India Ratings & Research (Ind-Ra) has affirmed Usha Martin Limited’s (UML) Long-Term Issuer Rating at ‘IND A+’. The Outlook is Negative.

Key Rating Drivers
The affirmation reflects the continuous improvement in UML’s profitability over the last six quarters. The Negative Outlook reflects the lower-than-expected improvement in the credit metrics of the company due to its unexpected capex of INR1.2bn during FY14 and delays in the commencement of operations in its pellet plant.

UML’s standalone EBITDA margins improved to 23.8% in 2QFY14 from 15.1% in 1QFY13. The operationalisation of  its captive power plant and coke oven batteries and higher extraction of coal from the captive coal mines contributed to an increase in the integrated EBITDA per ton to INR12,109 in 1HFY14 (FY13: INR10,040, FY12: INR7,539). This is likely to improve further when the pellet plant is commissioned in 4QFY14. The pellet plant commissioning would improve the capacity use of the sponge iron plant and UML expects a part of the production to be sold as billets. The sale of the low-value added billets would increase the volume of steel sold and the total EBITDA, but would depress the overall EBITDA margins.

Also, with all planned capex completed, UML’s debt is now likely to decrease as the term loans will be repaid. This along with an increase in EBITDA from the pellet plant will result in consolidated net leverage improving to marginally above 4x by end-FY14 and to below 3.5x over the next two years.

Gross debt levels increased to Rs41,494m by end-1HFY14 due to a cost overrun of INR2,750m and a time overrun of around nine months in some projects due to a change of the scope of project. Also, there was capitalisation of a mark-to-market loss on foreign currency denominated debt. Furthermore, in 1HFY14, the consolidated EBITDA margin improved to 19.66% but  net debt increased to INR39,770m (FY12: INR35,052m) leading to elevated annualised net leverage of 5.4x.

During FY13, consolidated EBITDA of UML improved to INR6,907m (FY12: INR4,571m) with EBITDA margin improving to 19.1% (13.6%) and net leverage improving to 5.1x (5.62x) on account of better profitability on a standalone basis and maintenance of performance at the subsidiary level.

UML’s ratings continue to reflect its dominant position as the leading manufacturer of wire ropes in India with integrated operations.