Usha Martin Q3FY24 Concall Summary
Present on the call :Rajeev Jhawar (MD), Anirban Sanyal (CFO), Shreya Jhawar (Strategy and Growth Team)
Management Tone : Extremely confident and Bullish.
Management
- UML Wire rope realisations have consistently shown an upward trend, particularly visible in the wire rope products which have helped the company in increasing EBITDA margins.
- In FY23, the focus of the management was one Value. From next year onwards, the focus will be on Value led Volume growth.
- Growth Initiatives taken by management in Q3FY23-
- Management has set up a step down subsidiary company in Saudi Arabia, through its Dubai Subsidiary (Brunton Wire Ropes), to target the growing market and the massive opportunity (led by initiatives of the new Crown Prince). Through this entity, the management, under the EMM brand, wants to provide value added services for ropes similar to other service centres in Europe. Value added segments catered through this entity include Oil & Gas, Ports, Cranes, Construction and Infrastructure apart from general engineering ropes. This is expected to start from Q1FY25, as equipment has already been ordered. Plant setup for this will start firstly as a service centre for value added ropes (cutting, coiling, testing) and a distribution point for customers in Saudi Arabia. Recently, through Usha Siam, management has acquired the remaining 50% stake in TEZAC Wire ropes (Japan). Previously, it was a 50:50 JV between both the companies. Management wants to use this facility to manufacture high value elevator ropes.
- Management is planning to enter the highly valued added Synthetic Sling rope market through its UK plant (Brunton Shaw). This will be the company’s first foray into the synthetics space. Company is investing 4.5 mil pounds (5.5 mil dollars).This could start showing a positive outcome in 2-3 years time.
- Management has set up cross functional groups in the key growth segments such as Mining, Elevator, Fishing.
- Management wants to continue to maintain and grow margins led by increase in volumes of wire rope coming in from new capacity expansion. They want to grow it to 20% on a sustainable basis (even with poor margins in LRPC) and then push it to 20%+ margins.
- The margin profile of the GCC business will be similar to the Europe and US markets for value added ropes but will see some competition for GP ropes led by increased competition here. To tackle the competition in GP ropes in this market, the company has
- Value added services (rigging services) last year in the Dubai Plant
- Contained the share of GP ropes in the business while focusing on crane and oil & offshore ropes (60% now vs 47% last year)
Business
- During the quarter, pricing pressure in the wire, strands and LRPC segments impacted the topline. This was controlled to an extent due to the mix of core wire rope business.
- Revenue mix 9MFY24- Wire rope (70%) up from (67%) last year same Q, Wire & Strand (9%) and LRPC (12%).
- Share of value added industry segment now 49% vs 44% last year.
- Share of value added business in the wire rope category now 70% vs 65% last year.
- International business now contributes 55% to the topline.
- The integration of the international businesses with the Indian Operations is showing encouraging growth synergies and creating a collaborative approach across global and local teams.
- Through this integration, the company is supplying wire and strands as raw materials for high value added ropes made by Brunton Shaw in Europe. This is giving a competitive edge to the company on a cost front compared to the international peers and is helping the company to win market share.
- The growth in the European market for the GP rope segment is slow but the same for high end ropes continues to have a strong market. As per management, they will continue to do well in the European market led by a strong order book.
- Brunton Shaw UK continues to see strong growth. Management expects it to grow 30% in FY24. This growth is supported by strong growth in products like OceanMax and CraneMax brands supplied to high end customers.
- Now, Company also has approvals from OEM suppliers in Europe for Elevator ropes.
- There is good traction in Mining as well, as the business has been able to win key contracts with OEMs in US & Europe led by the MineMax brand.
- The US market is seeing good traction for Mining ropes where the company did some trial orders and has received good feedback from customers. There is a good demand for Crane, Elevator and Gondola ropes in this market
- Through the US market, the company caters to the South American market (Brazil, Chile, Peru and Columbia region) where the company has done well in the mining market. Company has also gotten traction in the port segment of this market with some contracts being done and the fishing market of LATAM where the company has gotten some trial orders.
- Company has started getting repeat business from premium customers in both the US and Europe.
- In the India business, management sees good potential from the Parvat Mala project of Govt to establish big ropeways. Moreover, they see a good potential from the big infrastructure projects in India (Highways, railways) where there will be good demand for plasticated and galvanised LRPC. Growth here will be similar to India Market growth and the company will retain similar market share.
- EBITDA/tonne was ~Rs 34,000 in Q3FY24 up 33.3% from Q3FY23. This is the highest number till now.
- Company has increased inventory levels to be well prepared in anticipation of demand in the coming Quarters.
- Phase 1 of the Brownfield Capex done in Ranchi (300-310 crs) is set to be completed in Q4FY24 (within 1 month). Volumes from this will start from Q1FY25. This will help the business generate at least 15,000 Tons more volume of ropes (both special and normal ropes)in FY25. This number could be higher looking at the demand environment. This will add to the revenue in the coming Quarters. Phase 2 capex will be completed in the next 18 months. A lot of imported equipment ordering has been done for Phase 2.
- Combined additional capacity from Phase 1 and Phase 2 capex will be 45,000-50,000 tons. Phase 1 will help the company reach 30,000-35,000 tons of capacity increase. Phase 2 will add 10,000 to 15,000 tons. This will add capacities to all the different categories of wire ropes and LRPC.
- This phase of expansion includes the increase of capacities for higher valued added products such as crane ropes, compacted ropes, plasticated ropes, oil and offshore ropes. This phase also includes expenditure towards modernisation of facilities.
- Company is focusing on getting into value- added LRPC- Galvanised, Plasticated and PVC coated where they have got some good orders. The ramping up of these orders will take a few Quarters.
- Management is also looking for opportunities of using the wire drawing and patenting facilities of the LRPC line to get into other valued added wires both for domestic and Brunton Shaw units.
- Net debt to equity improved to 0.05x as of Dec '23 despite the capex spend of 196cr in 9MFY24.
- CFO for 9MFY24 stands at 423 cr (94% of operating EBITDA) vs 214.5cr for 9MFY23 (60% of operating EBITDA).
- All International Subsidiaries are performing well and have decent growth. This will continue going forward.
Risk
- In the LRPC segment, they are not the biggest player and have been impacted by the larger volumes from players who are backward integrated into steel. This has led to an impact on the realisation of the LRPC segment. Management expects a few difficult quarters going forward in this segment wrt to margins.
- Brunton Wire Rope (Dubai) is the only wire rope producer in the GCC region till now. This gives the company some advantage. However, some other local producers and service providers are entering this market region led by favourable policies. GCC is a big market that is also attracting Korean, Chinese and even European Players which can lead to increase in competition.
*Due to the Red sea issue, firstly, the transit time for goods to US and Europe will increase by at least 15-20 days (30% increase in time) coupled with higher freight. This will be a global industry wide problem for players supplying to these markets. Management hopes to pass on this increase in costs to customers. Secondly, there could be increased working capital needs due to increased transit times.
One of the best concalls I’ve heard this earnings season. So, tried to make it as comprehensive as possible.
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