Stock Idea: Prakash Industries

prakash industires [BSE:506022|nse:prakash]

CMp: 156.30 | tp:262 |duration: 12 months June 18, 2010

company

Prakash industries Ltd , part of “Surya Roshni” group was started in the year 1980 by Sh. B.D.Agarwal, Founder Chairman of the company. Though primarily a steel maker, the company diversified and currently has three primary business subsidiaries - Steel, PVC and power. According to the FY10 annual report, steel, PVC and power contributed to 79.3, 5.5 and 15.1 percentage respectively to the total revenues. The company has given a major push to become a self reliance and also a fully integrated player.

Steel subsidiary has got its own mining & crushing division in Sundargarh, Orissa to supply raw materials for its steel plant. It also has a captive iron-ore mine in Chattisgarh with a capacity of 85MT. This mine is going to be sufficient for steel division for the next 50 years.

Power subsidiary is getting a big push from the management to be the next growth driver for the company. In fact, by 2014 the company expects 60% of its profit from the power subsidiary. It is targeting a capacity of 775MW by 2014 in a phased manner, with a capacity addition of 150MW every year from 2012. It has also set up wind power generation farms in Tamil Nadu, with a capacity of 6MW. Also with captive coal mines of 150MT capacity, Prakash industries is well on way towards its growth target.

COMPANY DATA

Share Data

Market Cap (Rs)	1902.17
Issued Shares (mn)	121693714
52 wk High/Low	243.95/93.55

Valuation Ratios

To 31 Mar	FY09	FY10	FY11E
Gross Sales (Rs in Lk)	17097	16907	19443
EPS (Rs)	17.7	21.87	26.24
+/- %	2	29	23
P/E (x)	2.6	7.1 (current)	5.81
P/B V (x)	0.64	1.69 (current)	-

Shareholding Pattern (%) (Quarter ending Marh,2010)

Promoters	51.79
FIIs	17.32
MFs	4.26
Public	13.97
Others	12.66

positives

1. Steel division

a. The enhanced profitability of the steel subsidiary is planned through integration with raw material sources. The new 85MT iron ore mines are expected to decrease the input raw material cost significantly, and this will show up from June 2010, when the mine is expected to be operational.

b. With capacity increases planned for sponge iron (0.6 to 1.2MTPA by FY12) and semi-finished steel products (0.5 to 1 MTPA by FY11), and with backward integration with iron-ore mines, the company is well placed for higher realizations from the steel division.

2. Power division

a. Prakash industries has a captive power capacity of 100MW and would add another 125MW by December 2010.

b. According to company director, Mr.Vipul Agarwal, the cost of power production is less than Rs.1 per unit, where as the merchant power consumers buy it around R.s5-6 per unit. During peak time, the consumption rates have gone up to Rs.10-12 per unit. This presents a huge profitability proposition and would directly show up on the revenues by January 2011.

c. The capacity addition plan is to add 150, 150, 125, 125MW respectively for the years 2012,13,14 and 2015. With a power hungry nation, and a realization of almost of Rs.4 for every unit sold, the company is poised to realize good profits from this segment in the next 2 to 3 years. . In fact, as stated earlier, by 2014 the company expects 60% of its profit from the power subsidiary.

concerns

Apart from the general economic recession concerns, the following are the specific concerns:

1. Global pricing pressure on input raw materials for the steel industry. But the 85MT captive iron-ore should offset this problem

2. Captive mines are located in Chattisgarh & Orissa could pose law & order issues due to naxalite influence in that area.

3. With the huge CAPEX push, the new projects should also be completed on time for an early realization of profit and avoid falling into the debt trap. Power capacity expansion plans, especially will suffer if backward integration plans are not in place.

valuations

For Prakash industries, there a lot of peers in the power & steel category, some are listed below

Company	PE	Net sales
Godawari Power & ISPAT	11.63	234.
Vikas power & steel	17.81	202
Jindal steel & power	42.19	2388
Rathi power & steel	10.02	189
Prakash Industries	7.15	464

Power companies usually demand a very high PE. With Prakash industries slowly transforming itself into a power player, a PE of 7.15 is unreasonable. Even after comparing with its peers, the current PE is quiet low for the power & steel industry segment. It is currently trading at 5.8X FY11E PE and even with a conservative PE estimate of 10X FY11E PE, its target comes to Rs.262. That is increase of 67% from the current value. Hence I suggest a “BUY” on Prakash industries with a target of Rs.262 in 12 months time frame.

disclaimer

I am a newbie into equity research. This blog is to start posting my research reports on various stocks. The information and views presented in this report are prepared by me. The information is based on my analysis and on sources available on the public domain. Investors are requested to use this report as guidance and the final decision to be made by the investors themselves. I will not be responsible for any loss incurred by the investor based on this report.

Peer Comparison