CMP Rs81, Target Price Rs102, Upside 25.2%
UML is well placed to reap the benefits of a massive capex undertaken over the last three years. Volumes are set to more than double over the next two years while improvement in raw material integration would add further value.
We expect UML to witness a volume growth of 75.5% yoy to 0.56mn tons in FY11 and a further 30.8% yoy to 0.73mn tons in FY12. With steady steel prices globally, we expect topline to jump 55% yoy to Rs28.9bn in FY11 and thereafter 25% yoy to Rs36.2bn in FY12. With the increase in captive consumption of both metallic and raw materials like iron ore and thermal coal, OPM for the company is expected to increase 412bps yoy to 23.4% in FY11. The company’s balance sheet is set to improve following the successful QIP issue in FY10 and the steady cash flows expected over the next two years. Debt/Equity ratio is expected to remain flat at 0.7x as the company has announced a further capex of Rs12bn over the next three years.
At the CMP of Rs81, the stock trades at a P/E of 5.3x and an EV/EBIDTA of 3.8x FY12E, which is at a huge discount to the larger players. We believe that the valuation gap will reduce and recommend a BUY rating on Usha Martin
