In the last year, the 63-year-old wire rope maker from Kolkata has spent three years correcting a decision made in the late 2000s. After spending the last three years correcting a decision made in the late 2000s, the Kolkata-based wire rope maker is reaping the benefits as the stock has become a multibagger stock.
Through a masterstroke, the company shook off its excess debt and gained a 65% market share. Furthermore, thanks to its international presence – four countries in Europe, five in Asia, in addition to Australia and the US – it is also growing its share globally – a move that has been rewarded by the street.
During the past year, the multibagger stock has returned 130%, with a rally of over 50% in the last six months.
According to B&K Securities, the business is likely to grow with a CAGR of 15% (FY23-26) with EBIDTA margins of around 18%, due to a highly fragmented market.
The term EBIDTA refers to earnings before interest, taxes, depreciation, and amortization.
From bad debt to good debt
In the late 2000s, the company invested unfavorably in the steel commodity business, producing highly engineered specialised steel ropes, customised fittings and more.
Due to the commodity downcycl of 2015-17, its net worth was severely eroded during the debt trap. Two years later, it managed to reduce its debt by selling off its steel business to Tata Sponge — a move that not only helped it reduce its debt but streamlined its focus to steel wire ropes, a niche but much more profitable business and helps to became it multibagger stock..
Usha Martin never defaulted, did not undergo debt restructuring, and had no haircut from the lenders. As a result, B&K Securities initiated coverage of the company, stating that it had been able to deleverage significantly and turnaround its financial and operational position.
In addition to focusing on a favourable product mix, value migration also prevents the company from being affected by changes in raw material prices, primarily steel and zinc. Raw material costs can be passed on to customers with a three-month time lag by all companies in this business.
According to Rajeev Jhawar, managing director of Usha Martin, wire rope is a highly customized engineered product whose price is not entirely determined by metal price cycles. The products aren’t very price sensitive either since they are highly customized and focus on safety and quality.
Arbitrage of costs
Companies in this business, including Bharat Wire Ropes, Bedmutha Industries, and D P Wires, have an advantage over international competitors – employee costs.
According to B&K Securities, disruptions in global supply chains and higher costs are giving them (Usha Martin) a chance to increase their market share.
With distribution centers in 11 countries, including the US, Australia, Middle East, and South East Asia, it plans to increase its share of the international market from 3% to 5-7% by the year 2020.
So that we can be close to our customers, we have our own distribution centres around the world where we stock the material. In addition, we can add cutting and coiling services, so we can charge a higher price and serve our customers better.”
Moreover, the demand outlook for the sector is improving, especially in offshore and shipping sectors.
How will things turn out?
The company will increase capacity at its Ranchi facility, as part of its ‘value migration’ model, by the third quarter of FY24.
The second capex wave of ₹167 crore will be completed by the next two fiscal years. 70-75% of this capex will be funded by internal accruals. In addition, analysts say that return on capital employed (RoCE) is likely to improve from 20% in FY23 to 23.1% because major capital investments have already been made.
As a result of its steady business, the stock’s valuation has gradually improved and became multi bagger stock. Despite the steep run-up in the stock in the recent past, B&K Securities believes the upside potential remains due to management focus, the industry outlook and potential, low gearing, and constant improvements in margins, adding that the market would pay attention to the company’s long-term prospects.
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