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Prakash Industries – 2QFY2011 Result Update
Angel Broking maintains a Buy on Prakash Industries with a revised Target Price of Rs205.
Another quarter of stellar performance: For 2QFY2011, Prakash Industries (PIL)
reported an 11.5% yoy increase in net revenue to `421cr. Sponge iron production
increased by 28.0% yoy and 9.4% qoq to 103,917 tonnes. Billet and wire rod
sales increased by 9.2% yoy and 9.4% yoy to 18,000 tonnes and 111,000
tonnes, respectively. Average gross realisations for billet and wire rod increased
by 17.7% yoy and 9.1% qoq to `25,545/tonne and `29,729/tonne, respectively.
Bottom-line stable on account of strong operating performance and lower interest
expense: Despite steel prices declining qoq, EBITDA margin increased by 162bp
to 21.6% on account of lower raw-material cost, which declined by 11.4% qoq.
EBITDA margin dipped by 231bp yoy, while EBITDA was stable at `91cr.
Depreciation expense increased by 33% yoy to `17cr, whereas interest expense
declined by 94.1% yoy to `0.4cr. Consequently, net income stood stable at `71cr.
Iron ore mining plan approved, operations to start by 1QFY2012: PIL received
the approval for its Sirkaguttu iron ore mine in Orissa during the quarter. PIL
expects to receive the forest and environmental clearance quickly by 4QFY2011E.
For FY2012, management has guided for 0.5mn tonnes of iron ore production.
Outlook and valuation: PIL is currently trading at 5.0x and 3.9x FY2011E and
FY2012E EV/EBITDA, respectively. On P/B basis, it is trading at 1.0x and 0.8x
FY2011E and FY2012E, respectively. With EBITDA expected to register a 32.2%
CAGR over FY2010–12E and net debt/equity to remain low at 0.2x during the
period, we maintain our Buy recommendation on the stock with a revised Target
Price of `205, valuing the stock at 5.0x FY2012E EV/EBITDA. In our best-case
scenario, the Target Price would increase to `246, assuming 0.25mn tonnes of
iron ore is provided by the captive iron ore mine in FY2012E.
Key concall takeaways
Iron ore mining plan approved, operations to start by 1QFY2012E
• During the quarter, the company received the mining plan approval for its
Sirkaguttu iron ore mine in Orissa. The company expects to receive the
forest and environmental clearance quickly by 4QFY2011E as clearance
is required from the state government only. Mining operations are
expected to start by 1QFY2012E.
• The mine has reserves of ~10mn tonnes with 65% Fe content.
• Management has guided for 0.5mn tonnes of production in FY2012E.
• Landed cost of iron ore is expected to be ~`1,500/tonne
Despite steel prices declining qoq, EBITDA margin increased by 160bp to
21.6%. This was mainly on account of a) reduced purchase of sponge iron,
and b) lower iron ore cost at `5,100/tonne as compared to `5,400/tonne
in 1QFY2011.
Sponge iron capacity of 0.2mn tonnes each will be added by March 2011,
March 2012 and March 2013. Post the expansion, sponge iron capacity will
increase to 1.2mn tonnes from 0.6mn tonnes by March 2013. Billet capacity
of 0.3mn tonnes is expected to come by September 2011, six months later
than the planned schedule.
Management indicated that it has modified the plan for the 625MW
(5x125MW) power plant. Progressive commissioning of the first 125MW unit
(5x25MW) is expected to begin from January 2011. Two units of 100MW each
are expected to come on stream by March 2012 and March 2013. The
balance capacity of 300MW (2x150) will come on stream by March 2014 and
March 2015.
PIL has applied for coal linkage and expects to receive it by January 2011.
In 1HFY2011, the company incurred capex of ~`320cr. In 2HFY2011E, the
company expects to incur capex of `250cr–300cr.
Net cash at the end of the quarter stood at `89cr.
Sponge iron production in 3QFY2011 is expected to be ~140,000 tonnes.
Investment rationale
Expanding capacity to address imbalance and enhance integration levels:
Currently, PIL sources ~30% of its sponge iron requirement from third parties.
In its bid to reduce this dependence on external parties, the company is
expanding its billet capacity from 0.7mn tonnes to 1.0mn tonnes by
September 2011E and sponge iron capacity from 0.6mn tonnes to 1.2mn
tonnes by FY2013E. The company will steadily move towards a fully integrated
business model with the grant of new iron ore and coal mines along with the
existing Chotia coal mine.
Net long on power from 1QFY2012E: PIL is expanding its power capacity
from 100MW to 775MW by March 2015E. The company is setting up a
625MW coal-based power plant, with each unit being set up in 12 months
starting from 4QFY2011E. Thus, with the commissioning of the first 125MW
unit by 4QFY2011E, PIL will become a net seller of power in FY2012E.
Further, as the company's sponge iron capacity increases, the waste heatbased
power capacity will increase from 25MW to 75MW.
Capex funding not a constraint: PIL has raised US $110mn through FCCBs
over the last 12 months to fund its capex plan of `3,300cr. As capacity gets
added in a modular structure, the company's net debt/equity is likely to be
stable at 0.2x over FY2010–12E, as internal accruals will be sufficient to fund
its capex requirements.
Outlook and valuation
PIL is currently trading at 5.0x and 3.9x FY2011E and FY2012E EV/EBITDA,
respectively. On P/B basis, it is trading at 1.0x and 0.8x FY2011E and FY2012E,
respectively. With EBITDA expected to register a 32.2% CAGR over FY2010–12E
and net debt/equity to remain low at 0.2x during the period, we maintain our Buy
recommendation on the stock with a revised Target Price of `205, valuing the
stock at 5.0x FY2012E EV/EBITDA.
In our best-case scenario, the Target Price would increase to `246, assuming
0.25mn tonne of iron ore is provided by the captive iron ore mine.
We revise our estimates marginally to factor in the delay in expanding the billet
capacity. Consequently, our estimates for power sales volume will increase, as
producing billet is highly power sensitive. We also increase our power cost to factor
in the possibility of coal not being provided for the 125MW plant.
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