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 517146 USHAMART 2061.3 61.62% 106.95/66.4 65215 100% 30.54 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. 1200 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 (+91 22 3926 8172) 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 FY09 2952.2 36% 537.8 18.2% 185.3 6.3% 7.4 9.5 1.6 FY10 2514.4 15% 506.3 20.1% 168.5 6.7% 5.5 12.7 1.3 FY11E 2985.8 19% 611.5 20.5% 193.4 6.5% 6.3 11.1 1.1 FY12E 3670.9 23% 854.4 23.3% 313.8 8.5% 10.3 6.8 1.0
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. 763.55 crores in Q2FY11 from Rs. 669.67 crores in Q2FY10; and was up by 13.4% from Rs. 673.15 crores in Q1FY11. Standalone Net Sales for Q2FY11 was up by 32.6% to Rs. 639.65 crores as compared to Rs. 482.26 crores in Q2FY10 and was up by 16.3% from Rs. 550.21 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 20000 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. 158.87 crores in Q2FY11, an increase by 42.8% from Rs. 111.28 crores on y o y basis, whereas it was up by 9.6% from Rs. 144.98 crores in Q1FY11. Standalone EBITDA increased by 66.2% to Rs. 130.28 crores in Q2FY11 compared to Rs. 78.4 crores in Q2FY10 and increased by 8.2% from Rs. 120.42 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 42013 tons of thermal coal from captive mines. Though the production of thermal coal was significantly lower in Q2FY11 as compared to Q1FY11 of 120000 tons due to seasonal factors. Standalone Raw material cost increased by 14.8% to Rs. 238.42 crores in Q2FY11 as compared to Rs. 207.7 crores in Q2FY10 and was down by 2.5% from Rs. 244.55 crores in Q1FY11. The Consolidated PAT was up by 40.8% to Rs. 45.92 crores in Q2FY11 from Rs. 32.61 crores in Q2FY10 and was up by 9.7% from Rs. 41.86 crores in Q1FY11. Standalone Net Profit for Q2FY11 was up by 121.8% to Rs. 32.5 crores as compared to Rs. 14.65 crores in Q2FY10 and increased by 6.8% from Rs. 30.43 crores in Q1FY11. UML reported a PAT margin of 5.1% in Q2FY11 as compared to 3% in Q2FY10 and 5.5% in Q1FY11.
The company reported a consolidated EPS of Rs. 1.5 in Q2FY11 as compared to Rs. 1.3 in Q2FY10 and Rs. 1.37 in Q1FY11. The Company reported a standalone EPS of Rs. 1.06 in Q2FY11 as compared to Rs. 0.58 in Q2FY10 and Re. 1.00 in Q1FY11. The management has lowered its guidance for FY11E billet production from 575 600KT to 540KT while it has maintained its guidance of 800KT for FY12E. Q2FY11 Result Analysis Production Data (tons) Sponge Iron 52522 35045 49.9% 72354 27.4% Hot Metal 79747 36247 120.0% 52849 50.9% Billets 129265 77071 67.7% 120951 6.9% Wire Rods & Bars including Blooms 120623 82893 45.5% 118142 2.1% Wire Ropes 25131 17831 40.9% 22593 11.2% Wire & Strand 33226 24244 37.0% 35914 7.5% Bright Bar 5235 3284 59.4% 4418 18.5% Source: Company & Nirmal Bang Research Sales Data (tons) Rolled Products 76930 37615 104.5% 56358 36.5% Value Added products 46412 41100 12.9% 42648 8.8% Source: Company & Nirmal Bang Research Sales Realization Trend (Rs. / ton) Steel products 40400 37300 8.3% 40800 1.0% Wire ropes 85850 88050 2.5% 89850 4.5% Wire & Strands 47750 43600 9.5% 50800 6.0% Bright Bar 59650 52750 13.1% 57650 3.5% Source: Company & Nirmal Bang Research
Standalone Q2FY11 (Rs. in crores) Net Sales 639.65 482.26 32.6% 550.21 16.3% Other Operating income 4.74 3.49 35.8% 0.00 Total Income 644.39 485.75 32.7% 550.21 17.1% Increase/decrease in stocks 23.48 0.23 10108.7% 111.71 121.0% Consumption of raw materials 238.42 207.7 14.8% 244.55 2.5% Purchase of traded goods 0.58 2.51 76.9% 0.49 18.4% Power & Fuel 81.78 54.94 48.9% 76.62 6.7% Consumption of stores and spare parts 49.28 32.13 53.4% 49.24 0.1% Employee Cost 37.01 25.67 44.2% 32.8 12.8% Other Exp. 83.56 84.17 0.7% 137.8 39.4% Total Expenditure 514.11 407.35 26.2% 429.79 19.6% EBIDTA 130.28 78.40 66.2% 120.42 8.2% Depreciation 40.09 24.48 63.8% 40.79 1.7% EBIT 90.19 53.92 67.3% 79.63 13.3% Interest 42.94 22.47 91.1% 36.22 18.6% PBT & OI 47.25 31.45 50.2% 43.41 8.8% Other Income 2.7 0.77 250.6% 0.4 575.0% PBT 49.95 32.22 55.0% 43.81 14.0% Tax 17.45 17.57 0.7% 13.38 30.4% Fringe Benefit Tax 0 0 0 Deferred Tax 0 0 0 Reported Profit After Tax 32.5 14.65 121.8% 30.43 6.8% Extra ordinary Items 0 0 0 Adjusted Profit After Extra ordinary item 32.5 14.65 121.8% 30.43 6.8% EPS (Unit Curr.) 1.06 0.58 1.00 Equity 30.54 25.09 30.54 Face Value 1 1 1 EBIDTA(%) 20.4% 16.3% 21.9% PBT(%) 7.8% 6.7% 8.0% PAT(%) 5.1% 3.0% 5.5%
Consolidated Q2FY11 (Rs. in Cr.) Net Sales including operating income 763.55 669.67 14.0% 673.15 13.4% Other Operating income 6.66 7.68 13.3% 3.58 86.0% Total Income 770.21 677.35 13.7% 676.73 13.8% Increase/decrease in stocks 19.86 21.22 6.4% 113.05 117.6% Consumption of raw materials 295.1 289.34 2.0% 300.73 1.9% Purchase of traded goods 0.59 2.53 76.7% 0.56 5.4% Power & Fuel 86.64 60.17 44.0% 81.34 6.5% Consumption of stores and spare parts 52.05 34.52 50.8% 51.22 1.6% Employee Cost 57.76 46.9 23.2% 52.74 9.5% Other Exp. 99.34 111.39 10.8% 158.21 37.2% Total Expenditure 611.34 566.07 8.0% 531.75 15.0% EBIDTA 158.87 111.28 42.8% 144.98 9.6% Depreciation 46.18 30.03 53.8% 46.57 0.8% EBIT 112.69 81.25 38.7% 98.41 14.5% Interest 44.91 25.5 76.1% 38.33 17.2% PBT & OI 67.78 55.75 21.6% 60.08 12.8% Other Income 0.55 1.19 53.8% 0.72 23.6% PBT 68.33 56.94 20.0% 60.8 12.4% Tax 21.57 23.35 7.6% 18.21 18.5% Fringe Benefit Tax 0 0 0 Deferred Tax 0 0 0 Reported Profit After Tax 46.76 33.59 39.2% 42.59 9.8% Minority Interest 0.84 0.98 0.73 Extra ordinary Items 0 0 0 Adjusted Profit After Extra ordinary item 45.92 32.61 40.8% 41.86 9.7% EPS (Unit Curr.) 1.50 1.30 1.37 Equity 30.54 25.09 30.54 Face Value 1 1 1 EBIDTA(%) 20.8% 16.6% 21.5% PBT(%) 8.9% 8.5% 9.0% PAT(%) 6.0% 4.9% 6.2%
Consolidated Income Statement (Rs. in crores) 2008 2009 2010 2011E 2012E Sales 2,527.7 3,146.8 2,630.3 3,142.9 3,864.1 Excise 220.4 194.6 115.9 157.1 193.2 Net Sales 2,307.3 2,952.2 2,514.4 2,985.8 3,670.9 Other Income 45.7 22.0 85.3 25.0 25.0 Total Income 2,353.0 2,974.3 2,599.7 3,010.8 3,695.9 Cost Of Raw Material 1,168.4 1,434.4 1,160.5 1,291.4 1,508.3 Stock Adjustment (66.6) (49.7) (81.6) Employee Expenses 163.9 171.0 178.1 196.4 231.8 Power, Oil & Fuel 168.4 180.6 227.2 235.7 280.1 Selling & Administrative Expenses 193.3 268.7 243.6 275.0 338.1 Other Operating expenses 239.1 272.0 310.8 337.9 405.7 Misc. Expenses 37.8 159.4 54.8 62.9 77.3 Total Expenditure 1,904.2 2,436.5 2,093.4 2,399.3 2,841.4 EBITDA 448.8 537.8 506.3 611.5 854.4 Interest 104.5 148.6 136.8 153.0 201.4 Depreciation & Amortization 97.5 108.6 129.5 177.9 200.4 Profit Before Tax 246.8 280.6 240.0 280.6 452.6 Total Taxes 70.4 92.2 68.5 84.2 135.8 Net Income After Taxes 176.5 188.4 171.5 196.4 316.8 Minority Interest in Income 1.1 3.0 2.9 3.0 3.0 Extraordinary Items 0.5 0.1 0.2 Adjusted Net Profit 174.9 185.3 168.5 193.4 313.8 Net Income Available to EqSh holders 174.9 185.3 168.5 193.4 313.8 Earnings Per Share (Rs) 7.0 7.5 5.6 6.4 10.4 Total Common Dividends 25.0 25.0 30.5 19.3 31.4 Shares Outstanding (Diluted) 25.1 25.1 30.5 30.5 30.5 Retained Earnings 149.9 160.2 138.0 174.1 282.5
Consolidated Balance Sheet (Rs. in crores) 2008 2009 2010 2011E 2012E Sources of Funds Shareholders' Equity 25.1 25.1 30.5 30.5 30.5 Reserves 882.3 1057.0 1657.0 1831.0 2113.5 Share Holders Funds 907.4 1082.1 1687.5 1861.6 2144.0 Minority Interest 11.8 16.8 16.3 16.3 16.3 Secured Loans 1023.1 1644.7 967.3 1889.5 1889.5 Unsecured Loans 114.4 26.6 28.5 28.5 28.5 Total Debt 1137.5 1671.3 995.8 1918.0 1918.0 Net Deferred Tax 153.6 129.8 178.4 178.4 178.4 Total Liabilities and Equity 2210.3 2900.0 2878.0 3974.2 4256.7 Application Of Funds Gross Fixed Assets 2123.0 2383.6 3704.0 4204.0 4704.0 Less:Depreciation 895.9 1008.2 1119.4 1297.3 1497.8 Less : Impairment of Assets 16.5 16.7 16.4 0.0 0.0 Net Fixed Assets 1210.6 1358.8 2568.2 2906.6 3206.2 Investments 0.4 0.4 0.4 0.4 0.4 Misc Exps Not W/off 1.6 0.7 0.0 0.0 0.0 WIP 502.3 1210.4 609.5 537.6 766.4 Current Assets, Loans & Adv Cash 72.1 108.8 47.6 204.0 105.9 Receivables 323.4 426.4 309.8 404.7 455.2 Inventories 783.6 656.6 893.2 947.2 1058.6 Loans and Advances 423.3 311.0 307.7 430.5 476.4 Total Current Assets 1602.4 1502.8 1558.3 1986.4 2096.1 Current Liabilities & Prov Current Liabilities 1065.5 1119.4 1809.9 1400.8 1745.9 Provisions 41.5 53.7 48.5 56.0 66.5 Total Curr.Liabs & Prov. 1107.0 1173.0 1858.4 1456.8 1812.5 Net Current Assets 495.4 329.7 300.1 529.6 283.7 Total Assets 2210.3 2900.0 2878.0 3974.2 4256.7
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