Expansion At Ranchi And Thailand Plants Will Improve Market Position And Margins

Key Takeaways

• Centralizing procurement and logistics through One Usha Martin is expected to unlock cost savings and improve net margins.
  
• Expansion projects and digitalization initiatives are anticipated to enhance market position and revenue growth.
  
• Usha Martin faces international pricing pressure, declining demand, and rising competition, which could hinder profitability and revenue growth across multiple markets.

Catalysts

Manufactures and sells steel wires, strands, wire ropes, and cord related accessories in India and internationally.

• Usha Martin is undertaking strategic cost optimization through its One Usha Martin approach by centralizing procurement and logistics, which is expected to unlock cost savings and improve net margins.
  
• The ongoing expansion projects at the Ranchi and Thailand plants are on track, expected to ramp up volumes and enhance the company's market position, contributing to future revenue growth.
  
• Investments in digitalization and automation across operations are anticipated to improve productivity, resulting in enhanced operating leverage and potentially better net margins.
  
• The capital expenditure for the synthetic slings production in the U.K. plant is progressing, with commercial operations set to begin soon, which may contribute to revenue growth through product diversification.
  
• Direct supply of wire ropes from India to Europe, leveraging cost advantages and reducing the working capital cycle, is likely to aid in maintaining competitiveness and may enhance operating margins in volatile market conditions.

Usha Martin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Usha Martin's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 17.0% in 3 years time.
• Analysts expect earnings to reach ₹8.5 billion (and earnings per share of ₹27.92) by about March 2028, up from ₹4.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.1x on those 2028 earnings, up from 24.1x today. This future PE is greater than the current PE for the IN Metals and Mining industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.55%, as per the Simply Wall St company report.

Usha Martin Future Earnings Per Share Growth

Risks

• Usha Martin is experiencing pricing softness and margin pressures in international markets, which have affected their operating profit, resulting in reduced EBITDA margins. This could impact overall profitability.
  
• There is a noted slowdown in European markets, which is leading to pricing and margin pressure due to increased competition, affecting both revenue and net margins.
  
• The LRPC segment has reported a decline due to softer demand, partly due to oversupply in the market. This could impact revenue potential and result in slower growth in this segment.
  
• The sluggish demand scenario in Indian and European markets, despite expanded capacity, presents a risk of not being able to increase volumes as expected, which could impact revenue growth targets.
  
• Increasing competition from European and South Korean manufacturers, as well as the need to reduce costs to remain competitive, suggests pressure on margins if aggressive pricing strategies are required to maintain market share.

Valuation

• The analysts have a consensus price target of ₹541.0 for Usha Martin based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹50.1 billion, earnings will come to ₹8.5 billion, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹326.05, the analyst price target of ₹541.0 is 39.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.