Sell Usha Martin: Aditya Birla Money

"Usha Martin's (UML) standalone net sales increased 6.6% YoY and 12.8% QoQ to Rs 6.1bn. The increase was on account of higher steel prices and increased sales of wire ropes (up 17.7% YoY and 16.9% QoQ to 19,200 tonnes)."

"UML’s standalone EBITDA was up 8.6% YoY and 7.2% QoQ to Rs 1.1bn. The lower-than-expected performance was on account of lower output of captive coal, sponge iron and billets, and higher power & fuel costs. Non-coking coal production declined 42% YoY and 73% QoQ to ~25000 tonnes. This resulted in a 22% YoY and 20.5% QoQ decline in production of sponge iron to 40,981 tonnes. Power & fuel costs were up 20.1%YoY and 12.7% QoQ to `981.9mn. EBITDA margins were down 92bps QoQ to 17.5%. There was a mark-to-market foreign exchange loss of Rs 1.2 bn."

"UML’s standalone adjusted net profit was down 40.6% YoY and up 54.7% QoQ to Rs 118.2mn. Interest costs were up 35.5% YoY and 10.7% QoQ to Rs 582mn. Consolidated adjusted net profit was down 15.2% QoQ to Rs 256.7mn on account of lower-than-expected performance of international operations. Billet production was down 4% QoQ to 124,105 tonnes."

"Factoring in lower-than-expected production performance and higher costs, we cut our consolidated EPS estimates of FY12E and FY13E by 27.4% and 28.3% to Rs 3.7 and Rs 4.9 respectively."

"UML is currently trading at a consolidated P/E and EV/EBITDA of 5.1x and 4.6x FY13E respectively. UML continues to grapple with ramping up its capacities. Performance continues to be well short of management guidance. Inability to ramp up capacities has resulted in asset turnover to decline to 0.8x as compared to historical levels of 1.1x and RoE to fall from 15-20% levels to sub-8%. Further capex spend of Rs 12bn on top of the Rs 21bn spent over the last 3 years is likely to stretch the balance sheet with likely net debt level of more than Rs 25bn by FY13E."

"In a scenario of tremendous global uncertainty and high domestic interest rates and slowing economic growth, companies with high debt and poor performance are likely to get significantly de-rated. On account of continuing execution issues, high debt and poor RoE, we value UML at a consolidated P/E of 4x FY13E to arrive at a fair value of Rs 19.5 per share. We cut our target price per share for UML by 52.4% from Rs 41 to Rs 19.5, implying a potential negative return of 22.3% from the last closing price. We downgrade our rating on UML to Sell from Neutral."

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