Usha Martin Ltd (UML) is globally one of the leading producers of specialty steel value added long products. It is also one of the most integrated players with ownership of captive iron ore and coal mines and commands a very diverse product portfolio.
The company is in the midst of a capacity expansion plan across its entire operational chain. As per the undergoing Rs21 billion capex plan, the steel making capacity would increase 2.5x to 1mtpa with a commensurate increase in iron making (pig iron and sponge iron) and finishing facility by March 2010.
However, sharp rise in input costs, especially coke (the critical input for the company) restricted margin expansion over FY08 despite increasing usage of captive iron ore.
We believe Q4 FY08 was the worst quarter in terms of profitability with 18.2% OPM. Since the start of Q1 FY09, UML has implemented significant price hike across all products.
The blended realizations are likely to be higher by 20-25% on q-o-q basis. We expect OPM to improve by 200-250 bps q-o-q in Q1 FY09 to 20.5-21%. Further improvement in OPM will result from company’s backward integration initiatives especially from consumption of captive coal November 2008 hence.
On a full-year basis, we expect OPM to improve from 18.5% in FY08 to 21% in FY09 and 23.5% in FY10.
A strong topline CAGR of 28% with a material OPM expansion of 500 bps over FY08-10E would lead to a net profit CAGR of 51%. At the current market price, the stock trades at attractive valuations of 5.8x P/E and 4.6x EV/EBITDA on FY10 estimates.