[T.S.R:10858] short term buy USHA MARTIN

Buy Usha Martin Ltd

Snapshot
Usha Martin Ltd is a leading producer of specialty steel and one of the largest wire rope manufacturers globally. The company is engaged in manufacture of wire, wire ropes, steel with captive mineral linkages of iron ore and coal. The company operates in three manufacturing divisions, namely steel, wire ropes and others.

Investment Rationale

- In spite of the Global Slowdown in general & Metals in particular over last few quarters, Usha Martin went ahead with its planned Capex of Rs. 2100 crores of which Rs. 1700 crores have already been spent, the impact of which will be seen in FY10 & FY11.

-The Company will get benefit from the removal of anti-dumping tariff by European Union and also South Africa has levied anti-dumping duty of 75-110% on China and Korean Steel products will help Usha Martin to sell more wire ropes volume, thus improving exports and operating margin.

-The coal mining facility has commenced operations from Q3 FY09 but due to some local problem, the mine will become fully functional by September 09'. We believe that once the coal mine would become fully operational, it will reduce the operating cost substantially resulting in higher operating margin.

-The company enjoys the merchandising rights of the iron ore mines it has, which will allow the company to profitably sell the iron ore at the market prevailing prices. The income from these mines would start contributing to the revenues from the current year.

-The company has Captive Power Plant of 43.5 MW which has increased to 73.5 MW in May 09' and will increase to 118 MW by FY11. The rate per unit cost amounts to Rs. 2 per unit. With the increase in power capacity, the dependency on the state grid will reduce substantially as the company would become self-sufficient in the power front once the total capacity comes into operational. We believe that this would reduce the operating costs substantially, hence, improving margins going forward.

Valuation Recommendation

We have valued the Company on an EV/EBIDTA basis, wherein, we believe that the company will trade at 4.5x FY11E EV/EBIDTA, arriving at an EV of Rs. 3576.9 crores. Adjusting for net debt, we value the company at Rs. 75 per share, implying an upside of 41.3% to the current market price of Rs. 53.30 per share over a period of 18 months time. At Rs. 53.30 per share the stock is currently available at a PE of 6.4x in FY10E & 5.1x in FY11E, which we feel is quite undervalued looking at the huge earnings potential of the company &
the backward integration in the form of mineral resources coming on time.
The price target of Rs. 75 per share discounts FY10E earnings at a PE of 9x & FY11E earnings at 7.1x times which we feel justified looking at the overall profitability scenario of the company.

 

 

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