Rattibha

Thread on #UshaMartin 's turnaround story.
After 14 years, in Dec 2022, the steel company's stock finally crossed it's previous all time high of 147 it had hit in 2008, along with unusually high volumes.

Let's roll back a bit.
In 2018, things weren't looking rosy for Usha Martin. They had made a loss for 4 consecutive years.

So what happened?
In 2018, one of the company's promoter and currently Usha Martin's Managing Director, Mr. Rajeev Jhawar, had several disagreements with the board of directors. Eventually, he successfully persuaded them to sell off their steel business.

In 2019, Usha Martin sold off their steel business to the Tatas.

Hang on.
A steel co. sold off their steel business 4 yrs back and their operating profits have been growing steadily.
How did that happen?
Something isn't adding up.

The answer lies in Usha Martin's Steel Wire Ropes business.
I know. I know. I hate jargons too.
Let me tell you more about what Steel Wire Ropes.

Steel wire ropes are like really strong and tough ropes made of many small metal wires twisted together. They are used in things like elevators, cranes, and bridges to help lift and hold heavy things safely.

Mining Ropes

Oil & Offshore Ropes

Suspension Bridge Ropes

The first thing that comes to one's mind is Steel Wire Ropes are another commodity business and are likely to suffer due to the ups and downs in Steel cycles.
But then one needs to look beneath the surface.
Mgmt recently clarified that they are doing 2 things to improve ROCE.

One, after selling off their steel business in 2018-19, they decided to focus on more Value added products.
What happens in value added Wire Ropes is that the % of steel in the price of the end product, goes down, leading to better return ratios.

Second, they decided to focus more on their international Wire Ropes business, because the margins are much better there.

Ok so how do we know they have been able to maintain margins in spite of highly volatile steel prices.
If you compare their EBITDA per tonne figures with steel prices, you'll notice that the management's claims are aligning well with the actual results.

Ok. So what about entry barriers and margin sustainability?
As per Mgmt, Steel Wire Ropes have high entry barriers because of long customer approval cycles and critical applications.

Here comes, Loss Aversion, an important mental model in psychology.
Imagine I am an employee at an Elevator manufacturer buying ropes from Usha Martin and the cost of an Elevator Rope is a fraction of the overall Elevator cost and I decide to switch vendors.

If my employer, the elevator co. saves some money by switching vendors, then I get some applause.
However, if the new vendor's quality is a little less than Usha Martin's and the rope snaps, what happens to my job and my reputation?
Most humans would rather not switch.

Ok. That kind of explains entry barriers.
What about future growth and margins, because the market is a future discounting machine?

Valuation - The stock trades at 20 times earnings. If the same growth trajectory continues and return ratios further improve, will the stock get re-rated?
We don't know the answer to that because Mr. Market is gonna decide that.

If you liked the insights in this thread, help your other investor friends by sharing it with them.
No doubt, it will serve as motivation for me to write more company analysis threads.