Up 63% in 2022! Usha Martin is HDFC Securities' top techno funda pick

Shares of wire-manufacturing stock Usha Martin have gained over 63 percent in 2022 despite it being a volatile year. In comparison, the benchmarks have only advanced nearly 6 percent in this calendar year.

On the back of its strong performance during the year, brokerage house HDFC Securities has picked it as a top 'techno funda pick'.

The brokerage advises buying the stock between ₹131-134 and add more on ₹114-116 for targets of ₹149 and ₹162 and a stop loss of ₹104. The time horizon given by the brokerage for this is 3-6 months. The brokerage explained that the firm has been able to generate strong cash flows, driven by the management’s increased focus on improving the company’s product mix towards a more value-added portfolio in India as well as in the international markets.

Usha Martin (UML) is primarily engaged in the manufacture and sale of steel wires, strands, wire ropes, cords, related accessories, etc. It 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 among the top five leading manufacturers globally. The company caters to various non-correlated end-user industries – elevators, mining, container port cranes, fishing, and construction, among others – with a considerable market share in each industry.

"The new, potential high-margin value-added products being added to UML’s portfolio, shall be EBITDA accretive post the large self-funded capex is complete and the enhanced facilities reach optimal capacity utilization. The company also caters to sectors like oil and offshore, infrastructure, and construction. Growing demand from oil and offshore for specialty steel products, increased use of specialty steel products in construction and government spending on infrastructure will provide strong growth opportunities for UML," said the brokerage.

It further pointed out that post divestment of its Steel Business Undertaking in April 2019, UML has improved its performance with its focus on capability building, debottlenecking of constraints and increased focus on value-added products. The pending dues worth ₹93.5 crore from Tata Steel Long Products Limited, post the slump sale of UML’s steel division, are also likely to be realized in FY23; these dues will be deployed for capex as well as for enhancing the group’s liquidity, likely to aid in further deleveraging, stated HDFC.

One setback for the firm is the ongoing Central Bureau of Investigation’s (CBI) inquiry with respect to the sale of iron ore fines from its captive mines over FY06-FY10. The brokerage believes that any adverse court order for a higher-than-expected amount will lead to a deterioration in UML’s liquidity and may put pressure on stock price, which will be a key risk to watch out for.

but one key positive is that the company is enhancing the capacity of its Ranchi plant, which shall enhance its overall capacity by 25 percent to 233,000 tons per annum (TPA) by FY25E, HDFC informed.

"This capacity expansion plan includes adding new high-value, high-margin niche products to UML’s portfolio, having a significant demand in the export market. UML shall remain 100 percent self-sufficient in terms of power as its existing power plant has surplus capacity. Also, with the modernization and upgradation of facilities, the total power consumed per unit is likely to reduce thus, improving the efficiency of operations over the medium term," it rationaled.

Financial performance

During the September quarter, UML maintained strong profitability by managing spread and met customer commitments despite a decrease in the realization of Wire due to softening of metal prices. Its operating income rose 38 percent to ₹820 crore in Q2FY23 versus ₹594 in Q2FY22. Meanwhile, its EBITDA and adjusted PAT were up 35 percent YoY and 37 percent YoY, respectively in the quarter under review.

Technical Observationsd

- As per the brokerage the stock price (Usha Martin Ltd) as per the weekly timeframe chart was moving in a larger consolidation phase over the last many months.

- The brokerage observed the formation of a larger symmetrical type triangle pattern (rising bottoms and lower tops) during this period. Normally, such triangle formations during trended-up moves are considered a temporary halt in the upside momentum or called as a running correction in the stock trend.

- Such consolidation moves eventually result in a sharp upside breakout of the apex point of the triangle with acceleration in upside momentum. Presently, the stock price has closed near its upside breakout point at ₹138-140 levels, it noted.

- Hence, there is a higher possibility of buying emerging from here in the Usha Martin Ltd and one may expect this stock to move above the said hurdle and bring sharp upside momentum in the near term, said HDFC.

- It also pointed out that historically, the stock price has formed similar type patterns (consolidations or triangles) in the past and has witnessed decisive upside breakouts of the pattern and moved up decisively in the past 1-2 years.

- The volume has dried up now and is expected to breakout along with the rise in the stock price. Weekly 14 period RSI has turned flat around 50 levels and is likely to turn up from here, it further stated.

- With an overall positive chart pattern in Usha Martin Ltd, we are anticipating a significant upside breakout in the near term. One may look to create a positional buy as per the levels mentioned above, advised the brokerage.

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