Usha Martin (Q4 FY07): "Good quarter, Remain positive"

Dear Sir/Madam,
Usha Martin consolidated Q4 FY07 results were on our expected lines with earnings remaining flat qoq at Rs393mn and revenues growing 3.8% qoq to Rs4.99bn. On stand-alone basis, revenue growth was strong at 14.4% qoq while earnings growth was marginal at 2.1% qoq. During the quarter OPM slipped sequentially by 222 bps on stand-alone basis and 100 bps on consolidated basis. Margin was mainly impacted by sharp Rupee appreciation, higher coke prices a nd higher contribution from Agra rolling mill. Full year consolidated numbers were also in line with our expectations. We remain positive on Usha Martin but have marginally tweaked our FY08 EPS estimate downward to Rs33.9 from Rs34.1.

Since our last recommendation at Rs210 in our Q3 FY07 Investment Update in February 2007, the stock has run-up by 16.7%. Despite this, we remain positive on the company for its re-rating potential. At CMP Rs245, company trades at 7.2x FY08E EPS and 5.1x FY08E EV/EBITDA. 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 as seen, 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.

Click below for the detailed Investment Update:


Warm Regards,

Rajiv Mehta
India Infoline Ltd.



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