Prakash Industries :: TP: INR99 Buy :Motilal Oswal

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Prakash Industries 3QFY12 results were in-line; Greater focus on sponge iron and power sales boosts earnings
 Prakash Industries’ 3QFY12 Adj PAT grew 20% QoQ to INR668m (v/s est INR668m) due to stronger market for
sponge iron and power. EBITDA at INR910m was also broadly in line with our estimate of INR956m.
 Sponge iron realization increased 9% QoQ. PKI sold more sponge iron and power at the cost of steel production
to capitalize on stronger market.
 PKI has entered into a contract with Andhra Pradesh SEB for sale of 27MW power at an average rate of INR3.75/
kwh for next 5 months. Another 40MW capacity will be available for external sales after stabilization of all the
units.
 New Fe-Mn capacity of 24ktpa is being planned in FY13 at a capex of INR600m to leverage on enhanced power.
 Steel production is now being optimized to gain from improved market.
 Stock trades at very attractive FY13E P/E of 2.5x, EV/EBITDA of 2.7x, and P/BV of 0.3x. Maintain Buy.
Greater focus on sponge iron and power sales boosted earnings
 Net sales increased 14% QoQ (up 9% YoY) to INR5.2b due to higher steel realization,
higher sponge iron sales tonnage and external sale of power. Sponge iron sales
increased 137% QoQ on smaller base of 2QFY12 to 32kt. However, steel sales
tonnage was lower 6% QoQ to 101kt.
 Crude steel production decreased 6% QoQ to 93kt as company resorted to external
power sales to arbitrage between steel prices and power realization. However
with current improvement in domestic steel prices, company has again producing
steel at optimum levels.
 Sponge iron production increased 8% QoQ to 117kt while realization increased
9% QoQ at INR22,083/t.
 EBITDA increased 18% QoQ to INR910m on higher sponge sales volume, better
steel realization and external sale of power. Company sold 73m units of power at
average gross realization of INR3.6/kwh against negligible sales in 2QFY12.
 Input scenario: Landed price of e-auction coal from Coal India (CIL) is around
INR2,400/ton while linkage coal cost is around INR1,600/ton. Iron ore landed cost
continue to remain higher at INR7,000/ton among tight supply in domestic market.
However company is not facing issue regarding supply of iron ore owing to long
term relationship with the supplier.


Phase I capacity to be over by 4QFY12; new 24ktpa Fe-Mn unit planned
 Phase I capacity expansion plans containing 5x25MW power plant and 200kt sponge
iron kiln is expected to finish in the current quarter. However 150kt billet capacity,
where construction was almost 70% complete, is put on hold due to insufficient
demand.
 New Fe-Mn capacity of 24ktpa is being planned in FY13 at a capex of INR600m to
leverage enhanced power capacity which also enjoys Section 80IA tax benefits.
Tax rate for the company is quite low as market driven prices for internal transfer
of power, shift most of profits to power segment.
 Iron ore mine is progressing slowly due to increased vigilance in mining approvals
in Orissa post mining ban in Karnataka.
 Further capex for next phase of 100MW is being slowed down in order to time it
with opening of captive coal mine. Forest clearance is awaited, and it will take
another 2-3 years for mines to be operational. Steel expansion is also being slowed
down as utilization from existing facility is low on sluggish demand.
 Capex guidance for FY12, FY13 and FY14 stands at INR3.5b, INR 2b and INR1.5b.


Additional power of ~27MW being sold under open access; New capacities
to further external power sales
 PKI has entered into a contract with Andhra Pradesh SEB for sale of 27MW power
at an average rate of INR 3.75/kwh for next 5 months.
 Another 40MW capacity will be available for external sales after stabilization of
all the units. Currently, one of the old units of 25MW is not operational due to
high variable cost which is not commensurate with current power realization.
Valuations attractive; Maintain Buy
 We expect FY11-13 EPS CAGR of 4% despite much higher revenue growth (25%
CAGR) on increased capacity. New capacity commissioning will also lead to higher
depreciation and interest charges which will hit P&L; so, profit growth will not be
commensurate with the sales growth.
 Sluggish steel demand and lack of progress on mining will also undermine benefits
of enhanced capacity.
 Attractive valuations: However, stock trades at very attractive FY13E P/E of 2.5x,
EV/EBITDA of 2.7x, and P/BV of 0.3x. Maintain Buy.