Buy Prakash Industries ::Motilal Oswal

Prakash Industries' adjusted 2QFY12 PAT declined 22% QoQ to INR555m; below estimate of INR687m on lower
steel sales volume on account of sluggish demand. EBITDA at INR769m was below our estimates of INR935m while
EBITDA/ton at INR7140/ton were in line with our estimates.
 Revenues declined 8% QoQ to INR4.6b due to lower steel volumes and flat realizations. Crude steel production
decreased 14% QoQ to 99,358 tons as company stopped buying external power for billet production.
 Commissioning of 125MW power plant has started in phases. Two units aggregating 50MW are already operational
and are running at 90% PLF since October. Though the merchant rates have improved, the margins are still thin due
to high cost of purchased coal. Remaining 75MW is expected to be commissioned by January 2012.
 Further capex for next phase of 200MW is being slowed down in order to time it with opening of captive coal mine.
Forest clearance is still awaited and it will take another 2-3 years for mines to be operational. Steel expansion is also
being slowed down due to sluggish demand; utilization from existing facility is low.
 Over FY11-13, we expect earnings to remain flat on sluggish steel demand. Though 125MW power plants will
increase captive power generation, the margins remain thin due to high cost of purchased coal.
 The stock trades at attractive FY12E 2.4x P/E, 3.4x EV/EBITDA and 0.3x P/BV. Maintain Buy.
50MW started and is now operating at 90% PLF; Going slow on further
expansion due to coal availability issues
 Commissioning of 125MW power plant has started in phases. Two units aggregating
50MW are already operational and are running at 90% PLF since October.
Management expects to complete first phase of 125MW by December 2011- January
2012.
 The company realized INR 3.25-3.5 per kwh from external sales of ~ 40MW power.
With sluggish demand for steel resulting in lower margins from value added segment,
PKI expect to sell more power from incremental capacity rather than captive use in
steel production.
 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 still awaited and it will take another
2-3 years for mines to be operational. Steel expansion is also being slowed down due
to sluggish demand as utilization from existing facility is low.
 Capex guidance is further lowered to INR3.2b in FY12 and INR2.2b in FY13 as
second phase of power projects are delayed.
 4th Sponge iron Kiln is expected to be commissioned by December 2011.
 There is no material progress on iron ore or coal mining projects.
Valuations attractive; Maintain Buy
 Over FY11-13, we expect earnings to remain flat on sluggish steel demand. Though
125MW power plants will increase captive power generation, the margins remain thin
due to high cost of purchased coal.
 The stock trades at attractive FY12E 2.4x P/E, 3.4x EV/EBITDA and 0.3x P/BV.
Maintain Buy.


Company description
Prakash Industries (PKI) produces steel through the
induction furnace route, in which it uses sponge iron and
steel scrap or pig iron as input. With a steel making capacity
of 700,000tpa, its sponge iron (capacity of 600,000tpa) meets
70-80% of its metal requirement. Most of its steel production
is captively consumed to produce higher value added
products like structural/ TMT and wire rods. PKI's
operations are concentrated in the mineral rich state of
Chhattisgarh. It has been allotted three coal mining blocks
and two iron ore mines. Captive mines have reserves of
150mt of coal and 85mt of iron ore. Coal is produced from
its captive mine at Chotia (1mtpa) and an iron ore mine at
Kawardha is expected to start production in FY12.
Key investment arguments
 PKI will spend INR33b over five years to increase steel
capacity to 1mtpa, expand its sponge iron capacity to
capitalize on iron ore integration and put up a 625MW
power plant.
 Two units of 50MW out of 125MW expansion was
commissioned recently and rest 75MW is expected to
become operational in December 2011. Surplus power
will be available for merchant sale from FY12.
 The Sirkaguttu and Kawardha iron ore mines once
commissioning operation will make PKI 100% self
sufficient in raw material.
Key investment risks
 An unexpected fall in steel prices would adversely
impact earnings.
Recent developments
 PKI recently commissioned two units of 50MW out of
its ongoing 125MW expansion in power which are
currently running at 90% PLF.
Valuation and view
 The stock trades at attractive FY12E 2.4x P/E, 3.4x
EV/EBITDA and 0.3x P/BV. Maintain Buy.
Sector view
 The steel pricing environment has weakened across
regions due to expected demand slowdown, led by
continued uncertainty in developed nations, high inflation
and resultant softening in economic growth in
developing countries. Chinese steel prices started
falling as steel demand growth slowed due to reduction
in new projects. As a result, steel and its raw material
prices are also expected to fall over the next few
months. Apparent world steel use is expected to
increase 6.5% to 1,398mt in 2011 as per WSA. Indian
steel demand growth is expected to slow to 4.3% in
2011 and 7.9% in 2012.