>USHA MARTIN: Usha Siam getting re-operational

Usha Martin is the largest producer of speciality steel long products in India and is the world's 2nd largest wire rope manufacturer. The company is fully integrated backed by captive iron ore mine (~80 mnt reserves), non-coking coal mine (~40 mnt reserves) and captive power plant (93.3 MW). We recently met with the management of the Company to get some color on its recent initiatives to further enhance its capacity and improve margins. We summarize the key takeaways below:


Capex plans
Management has guided for a capex plan of INR 12 bn over the next 15 months to be financed through an equal mix of Debt & Equity. UML will expand its DRI capacity by 2 lakh tonnes by Q1FY13 (1 lakh tn by April'12 & another 1 lakh tn by June'12), its coke oven capacity by 4 lakh tonnes expected to be commissioned by Q4FY13, greenfield pellet plant of 1.2 mn tonnes capacity by Q4FY13 and another captive power plant by 60 MW in FY13.


Captive power to reduce cost
The company currently operates 93.3MW power plant of which 18.3MW is based on WHRS (Waste Heat Recovery System) and 75MW is thermal based. The average cost of power is INR 2.6/ unit. At present, it is able to meet 75% of its requirement through captive consumption and balance is sourced from outside. UML is further enhancing its power capacity by 60 MW (51MW - WHR and 9MW -coal) which should make it self-sufficient and lead to cost savings & margin expansion, as average cost of production is much lower in case of WHR. The Company has again started getting coal linkages which should help it in reducing cost (In 9MFY12, UML had to depend on e-auction coal).


Change of mix to lead to margin expansion
UML manufactures steel products through both pig iron & sponge iron in the mix of 60:40. With additional coke oven & DRI capacities coming in by end of FY13, it is expected that the mix will gradually change more favorable towards DRI with expected contribution of pig iron to sponge iron to 40:60, leading to substantial cost savings as cost of production

under hot metal/pig iron is higher vis-à-vis cost of production under DRI (Expected savings in costs of ~INR 1800/tn).


Approval received for sale of iron-ore fines inventory
UML has recently received approval to sell its iron ore fines in the open market which was previously barred by the Government. UML has been sitting on iron ore fines of ~2.2 mnt. The current market value of these fines is ~INR 1.5-1.6 bn. However, the company is waiting for more clarity w.r.t. identifying customers and may utilize it for captive consumption and/or external sales.


Usha Siam getting re-operational
Usha Siam, Thailand, is 98% owned subsidiary company of UML (contributing ~10% to bottom-line) operations, which got effected due to floods in Thailand in mid-October'11, has partially commenced operations from mid-Feb'12 and expects full operation to resume from July / August 2012 onwards.


Outlook &Valuation
The current low per capita consumption of steel of 50 kg, compared to the world average of 179 kg and Asian peers like South Korea (936kg), Japan (419kg) and China (405 kg), signifies that the domestic steel industry has enormous growth potential. On account of increased thrust on infrastructure by the government in the 12th plan, UML has guided for ~70% capacity utilization in FY13E and ~80-85% in FY14E vis-à-vis 50-55% in FY12E. It expects its margins to improve post commissioning of its planned capex and better integration. At CMP of INR 34.7, the stock currently trades at 15.7x TTM earnings and 7.2x TTM EV/EBITDA.


To read full report: USHA MARTIN
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