The key Demand drivers for Usha Martin Limited are listed below: Increase in consumption: Low per capita consumption of steel, at nearly 43 kg in India against the world average of nearly 194 kg indicates substantial scope for increase in domestic demand. GOI thrust on infrastructure: Steel is infrastructure s backbone, with the Union Budget 2010 allocation of Rs. 1,73,552 crore (46 per cent of total planned allocation), for infrastructure development there are all-round growth opportunities in the sector leading to growth in UML s specialty steel products like strands, which are used in power transmission and construction of bridge flyovers and buildings. Industry wise Applications of UML s Wire Ropes shows diversified end use Sector wise use of UML s wire ropes 5% 4% 8% 38% General Engg. Oil & Gas 17% Mining Port Bridges Fishing 28% Construction & Elevators Source: Company Corporate Presentation - 30 Dec 09-6-

7 Growth of Industrial and heavy engineering industry: UML would benefit from the growth of heavy engineering sector, with India s rise as one of the fastest developing manufacturing hubs would lead to capacity expansion of existing manufacturing facilities and setting-up of new facilities. Moreover, world economies have started moving out of recession would necessitate increased consumption of specialty steel products resulting in better price realisations. Overseas demand: As key markets of Europe recover from the current slump, demand uptake will lead to better price realisations. With 40 per cent of revenues derived from this segment, the increase in demand coupled with better realisations will boost the top line and bottom line. GDP and per capita income growth to drive demand: Steel is an essential input in the manufacture of consumer durables and household necessities. India s robust economic growth reflected in over 8 per cent GDP growth across much of the first decade of the new millennium emphasises the country s position as one of the fastest growing economies. This ensures growth of demand for steel market and general improvement in prices of all steel products resulting in better realisations. Large capacities in China could depress the global prices of steel Key Risks Recession: Economic slowdown would severely affect the capex plans of manufacturing companies, fiscal spending on infrastructure development and consumer spending dependent industries, resulting in low demand for steel Elasticity of raw material prices: Availability and price fluctuations of key inputs like Coke/Coking coal may put pressure on the margins. Volume to break-even: Capital intensive nature of the steel business requires larger volumes to break-even. Threat from bigger players: Competition of bigger players in India, SAIL and Tata Steel in wire and wire rope segment may pressurise the company s margins. Furthermore, most large steel makers have also aligned their strategies to improve backward integration, which in turn would lead to higher competition in acquiring captive mines and other resources. Large capacities in China could depress the global prices of steel. Political risk: Interference by Governments of different countries in the form of anti dumping duty may restrict the growth of top line from overseas markets. -7-

8 Profitability UML s EBIT and EBITDA and margins have set an improving trend across FY In FY10 there is a decline of EBIT and EBITDA but the margins have improved considerably over FY09. Margin trends EBIT & EBITDA margins considerably improved during FY10 over FY % 19.1% 17.4% 17.9% 19.5% 25% 20% Rs. in Crores % % 13.9% 14.2% 14.4% % 10% 5% Margins in % 0 FY06 FY07 FY08 FY09 FY10 EBITDA (LHS) EBIT (LHS) EBITDA Margin (%) (RHS) EBIT Margin (%) (RHS) Source: Company Annual Reports (FY07- FY10), ICRA Online Research 0% During FY10, raising equity, helped reduce gearing from 2 to 1 Return Ratios Among the return ratios, Return on Capital employed (ROCE) and Return on Equity (ROE) remained stable during FY During FY10 additional equity raised, amounting to Rs crores helped the company reduce gearing from 2.0 to 1.0, including capex letters of credit. Increase in equity base during the year resulted in decline in ROE and ROCE calculated on year-end shareholder s fund and capital employed balances. Return ratios have remained stable with growth in capital Trends of Return Ratios 20% 17.7% 18.1% 15% 14.8% 13.8% 15.8% 16.5% 15.1% 16.3% 13.6% 10% 10.0% 5% FY06 FY07 FY08 FY09 FY10 ROCE (%) ROE (%) Source: ICRA Online Research -8-

9 Expansion of backward integration facilities, would lead to substantial savings Input Cost Raw material costs form a major part of UML s input costs. Raw materials mainly consist of iron ore, metallic (Ferrous bearing), alloys and coke. By virtue of expansion of backward integration facilities, substantial savings on input cost would be achieved by better utilization of key inputs like metallic and iron ore. This in turn would lead to lesser dependence on purchases at escalating prices, resulting in an improvement in EBITDA margins. Break-up of input cost Particulars FY06 FY07 FY08 FY09 FY10 Raw material cost ,149 1,418 1,158 % of sales 48.96% 44.69% 49.76% 48.06% 46.06% Cost of purchased goods and services % of sales 27.73% 30.24% 26.81% 29.97% 31.57% Less: Stock in trade (15.5) (5.4) (50.5) (36.6) (85.3) Total COGS 1, , , , ,866.8 Gross margin 75.8% 74.7% 74.4% 76.8% 74.2% Source: Company Annual Report (FY07-FY10), ICRA Online Research Dividend The company paid 100 per cent dividend on equity share of Re.1 each during FY08 & 09, the same is proposed for FY10 also. Industry Overview Based on estimates of the World Steel Association, upto May 2010, China produced nearly 45 per cent of the total global steel production. The share of India in comparison pales at 4.5 per cent. Nevertheless, India has managed to retain its status as the fifth largest producer of steel, and is fast closing in on the fourth position. There has been a recovery in the growth rate of gross fixed capital formation which augurs well for an increase in demand for steel Demand for steel is directly linked with the growth of GDP, as high growth rate results in higher demand for steel products, pushing the prices northwards. After having gone through significant downturn in economic activity during FY08-09 the real turnaround came in Q2FY10 when the economy grew at 7.9 per cent (y-o-y), compared with 6.1 per cent (y-o-y) in Q1FY10. As per the advance estimates of GDP for , the economy is expected to grow at 7.2 per cent in FY10 with the industrial and the service sectors growing at 8.2 per cent and 8.7 per cent, respectively. This recovery is impressive as it has been achieved despite a decline of 0.2 per cent in agricultural output, which was the consequence of sub-normal monsoons. The recovery re-emphasises renewed momentum in the manufacturing sector, which had been in continuous decline for almost eight quarters since Manufacturing growth has more than doubled from 3.2 per cent in FY09 to 8.9 per cent in FY10, this however, is significantly below the prerecession growth rate of 14.9 per cent in FY07. There has been a recovery in the growth rate of gross fixed capital formation (GDCF), which had declined significantly in FY09. While the growth rates of private and government final consumption expenditure have dipped, there has been a pick-up in the growth of private investment demand. There has also been a turnaround in merchandise export growth in November 2009 and December 2009, after a decline of nearly twelve continuous months. -9-

10 The recovery in GDP growth for FY10 is broad based. Seven out of eight sectors/subsectors show a growth rate of 6.5 per cent or higher. Sectors including mining and quarrying; manufacturing; and electricity, gas and water supply have significantly improved their growth rates at over 8 per cent. The construction sector and trade, hotels, transport and communication have also improved their growth rates, though to a lesser extent. The recovery in the prices of steel has slowed owing to fluctuations in the raw material prices of steel Given the improvements in economic conditions and revival of all sectors in India and globally, the stage is set for an accelerated increase in the demand for steel. Furthermore, recoveries of the production volumes as indicated by reports from the World Steel Association indicate a smooth road ahead for the steel industry. However, a threat to this recovery remains as globally, the recovery in the prices of steel has slowed owing to fluctuations in the raw material prices of steel, which in turn has led to a sluggish off take in demand, as is evident from the quarter-on-quarter increase in steel production. The changeover of annual supply contracts to three-month spot price contracts for iron ore by mining companies has further added to the volatility in prices of iron ore. Crude Steel Production Statistics ( ) Million Tonnes Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Source: World Steel Association (World Steel), ICRA Online Research Process of integration is hindered due to inefficient processes of acquiring necessary approvals and rights. The strategy of backward integration is not unique to UML, with most large players embarking on similar drives, given the large fluctuation and availability in key raw materials. However, this process of integration is hindered due to inefficient government practices of issuing approvals for mining and land allocation. In addition to this, logistic issues and poor infrastructure have undermined the ability of steel producers to increase capacity at a fast clip. Nevertheless, based on the MoU s signed, the ministry of Steel has estimated that India s steel capacity would reach 293 million tonnes by

11 Summary Financials Profit & Loss Statement Particulars (Rs. crores) FY06 FY07 FY08 FY09 FY10 Net Sales Other Operating Revenue Total Income Growth (%) 9.5% 17.4% 27.6% -14.4% Cost of Good Sold (1363.7) (1466.9) (1717.3) (2265.1) (1866.8) Gross Profit Employee Costs (130.9) (146.8) (163.9) (171.0) (178.1) Other Expenditure EBITDA Growth (%) 17.0% 20.9% 19.4% -6.8% Depreciation (96.0) (93.5) (97.5) (108.6) (129.5) EBIT Net Interest expense (92.2) (91.5) (100.6) (142.2) (125.5) Other Income(expense) Exceptional Items PBT Income Tax (41.1) (44.1) (70.4) (92.2) (68.5) Profit after Tax Growth (%) 62.5% 27.1% 6.7% -8.9% Extra Ordinary Items Minority Interest (1.1) (1.3) (1.1) (3.0) (2.9) Net Profit Growth (%) 63.0% 27.6% 5.7% -9.0% Basic EPS* Diluted EPS* DPS Equity Capital Face value Ratio Analysis Particulars FY06 FY07 FY08 FY09 FY10 Margins Gross Margin (%) 24.6% 26.0% 26.2% 23.7% 26.5% EBITDA Margin (%) 17.4% 18.6% 19.1% 17.9% 19.5% EBIT Margin (%) 12.1% 13.9% 14.9% 14.2% 14.4% Net Profit Margin (%) 4.7% 6.9% 7.5% 6.2% 6.6% Valuation EPS BVPS * P/E (x) P/BV (x) EV/ EBITDA (x) EV/ Sales (x) Profitability ROCE (%) 14.8% 15.8% 16.5% 15.1% 13.6% ROE (%) 13.8% 17.7% 18.1% 16.3% 10.0% Solvency Ratio Deb/ Equity Ratio (x) Interest Cover (x) Turnover Ratio Inventory T/o Days Debtors T/o Days Creditors T/o Days Other Ratio Dividend Payout (%) 55% 75% 100% 100% 100% Dividend Yield (%) 0.7% 0.9% 1.2% 1.2% 1.2% * Adjusted for stock split of Rs 5 to Rs 1 FV in August,

12 Balance Sheet Particulars (Rs. Crores) FY06 FY07 FY08 FY09 FY10 Sources of Funds Equity Capital Reserves Shareholders Fund Long Term Debt Deferred Tax Liability, Net Minority Interest Total Application of Funds Net Fixed Assets Capital Work-in-Progress Investments Current Assets Inventory Sundry Debtors Loans& Advances Cash & Bank Balance Other Current Assets Total Current Assets Current Liabilities Sundry Creditors Provisions Other Current Liabilities (3.7) 21.9 (11.5) Total Current Liabilities Net Current Assets (300.1) Miscellaneous Exp not W/Off Total ` Cash Flow Particulars (Rs crores) FY06 FY07 FY08 FY09 FY10 CF from Operating Activities Profit Before Tax Depreciation Direct Taxes paid (17.4) (35.7) (61.9) (108.9) (55.1) Others Change in Working Cap 18.5 (54.7) (84.2) CF- Operating Activities CF from Investing Activities Change in Fixed Assets (152.2) (292.1) (377.8) (1066.9) (484.6) Change in Investments Investment Income Others 8.3 (7.3) (11.1) CF- Investment Activities (140.4) (293.5) (386.0) (1058.0) (471.8) CF from Financing Activities Increase in Equity Changes in Minority Interest Changes in Borrowings (184.2) Dividend Paid (7.0) (13.9) (22.8) (30.4) (31.0) Others (85.5) (93.7) (102.9) (143.7) (1404.8) CF- Financing Activities (165.0) (345.2) Net Change in Cash 18.1 (17.8) (62.9) Opening Cash & Bank Bal Closing Cash & Bank Bal

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