Usha Martin Ltd. Result Update
Usha Martin posted strong results for Q3 FY07 with stand-alone earnings rising 19.8% qoq and 72.2% yoy. On consolidated basis, net profit growth was higher at 29.3% on sequential basis. This robust bottomline performance was led by significant operating margin expansion; 170 bps qoq on stand-alone basis and 390 bps qoq on consolidated basis. During the quarter company reaped the benefits of higher iron ore integration, better realizations and improved product mix. We maintain 'BUY' and raise our EPS estimates to Rs27.2 (earlier Rs26) for FY07 and Rs34.1 (earlier Rs32.6) for FY08. Our one-year target price is Rs251 based on 5.2x FY08 EV/EBITDA and implying a multiple of 7.4x on FY08 EPS.
Since our last recommendation at Rs170 in our Q2 FY07 Investment Update in November 2006, the stock has run-up by 24%. Despite this, we still maintain 'BUY' as Q3 FY07 performance was above our expectations and has forced us to raise earnings estimates. At CMP of Rs210, company trades at 7.7x FY07E EPS and 6.2x FY08E EPS. We believe these valuations does not reflect sufficient premium to commodity steel makers with company's character of an alloy/special steel manufacturer producing high value added products like Wires and Wire Ropes in majority. Also company's products are subjected to far less cyclical price fluctuations than that of commodity steel players. With operating margin on improvement path from backward integration (iron ore - started & coal - to start) and stress on value added products, we expect material upgrades to valuations.