India Ratings revises Usha Martin outlook to negative

The affirmation reflects India Ratings’ expectation that UML’s elevated financial leverage (FY12 (year end March): 5.6x, FY11: 3.5x) will fall below 4x by FY14 due to the benefits of backward integration, which will be fully available to the company from Q4FY13. UML’s EBITDA per ton is likely to increase from FY13 due to its various cost saving measures and an increase in coal extraction from own coal mines. The company commissioned a waste heat recovery based power plant in Q1FY13 and is likely to commission captive coke ovens in H2FY13.

The Outlook revision reflects UML’s current elevated credit metrics, and the likelihood that consolidated financial leverage (adjusted debt net of cash/EBITDA) will remain high in FY13 as debt levels may remain at the FY12 level (INR29,317m). It also reflects the possibility that while the company’s backward integration is likely to improve its EBITDA margins from FY13 onwards (FY12: 13.6%, FY11: 18.8%), the increase may not be large enough to result in financial leverage of below 4x.

During FY12, consolidated EBITDA of UML declined to INR4,575m from INR5,721m in FY11 on account of a loss in value of coking coal inventory due to a decline in market prices in FY12; Further, UML’s captive coal mine was flooded due to monsoons leading to production losses. This, along with the situation of short supply of linkage-coal from Coal India Limited led the company to purchase coal at higher rates from the market. UML has taken measures to overcome problems in mining during monsoons which resulted in increased production of coal during H1FY13.

UML’s ratings continue to reflect its dominant position as the leading manufacturer of wire ropes in India with integrated operations.

In FY12, UML reported consolidated revenue of INR33,608.1m (FY11: INR30,465.7m) and an EBITDA margin of 13.6% (18.8%). Its performance improved significantly in H1FY13 with revenue of INR17,850.7m (H1FY12: INR15,951m) and EBITDA of INR2,734.8m (Q4FY12: INR707.2m, Q3FY12: INR771.9m) at the consolidated level.

WHAT COULD TRIGGER A RATING ACTION?
Negative: A rating downgrade may result either due to deterioration of liquidity or change in expectation for deleveraging below 4x for FY14. Such a change in expectation can be due to less-than-expected savings from various cost-saving measures or a fall in realisation per tonne due to adverse market conditions.

Positive: Net leverage below 4.0x would result in the Outlook being revised back to Stable.

Other rating actions include:

• INR20,673.9m term loans (decreased from INR20,858.3m): affirmed Long-Term ‘IND A+’
• INR2,000m term loans: assigned a final rating of ‘IND A+’ and affirmed at the current level
• INR7,000m fund-based working capital limits: affirmed at Long-Term ‘IND A+’
• INR7,000m long-term non-fund-based limits (reduced from INR7,250m): affirmed at Long-Term ‘IND A+’
• INR10,000m non-fund-based limits: Short-Term ‘INDA1+’ rating withdrawn as it is no longer considered by India Ratings to be relevant to its coverage