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Growth outlook intact
Prakash Industries (PKI) has emerged as an integrated steel producer through its
focus on backward integration over the last 8-10 years. It has a steelmaking capacity
of 0.7mtpa, backed by 0.6mtpa sponge iron units and 112MW of captive power.
Most of the crude steel it produces is converted into value-added products such
as structural/TMT (capacity of 0.3mtpa) and wire rods (capacity of 0.45mtpa).
PKI is setting up a 625MW thermal power plant at a capex of Rs25b in phases as
part of its Rs33b modular expansion in steel and power. The first phase of 125MW
is expected to get commissioned by the end of 1QFY12. Its steel operations
require ~130MW of power; we expect ~70MW of power to be available for merchant
sale.
BTG equipment for the next phases of 200MW and 300MW has already been
ordered. PKI expects the first unit of 100MW (of phase-II) to be commissioned in
June 2012 and rest 100MW by March 2013. We expect power generation to grow
at a CAGR of 84% to 386MU over FY11-13.
The company has recently expanded its steel capacity from 550ktpa to 700ktpa
as part of its expansion to 1mtpa. However, it has temporarily delayed further steel
expansion due to current volatility in the steel market and delays in receiving iron
ore mining approvals. PKI has spent ~Rs350m out of the Rs1b steel capex.
Sponge iron capacity is expected to increase to 0.8mtpa by 1QFY12 as the fourth
200ktpa DRI kiln is under commissioning. DRI production is likely to grow at a
CAGR of 22% over FY11-13 to 640k tons. This will help to reduce external purchase
of metallic further.
PKI had applied for captive mine allocation in 2003 and received three coal mining
blocks and two iron ore mines. Its captive mines have reserves of 150mt of coal
and 85mt of iron ore. Its Chotia coal mine has been operational for the last four
years. It produces ~1m tons of coal per year, which is used by PKI's sponge and
power plants.
Commissioning of its Madanpur coal mine is delayed due to the MoEF's "No-Go"
classification. Work on the Fatehpur mine (allotted for 625MW IPP) is on track.
Bank guarantees have been submitted and it is expected to start production in the
next 30 months.
The company has applied for tapering coal linkage for the 625MW IPP, which is
expected to receive coal from March 2011. Currently, it has a captive power
generation capacity of 112MW and imports the rest of its power requirement from
the grid.
Production from captive iron ore mines has been delayed by three quarters due to
procedural delays in Orissa and delays on account of stringent implementation of
environment and forest norms by MoEF.
Though the mining plan for the Sirkaguttu (Orissa) mine has been approved, it will
take 5-6 months to start operations, subject to receipt of mining lease. We have
cut our FY12 iron ore integration assumption to just 30%. If we assume zero iron
ore integration for FY12, our EPS estimate will get downgraded further by 21% to
Rs21.2 from the current Rs27.
PKI has planned the entire capacity addition schedule in such a way that it will be
able to execute it with internal accruals and modest debt. However, looking at the
existing difficult scenario in the steel market, we expect PKI to add ~Rs3b of debt,
which would take its peak debt to Rs7.8b (including FCCB) in FY12.
PKI's earnings will be driven by margin expansion due to increased production of
sponge iron and topline growth on account of volume growth in the steel business
and sale of surplus power from its 625MW over five years. Early start of captive iron
ore mines will be a bonus, which will drive up margins significantly.
We expect earnings to grow at a CAGR of 18% over FY10-13 on commissioning of
125MW power plant and partial raw material integration. The stock trades at 2.9x
FY12E EPS, 0.5x FY12E BV and at an EV of 2.9x FY12E EBITDA. Maintain Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth outlook intact
Prakash Industries (PKI) has emerged as an integrated steel producer through its
focus on backward integration over the last 8-10 years. It has a steelmaking capacity
of 0.7mtpa, backed by 0.6mtpa sponge iron units and 112MW of captive power.
Most of the crude steel it produces is converted into value-added products such
as structural/TMT (capacity of 0.3mtpa) and wire rods (capacity of 0.45mtpa).
PKI is setting up a 625MW thermal power plant at a capex of Rs25b in phases as
part of its Rs33b modular expansion in steel and power. The first phase of 125MW
is expected to get commissioned by the end of 1QFY12. Its steel operations
require ~130MW of power; we expect ~70MW of power to be available for merchant
sale.
BTG equipment for the next phases of 200MW and 300MW has already been
ordered. PKI expects the first unit of 100MW (of phase-II) to be commissioned in
June 2012 and rest 100MW by March 2013. We expect power generation to grow
at a CAGR of 84% to 386MU over FY11-13.
The company has recently expanded its steel capacity from 550ktpa to 700ktpa
as part of its expansion to 1mtpa. However, it has temporarily delayed further steel
expansion due to current volatility in the steel market and delays in receiving iron
ore mining approvals. PKI has spent ~Rs350m out of the Rs1b steel capex.
Sponge iron capacity is expected to increase to 0.8mtpa by 1QFY12 as the fourth
200ktpa DRI kiln is under commissioning. DRI production is likely to grow at a
CAGR of 22% over FY11-13 to 640k tons. This will help to reduce external purchase
of metallic further.
PKI had applied for captive mine allocation in 2003 and received three coal mining
blocks and two iron ore mines. Its captive mines have reserves of 150mt of coal
and 85mt of iron ore. Its Chotia coal mine has been operational for the last four
years. It produces ~1m tons of coal per year, which is used by PKI's sponge and
power plants.
Commissioning of its Madanpur coal mine is delayed due to the MoEF's "No-Go"
classification. Work on the Fatehpur mine (allotted for 625MW IPP) is on track.
Bank guarantees have been submitted and it is expected to start production in the
next 30 months.
The company has applied for tapering coal linkage for the 625MW IPP, which is
expected to receive coal from March 2011. Currently, it has a captive power
generation capacity of 112MW and imports the rest of its power requirement from
the grid.
Production from captive iron ore mines has been delayed by three quarters due to
procedural delays in Orissa and delays on account of stringent implementation of
environment and forest norms by MoEF.
Though the mining plan for the Sirkaguttu (Orissa) mine has been approved, it will
take 5-6 months to start operations, subject to receipt of mining lease. We have
cut our FY12 iron ore integration assumption to just 30%. If we assume zero iron
ore integration for FY12, our EPS estimate will get downgraded further by 21% to
Rs21.2 from the current Rs27.
PKI has planned the entire capacity addition schedule in such a way that it will be
able to execute it with internal accruals and modest debt. However, looking at the
existing difficult scenario in the steel market, we expect PKI to add ~Rs3b of debt,
which would take its peak debt to Rs7.8b (including FCCB) in FY12.
PKI's earnings will be driven by margin expansion due to increased production of
sponge iron and topline growth on account of volume growth in the steel business
and sale of surplus power from its 625MW over five years. Early start of captive iron
ore mines will be a bonus, which will drive up margins significantly.
We expect earnings to grow at a CAGR of 18% over FY10-13 on commissioning of
125MW power plant and partial raw material integration. The stock trades at 2.9x
FY12E EPS, 0.5x FY12E BV and at an EV of 2.9x FY12E EBITDA. Maintain Buy.
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