Products:
Usha Martin is in the business of manufacturing Steel ropes and wires. The company has 3 main products:
Wire ropes: specialised steel ropes used in elevators, cranes, mines, oil rigs, other engineering purposes. Revenue contribution is 67% in 2023.
LRPC (Low Relaxation Pre stressed Concrete) wires: used to pre stress concrete for various types of construction works. Revenue contribution is 15% in 2023
Wires and strands: Revenue contribution is 10% in FY23
Others (optical fibres, construction solutions, telecom cables, etc.): Revenue contribution is 8% in 2023
End industries:
Usha Martin caters to the following end industries: (FY23 revenue contribution)
Geographic split (FY23):
Manufacturing Capacity:
| Location | Product | Annual Capacity (MT/ annum) |
| Ranchi | Wire rope, LRPC, Wire, Strand | 186K |
| Hoshiarpur | Wire, Wire ropes | 48K |
| Usha Siam, Thailand | Wire, Wire ropes | 36K |
| Brunton Wolf, UAE | Wire rope | 15K |
| Brunton Shaw, UK | Wire rope | 12K |
Recent History:
Two recent events have triggered my interest in the business:
Trigger 1:
During the commodity cycle boom in early 2000s, Usha Martin had backward integrated, and ventured into steel mills. Steel as we all know if a commodity product, with no pricing power.
Now, there are two types of businesses which produce metal products. – Metal trading businesses and metallurgical businesses. Metal trading businesses typically are low margin, and often cyclical businesses (which have very limited chemistry/ metallurgy work). Metallurgical businesses on the other hand manufacture specialised products which require a certain level of technical expertise to do so (Margins vary widely across these businesses).
So, Usha Martin had a very well-established metallurgy business, which had backward integrated into a metal trading business. Now the problem is, a steel mill has to have a certain minimum scale to efficiently manufacture steel. So, the steel mill ended up having a lion’s share of the gross block of the business. The dynamics of the steel business also dictated the dynamics of the overall business. It was a classic case of what Charlie Munger describes as: “When you mix raisins and turds, you get turds”.
In 2019, the promoters decided to sell the steel business to Tata Long Products. This was a gamechanger for the entire business. The net debt of the business dropped from 4.3X in 2019 to 0.4X in 2020. Please refer to financials statements of the company to see impact on Net block, working capital and capital structure of the company pre and post 2020. Attaching a snapshot of BS below for reference.
Today, the debt-to-equity ratio for the company is <0.1 and soon to become net debt free.
Refer company AR/ other filings for details.
Trigger 2:
The business was run by two brothers. (business started by their father and divided shareholding between two sons). Now, when I saw business was run by two sons, I mean, it was run by one brother and the other brother was always on the run (lived in UK, – basically had no interest in the business) Ignore the jibe.
The two brothers were also fighting with each other. Their issues were taken to the court and in the recent past, all issues have been resolved by NCLT. So, the second estranged brother has now completely sold off his stake in the business. (You will notice promoter holding dropping in the business as a result).
Why Usha Martin? What is so interesting about the business?
I have previously talked about moats in most of my write ups. Most businesses do not have moats. They are just surviving. Some businesses have one source of moat. Very few businesses in the world have multiple sources of moats. And even fewer have them spread across both demand side and supply side. Usha Martin is of of those select few. +
Demand side moat:
For accessing this moat, we need to change hats from an investor to a customer of their wire rope products. For a moment, let us pretend to be the owner of a company which constructs ropeway/ cable cars or manufactures elevators. Now, I have been sourcing my steel wires and ropes on which the entire car/ elevator hangs from maybe 1 or 2 suppliers. 3 at max and that’s stretching it. Why do I have only a select few suppliers? Two reasons: There are very few people globally who manufacture the product (tremendous supply side power), even fewer who will create the bespoke SKU which I need. And fewer of them will be able to provide it at a reasonable price. But among all these considerations, the most important consideration is safety. I will not compromise on safety for whatsoever reason, because if compromised, it threatens my entire business. This is why, there is a supply side dominance in the space and I as a customer prefer to source from only 2/3 players. Due to their unparalleled reputation and uncompromised focus on quality. So, tomorrow, if a new player comes to me and offers me a product at 50% the price of their competitor, I would most likely not be interested unless they have an established presence in the space. This gives rise to two sources of moat:
- Customer stickiness
- High barrier to entry (technical and brand)
The demand side moat is an industry wide moat for the wire rope industry.
Supply side moat:
Usha Martin is one of the cheapest producers of wire ropes IN THE WORLD. And they manufacture hundreds of different SKUs, catering to specific needs of the customers. Because every end market, application and device are different and has varied requirements. This wide range of SKUs is what gives them the advantage. Because most of the products manufactured are very specific, the manufacturing and assembly set-up is not possible to be automated fully. There is a significant amount of manual intervention required. So, any competitor who focusses on a wide array of SKUs will require significant manpower to run operations, which is not a cheap affair in the western world (where the competition comes from, they are a monopoly in India, with close to 70% share)
So, the cost advantage is unique and is there to stay. This is unassailable by their competitors.
Also, the ability to manufacture so many SKUs, along with a history of tremendous performance in the space provides them an edge over their competitors in the space.
Combine this with the fact that most of their peers are also present across multiple business, which reduces their focus on steel wire business. Usha Martin is a focussed player, with an eye on only growing the steel wires business.
Another key factor, is the company has established distribution network all over the world, which is also a source of competitive advantage over their peers. (Have warehouses all over the globe) As I have always said, advantage of a moat needs to be substantiated with numbers
Ignore the heading of the slide for a moment. Raw material price volatility is the last concern for the business.
What I want to draw your attention towards is the EBITDA per tonne. If you have studied a few steel products manufacturing businesses catering to industries, you would realise that such levels of EBITDA per tonne are unheard of in the industry. The numbers here are multiple times higher than their closest peers. With this I rest my case on multiple sources of moat from both supplier and demand side.
Nature of revenues:
About 60% of the revenues are sticky revenues. What I mean by that is they are repeat orders. For example, if you are operating a mine, or an oil rig, you would need a certain number of steel wires and ropes in a month. These are repeat orders, and this comprises of 60% of the topline.
The remaining 40% comes from one off project or construction-based orders (for e.g. If you placed an order for construction of a bridge or to if you are a real estate developer placing order for a housing project). This part of the revenue is cyclical.
Another point to note is that the wire rope business has a much higher realisation (revenue or a better metric is EBITDA per tonne) compared to the rest of the business. Which is why the company refers to that as the value-added segment.
Why now?
Well, the easy answer is, I was stupid to not buy this share back in 2020/2021. – I have regretted that decision to “wait and watch” for the past two years.
The company is undertaking a capex initiative, which they plan to complete in two phases.
Phase 1 capex of ~300/310 Crores in Ranchi is coming live in January. (FA turnover for the company is marginally above 3. As this latest capex is to expand their Value-Added Portfolio, expect a slightly higher FAT ratio for the latest round of Capex). Management expects the capacity to be utilised to very high levels of efficiency (80% +) by March 2025.
Phase 2 capex of ~220 Crores (160 Cr in India and 60 Cr in Thailand) is expected to be deployed over the next 2 years.
The company is increasing focus on Europe (currently about 8/9% market share) and USA (2/3% market share) markets. They started focussing on these markets a couple of years back (you can refer to previous con calls held by the company). After spending significant time to receive patents on specific products, and multiple rounds of testing and trials with customers, they are witnessing demand from these markets. Company has confirmed that the UK subsidiary has a healthy orderbook (despite adverse economic scenario in Europe, which is a very strong development in my opinion).
Due to slowdown in end industries, the topline has flattened from March 2022 onwards. This has cooled the PE ratio down to ~20X trailing PE. Although this valuation is not cheap by any stretch of imagination, it is not too expensive either, keeping in mind the upcoming capex, strong dominance in Indian markets and inroads made into some western markets.
The concall for Q2 FY24 is very rich and a refreshing read. Gives a lot of confidence in the management. – I would urge you to read the concall, every line.
Risk:
Refer contingent liability section of financial statements. Though I do not foresee a significant risk there, but good to be aware of the associated risks.
Further analysis:
An investor should analyse the financial statements in detail, and read all company reports and concalls in order to make prudent investment decisions.
Further reading:
I would urge you to read up on Balakrishna Industries (Professor Sanjay Bakshi has a very good write up on this company) and Garware Technical Fibres (Dr Vijay Malik has an excellent write up on this company) to understand the advantages these types of businesses have and how it helps them grab market share from their global peers, who are much larger and have a bigger brand name backing them. There are so many lessons to learn from how these two businesses have grown and you can see a similar story playing out in Usha martin.
Two Feet Fences 