This multibagger is charting a growth path after escaping a debt trap

• Usha Martin gave 130% returns in the last one year, and analysts feel that there is still an upside potential.
  
• In the late 2000s, it invested unfavourably into the steel commodity business and fell into a debt trap.
  
• Company has managed to reduce its debt by selling off its steel business to Tata Sponge, and focussed on a better product mix.
  

The 63-year-old wire rope maker from Kolkata has spent the last three years righting a decision taken in the late 2000s and it looks like its efforts are paying off as the stock has turned a multibagger in the last one year.

After it shook off its excess debt with a masterstroke, it has gained a substantial market share of 65% in the country. Moreover, thanks to its international presence across – four countries in Europe, five in Asia, in addition to Australia and US, it’s also growing its share globally – a move that the street has been rewarding it for.

In the last one year, the stock has given 130% returns with the last six months seeing a rally of over 50%.

“With huge export opportunities due to a highly fragmented market likely to improve the overall outlook of the business, we believe the overall topline will grow with a CAGR of 15% (FY23-26) with EBIDTA margins of around 18%,” says a report by B&K Securities.

EBIDTA is earnings before interest, tax, depreciation and amortisation.

Back from bad debt

The company makes highly engineered specialised steel ropes, customised fitments and more – used in mining, offshore sectors along with conveyor belts. However, in the late 2000s it invested unfavourably into the steel commodity business.

Subsequently, it went into a debt trap during the commodity downcycle of 2015-17 — leading to severe erosion of its net worth. Two years later, it managed to reduce its debt by selling off its steel business to Tata Sponge — a move which not only helped cut down its debt but also streamlined its focus to steel wire ropes, a niche yet much more profitable business.

“It is important to note that Usha Martin never defaulted, did not go for debt restructuring and there was no haircut by the lenders. This enabled it to significantly deleverage and turnaround its financial and operational position,” said B&K Securities, as it initiated coverage on the company.

Now, it’s focussing on a favourable product mix, and the value migration also pulls it away from the effect of changes in price of its raw material, most of which are steel and zinc. All the companies in this business can pass on high raw material costs to the customers, with a three-month time lag.

“Wire rope is a highly customised engineered product and therefore its pricing is not entirely impacted through the cycles of metal prices,” Rajeev Jhawar, managing director of Usha Martin in the latest earnings concall. Due to the high customization and focus on safety and quality, the products are not very price sensitive either.

The cost arbitrage

Indian companies in this business, which also includes Bharat Wire Ropes, Bedmutha Industries and D P Wires have an advantage over their international competitors – employee costs which is a major cost component.

“Supply chain disruptions and higher cost structures faced by global competitors gives them (Usha Martin) an opportunity to increase their market share,” says B&K Securities. And, the company has been working on multiple fronts over this.

It has distribution centres across 11 countries including the US, Australia, Middle East and SouthEast Asia. It has plans to increase its share in the international market from its current 3% to 5-7% in the next few years.

“Our business model is basically having our own distribution centres across the world where we stock the material so that we are able to be close to the customer. We even add services to it by cutting, coiling, and will be able to demand a higher price and serve our customers better,” Jhawar says.

The company intends to become a one-stop shop with focus on services. Moreover, the demand outlook for the sector is also improving — especially in the offshore and shipping sectors.

What lies ahead?

As it carries on with ‘value migration’ model, the company is also at the fag one of one its capex wave of ₹310 crore — to increase capcity at its Ranchi facility – which will be done by the third quarter of FY24.

The second capex wave of ₹167 crore will be completed by the next two fiscal years. As much as 70-75% of this capex will be funded by internal accruals. Also as the major capital investments have already taken place, return on capital employed (RoCE) is likely to improve to 23.1% from 20% in FY23, say analysts.

Due to its steady business, there has been a gradual improvement in valuation of the stock. “Despite the steep run-up in the stock in the recent past, we feel upside potential continues to be there with management focus, industry outlook and potential, low gearing and constant improvement in margins,” said B&K Securities adding that the market will focus on its long-term potential.

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