Capacity additions to drive growth for UML

Ranchi-based Usha Martin Ltd (UML) was set up in 1961 to manufacture wire rope. Today, it is a leading producer of steel and steel wire rope. UML’s other manufacturing facilities are in Hoshiarpur, Silvassa, Agra, Bangalore and Jamshedpur. It also has manufacturing operations overseas in Thailand, UK, US and UAE.  Its network of marketing offices and distribution centres spread across the globe are supporting Usha Martin’s growth and helping it achieve a strong global presence. The company exports 60% of its wire ropes and 20% of its total wire rod productions. It also exports specialty steel and other value-added products.

Business: UML manufactures wire rods, bright bars, steel wires, specialty wires, wire ropes, strands, conveyor cords, wire drawing and cable machinery, along with telecom cables and optic fibre cables. The company has increased production of ropes and wires from 3,600 tonne initially to more than 2 lakh mt currently.

UML started business integration in 1979 by setting up a steel plant with a wire rod rolling mill at Jamshedpur and ensuring steady supply of steel. This plant caters to its manufacturing units. The Jamshedpur facility currently has a captive power producing capacity of 15 mw of green power and 25 mw of thermal power. It also has its own oxygen and lime kiln plants. UML’s steel capacities were recently expanded to 7,00,000 tonne per annum from about 3,50,000 tonne per annum earlier. The company also has its own mineral resources for iron ore. Its mines have estimated reserves of 80-100 mt. UML also has crushing and screening facilities.

For FY09, UML reported a turnover of Rs 4,499 crore. Global operations, specialty steel and value-added steel products contributed 95% and telecommunication cables contributed 5% to its turnover. Speciality steel and value-added products contributed 72.40% to UML’s  standalone turnover, while its subsidiaries contributed the remaining.
Investment rationale: Despite the ongoing global economic slowdown, UML is going ahead with its massive capital expenditure plans and capacity upgradations, to be completed by March 2011.

UML has earmarked an investment of Rs 2,100 crore to increase its steel capacities to 1 mt by FY11, its power capacity to around 120 mw and full integration of iron-ore & coal and metallics. In value-added products that have a market share of around 50%, UML is increasing production of wire rope, LRPC and bright bar.

The company is expanding its mineral resources and integrating coal blocks — A/B grade that have estimated reserves of 40 mt. Its captive power generation capacities will see an addition of 30 mw of thermal power and 25 mw of green power. UML is planning to add 20 mw of thermal power to the captive unit at its Ranchi plant. Its iron-making module will also see an addition of 300 kt of kilns and 800 kt of sinter.

The company is expanding its cord, bright bar and OT wire capacities to 5kt, 48kt and 6kt, respectively. UML’s facilities in Ranchi, Jamshedpur, Bangkok, UK and US will see enhanced capacities of value-added products. UML’s steel-making modules — billets and wire rod mills — will be expanded, too. A 600kt pallet plant, a 300kt coke oven for manufacturing iron and WR and a 200kt TMT mill are also under consideration.

In 2008-09, the global slowdown, volatility in exchange rates and higher cost of inventories impacted UML’s performance. With  a dip in demand, its sales volumes, including in all subsidiaries, fell across the product spectrum. If not for higher realisation of its value-added products, its net sales figure would have been rather dismal.

Inventory costs dented  margins and MTM losses added to UML’s  woes.
In the last two quarters, prices of steel and wire rods declined to around Rs 28,000 per tonne from Rs 45,000. A turnaround came only in the first half of the current fiscal, when prices rose 3% in May. However, it was too late by then as all high-cost inventories were used up by the fourth quarter, impacting its FY09 margins. Now with the turnaround, UML sees its margins improving this fiscal.

On the demand front, no turnaround is in sight in the European and American markets. However, demand remains buoyant from UAE, Saudi Arabia, Iran and South East Asian countries.  Usha Martin’s enhanced steel capacities will see its production increase by 2,00,000 tonne this fiscal vis-a-vis FY09.

Concerns: Fluctuations in currency rates and depreciation of rupee against the dollar have its own impacts in the backdrop of long-term foreign currency loans.
Valuations: Despite adverse demand conditions, Usha Martin’s topline in the fourth quarter of FY09 grew 5.1% to Rs 706.50 crore from Rs 672.50 crore in the same period the previous fiscal. However, consumption of high-cost inventories and MTM forex losses of Rs 11 crore dented its operating margins by 450 bps and operating profits by 21%. Net profit declined 52% to Rs 21.27 crore from Rs 44.31 crore last year. Its topline for the financial year 2008-09 grew 27.76% to Rs 2,949.8 crore from Rs 2,308.8 crore in FY08.

Net profit at Rs 188.40 crore also grew 6.74% from Rs 176.50 crore in FY08. Its operating and profit margins declined by 111 bps and 125  bps, respectively.  With raw material prices now ruling at reasonable rates, it seems the worst is over for UML. Moreover, integration of its already commissioned coal mines in FY10 will add to its margins. As the industry sees a stabilisation, UML’s ongoing expansions will drive growth. The company, therefore, offers good opportunities for investors with medium- to long-term investment horizon.

Disclosure: The writer does not hold any shares in the company