September 08, 2008
Usha Martin to undergo a significant capacity expansion
Moneycontrol.com reported that Usha Martin is in the midst of a significant capacity expansion by increasing the proportion of captive metallics, captive coal mining for its sponge iron unit and maintaining its captive power usage in line with the enhanced capacity. It is expanding its steel capacity by 2.25 to reach close to 1 million tonnes per annum in stages by end of 2009.
Usha Martin, to support its enhanced steel capacity and keep the operating costs under control, is adding DRI and hot metal pig iron capacities of 200,000 tonnes per annum and 400,000 tonnes per annum respectively and setting up captive power plants of total 60MW. Coal from the company’s coal mine is expected to be available from Q4 of 2008 assuming its usage only in 2009. Combined wire and wire rope capacity will increase from the current level of 225,400 tonnes per annum to 303,200 tonnes per annum in stages in 2009.
The proportion of value added products such as oil tempered wires, bright bars and TMT bars is also being enhanced, thereby, significantly enriching its already diverse product mix. Considering the usage of its products across engineering, oil and gas, automotive, and construction sectors, Usha Martin is also a proxy play on the oil and gas and infrastructure sectors.
Led by the above capacity expansion cum backward integration project, the company’s top line and bottom line are expected to increase at a CAGR of 20.9% and 43.8% respectively over 2007-10. At CMP of INR 56, Usha Martin trades at P/E of 6.3x 2009 earnings, which is at a discount of about 30% to the sector average. As a result, it had to purchase metallics externally, which increased operating costs by approx INR 190 million.
It is noted that since mid September 2007, Usha Martin has restarted its blast furnace. Though Q1 of 2008 profits would be adversely impacted by the higher cost, it sees this as a short term issue and is positive about the overall business model and the long term story.
