Usha Martin Ltd. Fully Wired to Rope in Growth. Recommendation Rationale. Valuation and Recommendation. 23 Oct, 2009

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1 23 Oct, 29 Key Data (INR) CMP 72.6 Target Price 91. Key Data Bloomberg Code USM IN Reuters Code USBL.BO BSE Code NSE Code USHAMART Face Value (INR) 1 Market Cap. (INR Bn.) Week High (INR) Week Low (INR) 18. Avg. Daily Volume (6m) Beta (Sensex).9 F&O Market Lot 165 Turnover (Rs mn) 2419 Shareholding % Promoters 46.2 Mutual Funds / UTI / Banks 17.5 Foreign Institutional Investors 19.3 Bodies Corporate 6.3 Individuals 8.5 Other 2.2 Total 1 INR mn FY9 FY1E FY11E Revenues 29,498 27,312 34,498 Operating Profit 5,888 6,188 8,36 OPM (%) PAT 1,884 2,182 3,242 Adj.PAT 2,85 2,182 3,242 PAT Margin (%) Adj.PAT Margin (%) EPS (INR) Adj. EPS (INR) Usha Martin Ltd Fully Wired to Rope in Growth B U Y We initiate coverage on Usha Martin Ltd (UML) with a BUY recommendation and a price target of INR91 (P/E of 7x FY11E EPS of INR13). UML is an integrated steel player that manufactures specialized wire ropes. It has an impressive 7~8% domestic market share. Our recommendation is underpinned by the company s expansion plans, which should drive sales growth and enable it to become a leading manufacturer of wire/wire ropes globally. At CMP of INR72.6, UML trades at P/E of 8.3x FY1E EPS of INR8.7 and 5.6x its FY11E EPS of INR13.. Recommendation Rationale Well positioned to benefit from recovery in steel demand: The global economy is showing signs of recovery, albeit weak, with steel production volumes recovering across countries. UML is a leading player and it has an 8% domestic market share in the wire rope segment. The company intends to increase its steel manufacturing capacity from 4, tonnes to 1,, tonnes by FY1. It has planned capacity additions, which would drive volume-led sales growth. Moreover, value-added products dominate UML s portfolio, allowing it to charge premiums. Margin expansion through better integration and cost saving: UML is an integrated player with presence across the value chain. To expand margins, the company is setting up a captive power plant (CPP) and acquiring coal mines. These initiatives will help UML save costs of power and coal and support margin expansion. Diversified customer mix to impart revenue stability: UML s value-added products find use in industries such as mining, oil exploration, elevators, cranes, passenger ropeways, bridges, defense, power, and construction. This customer diversity is a major source of strength, allowing it to offset cyclicality in one sector with robust growth in another. Valuation and Recommendation We expect UML to record volume-driven sales growth. Backward integration across the value chain should help the company expand margins. At CMP of INR72.6, UML trades at 8.3x and 5.6x FY1E and FY11E EPS of INR8.7 and INR13., respectively. We initiate coverage on UML with a BUY recommendation and a price target of INR91, implying a forward P/E of 7x FY11E EPS of INR13.. Analyst Chintan J. Mehta research@acm.co.in Tel: (22)

2 Investment Thesis The global economic slowdown has pummeled growth across sectors, and steel, a sector that is highly susceptible to economic cycles, is in the frontline, facing the severity of falling steel demand. However, the global economy is showing signs of recovery, albeit weak, with production volumes recovering across countries. According to International Iron and Steel Institute, India s steel consumption would grow in CY1, underpinned by strong domestic consumption. UML is on its way to increase its steel manufacturing capacity from 4,, tonnes to 1,, tonnes by FY1. The company has planned capacity addition across its value chain. This would drive sales volume. UML is also integrating backward to secure its raw material supply iron ore and coal. Such backward integration would support margin expansion and help save costs. The company currently procures 3% of its electricity requirement from the state electricity board at INR4.75 per unit. Captive generation at its plants (43.3MW) would cost INR1.2 per unit. Thus, the planned additional 75MW CPP would bring about immense cost savings since it would meet the power requirements of the expanded capacity. UML is also securing coal for the CPP and the 3, tonne sponge iron plant by acquiring mines. This would insulate it from price volatility in its major raw material and ensure steady supply. As against an average price of INR2,5 per tonne of coal, UML would be able to obtain coal from its captive mines at INR1,5 per tonne. This would help the company save considerably. Although logistical issues have delayed commissioning of the mines by September 29, they are expected to be operational by end-fy1 and early-fy11. A presence across the value chain insulates UML to a great extent from steel cycles. Value addition allows the company to charge premiums, supporting margins and profitability and imparting resilience to its business model. The company derives nearly 6% of its revenue from value-added products such as wires and wire ropes. It has a highly diversified revenue model. UML s steel products account for nearly 3% of total revenue and are used in the auto sector, wire drawings, forging, and construction. Its value-added products find use in industries such as mining, oil exploration, elevators, cranes, passenger ropeways, bridges, defense, power, and construction. This spread of customers across sectors is a major source of strength, allowing UML to offset cyclicality in one sector with robust growth in another. We believe the company is well positioned to register robust growth, supported by volume-driven sales. At CMP of INR72.6, UML trades at 8.3x and 5.6x FY1E and FY11E EPS of INR8.7 and INR13., respectively. We initiate coverage on UML with a BUY recommendation and a price target of INR91, implying a forward P/E of 7x FY11E EPS of INR13.. Company Profile Usha Martin Ltd (UML) is one of the largest wire rope manufacturers globally. It started operations as a small rope manufacturer, today emerging as a conglomerate with diversified products such as wires, wire ropes, and steel. The company s manufacturing facilities are in Ranchi, Jamshedpur and Barajamda (Jharkhand), Bangalore (Karnataka), Hoshiarpur (Punjab), and Agra (Uttar Pradesh). UML also has manufacturing operations in Thailand, the UK, the US and Dubai and distribution centers worldwide.

3 Business Mix UML derives nearly 6% of its revenue from value-added products such as wires and wire ropes. Its value-added products are used in industries such as mining, oil exploration, elevators, cranes, passenger ropeways, bridges, defense, power, and construction. Its steel products (wire rods and bars) that account for ~3% of total revenue are used in the auto sector, wire drawings, forging, and construction. 72% 28% Sales: Sales: Standalone INR21,272 million (69:31) Domestic: Export Export Sales: Sales: Subsidiaries INR8,226 million Sales: Sales: consolidated consolidated INR29,498 million (57:43) Domestic: Domestic: Export Export Steel: INR8,851 million Wire and Wire Ropes: INR18,443 million Others: INR 2, 23 million 3% 62.5% 7.5% Exports that largely comprise value-added products accounted for more than 4% of UML s sales in FY9. UML has the following subsidiaries with various facilities: Name of the Company % of controlling interest Location Facility Capacity (tonnes) Usha Martin International Limited (UMIL) 1% UK Wire rope manufacturing and distribution Usha Martin Americas Inc (UMAI) 1% USA Distribution-US Brunton Shaw America (BSAI) 1% USA Wire rope manufacturing 6 Brunton Wolf Wire Ropes FZCo (BWWR) 6% Dubai Wire ropes 12 Usha Siam Steel Industries (USSIL) 97.8% Bangkok, Thailand Wire and wire rope manufacturing 36 Usha Martin Singapore Pte Ltd (UMSPL) 1% Singapore Distribution - Indonesia, Australia and Vietnam Usha Martin cables Ltd (UMCL) 1% Silvassa, India Manufacturing 3 million pair km-copper Source: Company. Source: Company 6 cable and.5 million Fibre Km UML s subsidiaries contributed nearly 3% to its total revenue in FY9. Such a wide presence globally should enable the company to tap the overseas market where capacity for specialized steel is limited.

4 Largest player in domestic and second largest worldwide Presence across the value chain SWOT analysis Strengths 1) Largest domestic wire rope manufacturer and second-largest globally: UML has huge manufacturing capacity for specialized steel products. With current wire capacity of 1,2, tonnes and wire rope and strand capacity of 1,5, tonnes, it is the largest wire rope manufacturer in India and the only player that is completely integrated backward. 2) Well-diversified product mix: UML has a well-diversified product portfolio from billets to wire ropes. Products in one process are used as feedstock in another process. Iron from the blast furnace/sponge iron is used in manufacture of steel, which in turn is used in production of various downstream long products. Steel wire rods are sold as merchandise and also further processed for manufacture of wires and wire ropes. Such diversification reduces concentration of the company s presence in one segment. Current Capacity Iron capacity Tonnes Steel capacity Tonnes Value-added products Tonnes Hot Metal/Pig Iron 2 Billets 4 Wire and Wire Ropes 225 DRI/Sponge 1 Wire Rods 3 Conveyor Cords 36 Source: Company. Straight Bar 48 Bright Bars 18 Captive Power Plant-73 MW Rolled Products-TMT Bars 72 Moreover, a balanced portfolio has enabled UML to sustain its EBIDTA margins at 2%. In 28-9, when steel prices fell significantly, wire ropes enabled the company to sustain its EBIDTA margins. Diversified Product Mix ensures margin sustainability Standalone EBIDTA % Steel Wire and wire ropes Consolidated FY FY FY Source: Company, ACMIIL research. Further, presence in the niche specialized steel segment allows UML to charge premium prices for these products. Its value-added products fetched an average realization of USD155 per ton in FY8-9 vs. USD9 for its steel products. 3) Fully integrated process: Many players procure wire rods and convert them into wires and wire ropes. UML, on the other hand, has an integrated business model with captive iron ore mines for manufacture of iron through the blast furnace and a sponge iron plant. This iron is converted into billets via the steel making route (EAF), which are mostly used for production of wire rods. These wire rods are sold as merchandise and also used in manufacture of value-added products such as wires, strands, and wire ropes. To power these facilities, the company has a CPP (55MW thermal MW waste heat recovery-based). Moreover, UML recently added 3MW to its power capacity. However, although it has received coal mine allotments, people rehabilitation issues at the mines have caused operational issues and delays.

5 The company s business model Iron Ore Mines with Fe content 62-64% and Estimated reserves of 8-1 Mnt Coal (currently procuring fromoutside sources) Coke- Imports Pig Iron/ Liquid Steel 2,, tonnes DRI/ Sponge Iron 1,, tonnes 55 MW Coal based CPP Fully drawn integrated process 3.3 MW MBF Gas Base CPP 73 MW Captive Power Plant Scrap- Purchases Steel melting Shop I EAF 35 tonnes 15x15 Caster Steel melting Shop II EAF 4 tonnes 11 x 11 Caster 15 MW WHRB CPP Billets/Ingots -Purchases Billets 4,, tonnes Wire Rods 3,, tonnes Rolled Products-TMT Bars 72, tonnes Straight Bars 48, tonnes Wire Strands Wire Ropes Bright Bars 18, tonnes Source: Company, ACMIIL Research 4) Capex plans on track: In FY7-8, UML chalked out plans for major capacity additions across the value chain. Total outlay is INR21 billion. To date, INR17 billion has been spent. Funding of this project is done by mix of debt and equity in the ratio of 2:1 The company s capex plan: Capacity addition planned across its product line Particulars (tonnes) Current Additions Total Expected completion Iron capacity Pig Iron Mar-1 Sponge Iron Oct-9 Steel capacity Billets Oct-9 Wire Rods Commissioned Straight Bar Blooming Mill Commissioned Combination Mill (wire rod and TMT mill) Under Consideration Value-added products Wire and Wire Ropes Mar-1 Conveyor Cords Mar-1 Bright Bars Mar-1 Rolled Products-TMT bars Mar-11 (CPP) 73.3 MW 45MW 118.3MW Mar-12 Source: Company UML is expanding its steel capacity to 1,, tonnes from 4,, tonnes by increasing its billets capacity. To support such initiatives, UML is also increasing its sponge iron capacity to 3,, tonnes (from 1,, tonnes) and its pig iron capacity to 6,, tonnes (from 2,, tonnes). Consequently, UML intends to raise its wire rod and steel bar capacity as well to 4,48, tonnes (from 3,48, tonnes). Furthermore, UML is also considering setting up a blooming and combination mill (wire rods and TMT bar mill). This mill is not been taken into consideration for its capex plan of INR2.1 billion Capacity of value-added products (wires, strands and wire ropes) too would be expanded, though not in the same proportion as the increase in steel capacity. Thus, UML would be able to sell surplus steel products such as billets, wire rods, blooms, and TMT bars in the open market in addition to value-added products.

6 UML s post-expansion model Sinter Plant 8,, tonnes Iron Ore Mines with Fecontent 62-64% and Estimated reserves of 8-1 Mnt Coal Mines with an estimated reserves of 4 MnT. Coke- Imports Pig Iron/ Liquid Steel 2,, tonnes Pig Iron/ Liquid Steel 4,, tonnes DRI/ Sponge Iron 1,, tonnes DRI/ Sponge Iron 1,, tonnes DRI/ Sponge Iron 1,, tonnes 15 MW WHRB+ 3.3 MW MBF CPP 25 MW WHRB CPP 55 MW Coal based CPP 2 MW Coal based CPP Scrap -Purchases Steel melting Shop I EAF 35 tonnes 15 x 15 Caster Steel melting Shop II EAF 4 tonnes 11 x 11 Caster Steel melting Shop III EAF 7 tonnes 36 x 36 Caster Billets/Ingots - Purchases Billets 1,, tonnes Wire Rods 3,, tonnes Wire Rods 1,, tonnes WR & TMT Mill 2,, tonnes Straight Bars 48, tonnes Rolled Products- TMT Bars 72, tonnes Bloomimg Mill 2,75, tonnes Wire, ropes and strands 3,1, tonnes Bright Bars 48, tonnes Source: Company Broken lines indicate capacity additions Coal mines to bring significant cost reduction 5) Securing raw material sources: Iron Ore: UML has integrated backward by securing captive iron ore mines in Barajamda (Jharkhand). These mines have estimated reserves of 8-1 million tonnes, with Fe content of 62-64%. The company enjoys merchandise rights for these mines and thus it is able to sell ore in the open market. UML extracted 11,, tonnes of iron ore in FY9, as against its annual requirement of around 5,5, tonnes. The company sold nearly 5,, tonnes of iron ore in FY9. With additional capacity coming up, the company s annual requirement of iron ore would be around 2 million tonnes. The Company has got permission to extract 2.5 million tones of iron ore. Thus, backward integration would enable UML to have uninterrupted supply of iron ore at prices lower than the open market. Coal: UML also has captive coal mines with estimated reserves of 4 million tonnes of grade A-C coal. Besides supporting the power plants, coal is an important feedstock for the sponge iron plant. The coal mines are not currently functional, but management expects them to be operational by 3Q FY1. The company s annual coal requirement (at current capacity) is around 4,, tonnes 2,5, tonnes for the CPP (25MW) and 1,5, tonnes for the sponge iron plant. This would increase to around 1.2 million tonnes with the capacity expansion. Backward integration should mitigate the risk of high coal prices in the market. UML currently purchases coal at an average INR2,5 per tonne and captive mining would entail an average landed cost of INR1,5 per tonne. Thus, the company could have an estimated saving of INR1.2 billion due to captive coal mining.

7 Weakness Dependence on coke/coking coal: UML is integrated backward to a great extent. However, it procures coke/coking coal for manufacture of iron from the open market. For the current 2,, tonnes pig iron capacity, its annual coke requirement is 1,3, tonnes. With capacity expansion to 6,, tonnes, the requirement would increase to around 4,, tonnes. Coke prices are highly vulnerable to movements in the global markets. To mitigate this risk, UML has adopted a new strategy. Instead of relying completely on purchase of coke, the company plans to buy 5% coke and meet the remaining requirement by purchasing coking coal, which would be subsequently converted into coke. This would reduce its exposure to the volatility in coke prices. However there still exists medium risk as to coking coal prices also. Opportunities Growing domestic demand: Domestic steel demand is expected to grow with increasing infrastructure spending by GoI and announcement of stimulus packages. India is the fifth-largest steel producer and has the lowest per capita consumption of 43kgs, compared with the world average of 194kgs. Korea, China and Japan have highest steel consumption with per capita levels at 1143kgs, 37kgs and 626kgs respectively. Anti-dumping duty levied by various nations on competitors: EU nations abolished the 24% anti-dumping duty, which they originally levied on UML against its lower-than-cost exports. On the other hand, in July 29, the EU nations imposed an anti-dumping duty on Chinese wire rods, which would be levied for five years from August 29. With UML having facilities in European countries, the anti-dumping levy on Chinese manufacturers would give an edge to the company. Threats Exports to shrink further: UML exports nearly 4% of its output. India s steel exports shrank more than 25% in FY9. Due to the global economic slowdown, many foreign economies are seeing a slump in steel demand. Many foreign players have cut production by more than 5% to match supply with demand. Thus, demand for steel exports is expected to fall further. Severe domestic competition: The long products segment is highly fragmented and faces severe competition. As a result, large integrated players do not have a dominant position in this market. However, with booming economic activity, large integrated players are enhancing their long products capacity. This should enable them to grab share from smaller players.

8 GLOBAL STEEL INDUSTRY Production Scenario Global steel production grew at an average 7% during In 28, however, production fell 1.2% owing to the global financial crisis. In China, nevertheless, production increased 2.6% YoY in the period. Following the steep decline in September 28, global production fell 26% YoY in December. However, the global steel industry is showing signs of recovery from the economic crisis, backed by stimulus packages of governments. In July 29, almost all countries saw mild improvement in crude steel production, compared with the previous nine months. World Crude World Crude Steel steelproduction-yoy production- Change(%) Change 5% % 3% -5% -4% Steel production recovering from lows -1% -15% -2% -25% -3% -13% -2% -26% -23% -21% -23% -24% -21% -16% -11% Aug-8 Sep-8 Oct-8 Nov-8 Dec-8 Jan-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Jul-9 Source: World Steel Association In July 29, although global steel production fell 11% YoY, China and India saw 12% and 4% YoY growth respectively. World Crude World crudesteelproduction Steel Production-YoY YoY%change Change-July % 12.6% % -19.9% -11.1% % North America -35.6% European Union Source: World Steel Association C.I.S. Africa World India China

9 Global Demand and Supply Outlook Demand Outlook: Global crude steel demand has a correlation of 1.5~2 with world GDP. IMF expects GDP to fall 1.3% in 29 and recover from 21. 8% 6% World GDP vs Crude Steel Demand demand 12% Estimates 8% (%) 4% Actuals 4% % 2% -4% % -8% -2% 22 Consequently, World Steel Association expects steel demand to fall 8.5% YoY in 29.. However, with modest recovery in production over May-August 29, steel demand is expected to recover by 9.2% in 21, driven mainly by China and India, and by other developed countries. Nevertheless, the price scenario would remain sluggish owing to surplus capacities. Steel Supply: Robust demand CAGR of 7.8% up to 27 prompted numerous players worldwide to expand capacities. However Source: IMF, CRISIL. Mn Tonnes GDP growth 27 Expansions were put on hold: Global demand slumped in September 28, leading to a steep fall in steel prices. However, this was not accompanied by a fall in raw material prices (owing to annual binding contracts). Thus, lower realization and high raw material prices made it unfeasible for many players (especially in the developed economies) to continue with their operations. As a result, expansion plans were put on hold. And operating rates declined: The global demand-to-capacity ratio fell to 87% in 28 from 93% in 27 because of the global financial meltdown. An operating rate of 85% is considered healthy; below this, players face pricing pressure, which leads to losses. The global demand-to-capacity ratio is expected to decline to 78% in 29, led by the continued global economic slowdown. A mild recovery is expected in 21, when capacity utilization is estimated to increase to 79% (e) Steel Demand Growth Capacity to Demand 93% 87% 87% 86% 9% 87% 78% (E) 21(E) 21(e) 211(e) 212(e) 213(e) -12% 1% 86% 79% 81% 83% 9% 8% 211(E) 212(E) Capacity Demand Demand to Capacity Source: World Steel Association, CRISIL 213(E) 7% 6% 5% 4% 3% 2% 1%

10 Mn Tonnes India Steel Consumption Flat Long YoY change (%) Source: JPC, World Steel Association But China and India experience robust growth Although the developed economies are experiencing severe production cuts of 25-3%, China and India are seeing robust growth in steel demand. They are raising production capacities to match local demand. Global steel capacities are expected to increase to 1641 million tonnes in 213 (from 1412 million tonnes in 27); of this, China is expected to account for a major chunk. India too has capacity addition plans in the same period. However, the advanced economies have no significant expansion plans with low operating rates. Overall, we expect surplus capacity to continue for some years. INDIAN STEEL INDUSTRY Production and Demand Scenario Total steel consumption in India grew at 12% CAGR from 22 to 28, driven by robust consumption by the automobile and construction sectors. Consumption of long products, which are primarily used in the construction sector, grew at 1% CAGR and that of flat products increased at 8% CAGR. However, the strong growth momentum snapped in FY29 because of the global meltdown, with domestic steel consumption falling for the first time since In FY9, steel consumption fell 2.1% YoY. However, the Indian steel industry is seeing some signs of recovery since February 29 owing to various stimulus packages of GoI. Since April 29, steel production in India has grown at an average 4% YoY. Fall insteel consumption 3% 23% 15% 8% % -8% -15% (%) Mn tonnes India Trade Scenario Aug Sep Oct Nov Trailing 12 months production Dec % change YoY Until FY6-7, India was a net exporter. However, the country turned into a net importer owing to domestic consumption increasing at 12% CAGR over FY2-8. Jan Feb Mar Apr May Jun July 15% 1% 5% % -5% % -1% -15% India Import-Export India still a net importer Mntonnes Prodcution Consumption Net (Imports)/export Source: JPC

11 Until February 29, India imported 4.8 million tonnes of steel vs. exports of 3.2 million tonnes. Consequently, many domestic players are setting up additional capacities to cash in on the growing steel demand in India. Domestic Demand and Supply Outlook Demand Outlook: Steel consumption in India too is correlated with GDP growth. With the Indian economy growing at 9% over the past three years, steel consumption has increased in line. GDP (%) India GDP vs Crude Steel demand Source: JPC, IME, CRISIL GDP Following the global economic slowdown, Indian crude steel production declined. However, it was not as severe as in other developed economies. IMF expects India s GDP to increase 4.5% in 29, consequent to the fall in GDP growth in 28. Accordingly, after a drop in 29E, growth in steel demand is expected rebound in 21, supported by continued infrastructure investments by GoI. Supply Outlook: India has crude steel capacity of 62.2 million tonnes (latest 3 million tonnes capacity was from JSW Steel in 28-9) with average operating rates of 9% since the past five years. The major players have been operating at more than 1% in the past two years. Capcity Capcity Utilization Urilization 29E 21E Steel Consumption 211E 212E 213E Crude steel demand YoY (%) Million Tonnes % 82% 75% 88% 91% 91% 9% 92% 88% 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Capacity Utilization (%) FY1 FY2 FY3 FY4 FY5 FY6 FY7 FY8 FY9 Capacity Production % capacity Utilization Source: JPC, IME, CRISIL With current capacity utilization of 9%, steel demand would be met through capacity expansions in the future. With strong demand over the past five years and availability of natural resources such as iron ore and thermal coal at cheap rates, many players are looking at expanding capacity. India is expected to add 51 million tonnes of steel in the next five years. 11

12 Expansion plans of Indian steel makers (mn tonnes) Actual Next 5 Years = 51 mn t Company Tata Steel JSW Steel SAIL 13 1 RINL Bhushan Steel Ispat Industries Ltd Monnet Ispat Essar Steel Jindal Steel & Power Posco 4 Arcelor Mittal 3 Total Additions Total Capacity Source: CRISIL Though planned, project execution has always been a concern in India due to issues such as delay in environmental clearances for land use and a long process for securing mines, with ambiguity about the mine application process. Moreover, other factors such as the global demand slowdown have forced many domestic and international players to put their capex plans on hold. Nevertheless, with easing liquidity conditions and signs of recovery, capacity additions may come up at a pace slower than that expected by the Steel Ministry. In the medium term, we expect no major capacity additions. Thus, capacity utilization in the near to medium term should be high. In the long term (up to 214), we expect average capacity utilization of 8-85%. Prices Flat Products HR coils- International Prices Domestic and Landed Cost Apr-97 Apr-98 Apr-99 Apr- Apr-1 Apr-2 Source: JPC, CRISIL Apr-3 Apr-4 Black Sea FoB export Apr-5 Apr-6 Apr-7 Apr-8 Apr USD Per tonne Apr-97 Apr-98 Apr-99 Apr- Apr-1 Domestic Prices Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Landed cost HR coil prices rose continuously since 26, driven by strong global consumption, especially in China. However, they dropped to a low of $359 per tonne in April 29 (from an all-time high of $118 per tonne in September 28) owing to the global financial meltdown. Currently, the global markets appear to be recovering with steel prices having rebounded to $56 per tonne in August 29 on mild recovery in steel demand. 7, 6, 5, 4, 3, 2, 1, Apr-7 Apr-8 Apr-9 INR 12

13 Domestic Prices Domestic prices too rose to INR45,5 per tonne in July 28. However, due to frequent GoI interventions, they dropped to INR41, per tonne in September 28, when international prices were at a peak and landed cost in Mumbai was INR65,5 per tonne. In March 29, domestic prices and landed cost plunged to INR29, and INR22, respectively. Later, in August 29, landed cost recovered to INR32,5 following a rebound in international steel prices. Indian steel players too increased prices to INR33,5 per tonne on global cues and now, prices are on par with global levels. Long Products International Prices INR per tonne Apr-97 Apr-98 Apr-99 Apr- Apr-1 Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, 1,4 1,2 1, Apr-97 Apr-98 Apr-99 Apr- Apr-1 Apr-2 Apr-3 Apr-4 Apr-5 Apr-6 Apr-7 Apr-8 Apr-9 USD per tonne Source: JPC, CRISIL Following the slowdown in global infrastructure and construction activities, international long product prices declined from a peak of $1243 in June 28 (to $4 March 29). Domestic prices too dropped from a high of INR46,2 (April 8) to INR31, in January 29. However, with marginal recovery in global steel demand, international prices rebounded to $457 in August 29, which led to the gap narrowing between international and domestic prices, which still favor domestic producers. With the ongoing monsoon season, construction activities are expected to remain subdued; thus long product prices would be weak in the short term. Currently, they are around INR3, per tonne. Raw material outlook Iron ore and coking coal: Iron ore and coke are crucial raw material for UML, accounting for more than 55% of its production cost. An increase in raw material prices would inflate steel production cost. Spot prices for iron ore touched a high of $194/tonne in mid-fy8 and are currently at $75-78/tonne. Similarly, coking coal prices, which peaked in 28 to $293 per tonne, are around $ Iron Iron Ore Ore and Coking Coal Coal USD per tonne E 21E 211E 212E 213E Source: Econ state, CRISIL Iron Ore Coking Coal With global steel demand expected to decline in 29, prices of raw material for this commodity should drop too. 13

14 Valuation and Recommendation Peer Valuation EV/EBITDA PRICE/BOOK PRICE/EARNINGS ROE(%) 21 Y 211 Y 21 Y 211 Y 21 Y 211 Y 21 Y 211 Y Bluescope Steel Ltd Posco China Steel Corp Baoshan Iron & Steel Co Arcelormittal Nippon Steel Corp Jfe Holdings Inc Thyssenkrupp Ag Nucor Corp United States Steel Corp Angang Steel Co Ltd-h Indian Players Jindal Steel & Power Ltd Tata Steel Limited Steel Authority Of India Jsw Steel Limited Monnet Ispat & Energy Ltd Godawari Power And Ispat Ltd Adhunik Metaliks Ltd Bloomberg Consensus Estimates Usha Martin Ltd ACMIIL Research One-year forward P/E chart: /1/24 8/1/24 12/1/24 4/1/25 8/1/25 12/1/25 4/1/26 8/1/26 12/1/26 4/1/27 8/1/27 12/1/27 4/1/28 8/1/28 12/1/28 4/1/29 8/1/29 Close Price 12 P/E 1 P/E 8 P/E 6 P/E Source: Company, Capitaline, ACMIIL Research We expect UML to register volume-driven sales growth. Backward integration across the value chain would help the company expand margins. At CMP of INR72.6, the stock trades at 8.3x and 5.6x FY1E and FY11E EPS of INR8.7 and INR13. respectively. We initiate coverage on UML with a BUY recommendation and a price target of INR91, implying a forward P/E of 7x FY11E EPS of INR13. 14

15 Profit And Loss INR MN Particulars FY7 FY8 FY9 FY1E FY11E Net Sales 19,647 23,88 29,498 27,312 34,498 Total Expenditure 16,277 19,219 23,611 21,124 26,192 Operating Profits 3,37 3,869 5,888 6,188 8,36 Other Income Foreign Exchange (Gain)/Loss EBIDTA 3,581 4,298 5,143 6,398 8,456 EBDITA(normalized) 3,54 4,42 6,64 6,398 8,456 Depreciation ,86 1,599 2,37 EBIT 2,646 3,324 4,57 4,799 6,42 Interest 915 1,6 1,422 1,542 1,581 Adjustments for items capitalized and own consumption PBT(reported) 1,829 2,468 2,86 3,257 4,839 PBT (Adjusted) 1,788 2,212 3,727 3,257 4,839 Taxes ,75 1,597 Profit After Tax (reported) 1,388 1,765 1,884 2,182 3,242 Adj.PAT 1,346 1,58 2,85 2,182 3,242 Growth in sales 18% 28% -7% 26% PAT (reported) Growth 27% 7% 16% 49% Adj PAT Growth 12% 86% -22% 49% Operating Profit Margin 17.2% 16.8% 2.% 22.7% 24.1% EBIDTA Margin 18.2% 18.6% 17.4% 23.4% 24.5% Adj. EBIDTA Margin 18.% 17.5% 2.6% 23.4% 24.5% Net Profit Margin 7.1% 7.6% 6.4% 8.% 9.4% Adj. Net profit Margin 6.9% 6.5% 9.5% 8.% 9.4% Source: Company, ACMIIL Research Balance Sheet INR Mn Particulars FY7 FY8 FY9 FY1E FY11E Sources of Funds Share Capital Equity Warrants Reserves and Surplus 7,492 9,14 11,111 13,294 16,536 Total Shareholders Funds 7,765 9,69 11,362 13,545 16,787 Minority Interest Total Loan Funds 9,63 11,375 16,713 18,138 16,638 Share Application money Net Deferred Tax Liability 1,492 1,536 1,36 1,36 1,36 Total Capital Employed 19,6 22,719 29,548 33,26 34,948 Application of Funds Gross Block 2,155 21,512 24,377 39,981 4,731 Less: Accumulated Depreciation 8,161 8,959 1,82 11,681 13,718 Impairment Loss Net Block 11,781 12,387 14,129 28,3 27,13 Capital Work in Progress 1,998 5,23 12, Investments Net Current Assets 5,193 5,289 3,35 4,395 7,423 Miscellaneous Expenses not w/off Total Assets 19,6 22,719 29,548 33,26 34,948 Source: Company, ACMIIL Research 15

16 Cash flow Statement INR Mn Particulars FY7 FY8 FY9 FY1E FY11E Pre tax profit 1,829 2,468 2,86 3,257 4,839 Add Depreciation ,86 1,599 2,37 Interest Exp 915 1,6 1,422 1,542 1,581 Foreign Exchange gain/loss others Profit before working capital changes 3,343 4,134 6,447 6,398 8,456 Profit after working capital 2,796 3,292 9,245 5,862 8,34 Less Taxes ,91-1,75-1,597 Net Cash flow from operating activities 2,429 2,673 8,154 4,787 6,77 Net Cash flow in investment activities -2,935-3,86-1,58-4, -75 Net Cash flow from financing activities 328 1,412 2, ,368 Exchange differences on Translation of Foreign Currency Net increase /(decrease) in cash ,59 Op. balance of cash and cash equivalents ,88 1,468 Cl. balance of cash and cash equivalents ,88 1,468 4,58 Source: Company, ACMIIL Research Ratios Particulars FY7 FY8 FY9 FY1E FY11E Profitability Ratios Operating Profit Margin (%) 17% 17% 2% 23% 24% EBDIT Margin (%) 18% 19% 17% 23% 25% PAT Margin (%) 7% 8% 6% 8% 9% RONW (%) 18% 18% 17% 16% 19% ROCE (%) 15% 16% 14% 15% 19% Per Share Ratios EPS (Rs.) Adj. E.P.S CEPS (Rs.) BV Per Share (Rs.) Valuation Ratios P/E (x) P/CEPS (x) P/BV (x) EV/EBIDTA Capital Structure Ratios Debt/Equity Current Ratio Turnover Ratios Inventory Turnover Debtors turnover ratio Creditors turnover ratio Fixed Asset Turnover Source: ACMIIL Research 16

17 Notes: Institutional Sales: Ravindra Nath, Tel: Kirti Bagri, Tel: Himanshu Varia, Tel: Institutional Dealing: Disclaimer: This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views expressed in the report Disclosure of Interest Usha Martin Limited 1. Analyst ownership of the stock NO 2. Broking Relationship with the company covered NO 3. Investment Banking relationship with the company covered NO 4. Discretionary Portfolio Management Services NO This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may from time to time have positions in and buy and sell securities referred to herein. 17