Usha Martin’s wire manufacturing stock has gained more than 63 percent in 2022 despite its turbulent year. By comparison, the benchmark is only up nearly 6 percent this calendar year.

On the back of its strong performance throughout the year, brokerage house HDFC Securities has voted it a top ‘techno funda pick’.

Brokers suggest buying intermediate shares Rp131-134 and add more Rp114-116 for targets Rp149 and Rp162 and a stop loss of Rp104. The time horizon given by the broker for this is 3-6 months. The broker explained that the company has been able to generate strong cash flow, driven by increased management focus on increasing the company’s product mix towards a more value added portfolio in India as well as in international markets.

Usha Martin (UML) is primarily engaged in the manufacture and sale of steel wire, strands, wire rope, cables, related accessories, etc. Usha Martin is also involved in the sale of other products such as wire drawing and allied machines. UML is the market leader in the Indian wire and wire rope space and is one of the top five manufacturers worldwide. The company serves a variety of uncorrelated end-user industries – including elevators, mining, container port cranes, fishing and construction – with sizable market shares in each industry.

“Potential new high value added products added to the UML portfolio, will become EBITDA accretive once the large self-funded capex is completed and the upgraded facilities achieve optimal capacity utilization. The company also serves sectors such as oil and offshore, infrastructure and construction. Growing demand from oil and offshore for specialty steel products, increasing use of specialty steel products in construction and government spending on infrastructure will provide strong growth opportunities for UML,” the brokerage said.

It was further stated that after the divestment of the Steel Business in April 2019, UML has improved its performance by focusing on increasing capabilities, overcoming obstacles and increasing focus on value-added products. Delayed fee amount Rp93.5 crore from Tata Steel Long Products Limited, post reduced sales of UML’s steel division, is also likely to be realized in FY23; this contribution will be used for capital expenditures as well as to increase group liquidity, which is likely to help further debt reduction, HDFC said.

One setback for the company is the ongoing Central Bureau of Investigation (CBI) investigation into the sale of refined iron ore from its captive mines during FY06-FY10. The broker believes that any adverse court order for a higher-than-expected amount would lead to a reduction in UML’s liquidity and could put downward pressure on the stock price, which would be a key risk to watch out for.

but one major positive is that the company is upgrading the capacity of the Ranchi plant, which will increase overall capacity by 25 percent to 233,000 tonnes per annum (TPA) by FY25E, HDFC informed.

“This capacity expansion plan includes the addition of new, high-value, high-margin niche products to the UML portfolio, which have significant demand in the export market. UML will remain 100 percent self-sufficient in terms of power as existing power plants have excess capacity. In addition, with modernization and upgrading of facilities, the total power consumed per unit is likely to decrease, thereby increasing operating efficiency in the medium term,” he reasoned.

Financial performance

During the September quarter, UML maintained strong profitability by managing spreads and meeting customer commitments despite a drop in Wire’s realization due to weak metal prices. Its operating income rose 38 percent to Rp820 crore in Q2FY23 versus Rp594 in Q2FY22. Meanwhile, adjusted EBITDA and PAT rose 35% YoY and 37% YoY respectively in the quarter under review.

Technical Observationd

– According to the broker, the price for the share (Usha Martin Ltd) as per the weekly timeframe chart is moving in a phase of greater consolidation over the last few months.

– The broker observed the formation of a larger symmetrical type triangle pattern (rising bottom and lower top) during this period. Usually, such a triangle formation during an uptrend move is considered a temporary halt of upward momentum or referred to as a running correction in trending stocks.

– Such a consolidation move would eventually result in a sharp upside break of the triangle cusp with acceleration in upside momentum. Currently, the stock price has closed near the upside breakout point at Rp138-140 levels, he says.

– Hence, there is a higher probability of buying emerging from here on Usha Martin Ltd and one can expect the stock to move above those hurdles and carry sharp upward momentum in the near term, said HDFC.

– It also shows that historically, the stock price has formed similar type of patterns (consolidation or triangle) in the past and has witnessed a decisive reverse break of the pattern and moved up decisively in the last 1-2 years.

– Volume has dried up now and is expected to breakout as stock prices rise. The weekly 14 period RSI has turned flat around the 50 level and will likely emerge from here, further stated.

– Given the overall positive chart pattern in Usha Martin Ltd, we anticipate a significant upside break in the near term. One may wish to enter a long position at the levels mentioned above, the broker advises.

Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of MintGenie.

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