Sell Usha Martin; target of Rs 22: Aditya Birla Money

“Usha Martin Ltd. (UML) Q3FY12 results were below our expectations on account of (1) higher-than-expected raw material costs for coke and coal (2) higher-than-expected operational and interest costs.”

“UML’s standalone net sales increased 16.5% YoY and 4% QoQ to Rs7.1bn. The increase was on account of higher steel prices. UML’s standalone EBITDA was down 26.0% YoY and 40.3% QoQ to Rs718.5mn. The lower-than-expected performance was on account of higher raw material costs for coke and coal, and higher operational costs. EBITDA margins were down 578bps YoY and 748bps QoQ to 10.1%. There was an unrealised exceptional gain of Rs913.2mn on account of reversing of mark-to-market foreign exchange losses in Q2FY12 by opting for capitalization. UML posted a standalone adjusted net loss of Rs335.8mn. Interest costs were up 46.5% YoY and 14.7% QoQ to Rs667.6mn. On a consolidated basis, UML posted an adjusted net loss of Rs350.0mn on account of poor standalone performance and its international subsidiary at Thailand --Usha Siam- being non-functional due to floods, causing lower turnover and profitability”

“Factoring in higher-than-expected operational and interest costs, we cut our consolidated adjusted EPS estimates of FY12E and FY13E by 72.1% and 10.6% to Rs1.0 and Rs4.4 respectively. (Refer Table on page-2 for production assumptions) UML is currently trading at a consolidated P/E and EV/EBITDA of 6.9x and 4.9x FY13E respectively. On the production side, UML continues to grapple with ramping up its capacities. This has led to asset turnover declining to 0.8x as compared to historical levels of 1.1x. Also, steel demand is sluggish in both the domestic and the export sector. Thus, capacity utilisation is likely to continue to be low. Although FY13E is likely to be significantly better than a dismal FY12 for UML, we expect UML’s FY13 RoE to be still sub-8%. With the Eurozone crisis abating and domestic interest rates having peaked, stock valuations, however, would improve. We now value UML at a consolidated P/E of 5x FY13E (4x earlier) to arrive at a fair value of Rs21.8 per share. We increase our target price per share for UML by 12.0% from Rs19.5 to Rs21.8, implying a potential negative return of 27.2% from the last closing price. We, thus, maintain our Sell rating on UML,” says Aditya Birla Money research report.   

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