Prakash Industries:Motilal Oswal

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Prakash Industries (PKI IN; Mkt Cap USD0.5b, CMP Rs141, Buy)

Net sales declined 9% QoQ (up 12% YoY) to Rs4.2b, EBITDA declined 3% QoQ to Rs903m due to lower volumes , adjusted 2QFY11 PAT increased 1% QoQ to 

Rs709m.     

With consistent increase in volumes of saleable steel and excess power over FY10-14 and gradual increase in raw material integration, we believe Prakash is set to  

 outperform its peers in 12-18 months. The stock trades at a P/E of 5.4x FY12E and EV/EBITDA of 4.2x FY12E. Maintain Buy. 

Higher Sponge iron integration protected margins despite steel price

decline

 PIL's adjusted 2QFY11 PAT increased 1% QoQ to Rs709m (up 4% YoY, which was

in line with our estimates).

 Net sales declined 9% QoQ (up 12% YoY) to Rs4.2b due to a drop in realizations by

5% and a fall in steel volumes by 4%.

 Revenue from wire rod sales declined 6% QoQ to Rs3.34b. Wire rod sales declined

3% QoQ to 110,650 tons and gross realizations declined 3% QoQ to Rs30,156/ton.

Crude steel production declined 3% QoQ to 135,163 tons.

 TMT/Structures' production was curtailed due to subdued demand from the

construction industry during the monsoons and a squeeze in conversion margins between

billets and TMT bars. Instead, billet sales nearly doubled to 18,420 tons. Besides,

gross realization of billets increased 2% QoQ to Rs25,896/ton, contrary to the general

trend of declining prices.

 Sponge iron production increased 9.5% QoQ to 104,015 tons (up 28% YoY) as a third

kiln stabilized. This reduced third party purchase of metallics.

 A captive coal mine at Chotia produced 250k tons of coal despite the monsoons.

 EBITDA declined 3% QoQ to Rs903m due to lower volumes. EBITDA per ton was

sequentially flattish at ~Rs7,000/ton despite pressure from steel prices as higher sponge

iron production substituted expensive third party purchases.

 Interest costs for the quarter fell to Rs4m as the company repaid its high cost debt on

the balance sheet. But for expansion in power, the company will raise ~Rs3b through

in FY11. In 1HFY11 PIL raised Rs1.25b.

 Capex in 1HFY11 was Rs3.2b and during 2QFY11 it was Rs1.35b which was largely

used to set up the 125MW CPP.

Commercial generation from 125MW unit expected from May 2011; Orissa

iron ore mining plan approved; downgrading FY12 EPS

 Expansion plans in steel and power are on track. Steel capacity is expected to reach

1mtpa from existing 0.7mtpa by December 2011. The first unit of phase I (5x25MW)

of 625MW is expected to be commissioned by January 2011 and commercial generation

is expected from May 2011. We expect 550m units (~70MW) of power to be available

for merchant sale in FY12. Besides, 200MW capacity has been ordered. Of this

100MW is expected to be commissioned by December 2011 and 100MW by June

2012.

 There is no clarity on the Kawardha iron ore mine. But the mining plan for Sirkaguttu

(Orissa) mine has been approved and could take 6-8 months to start operations subject

to its getting the final mining lease. We have reduced the iron ore integration assumption

from 5% to 0 for FY11 and from 50% to 30% for FY12 due to uncertainty regarding

getting clearances from the Ministry of Environment and Forests (MoEF). As a result,

we are downgrading our FY12 EPS estimates from Rs29.5 to Rs26.

 Over FY10-12, we expect EBITDA to post 30% CAGR to Rs6b due to a modular

increase in capacities. Steel capacity is expected to increase by 43% in 18 months and

power generation capacity to increase by 200% (to 338MW). With a consistent increase

in volumes of saleable steel and excess power over FY10-14 and gradual increase in

raw material integration, we believe PIL is set to outperform its peers in 12-18 months.

 The stock trades at a P/E of 5.4x FY12E and EV/EBITDA of 4.2x FY12E. Maintain

Buy.