Prakash Industries Ltd. (Prakash)


(Kiran) #1

I analysed Prakash Industries at my blog -

http://kiraninvestsandlearns.wordpress.com/2010/12/12/prakash-industries-ltd-prakash/

I look forward to your comments, analysis and ruthless-dismissal-by-logic of this particular idea.

Fundamental rule I use yet again -

I look for stocks with a low P/E, low P/B, high ROCE (ROE, I think doesnat account for debt and hence a little skeptical), low D/E, good operating and NPM, consistent increase in Sales, EPS, OM and NPM over 3-5 yrs and finally low EV/EBITDA. If all this is good, then I look at the managementas track record. If all the above are satisfied, I then do a deep dive of the stock. As you realise by the above criteria, I hate losing money even if that means I overlook a few so-called multibaggers.

I use normal screeners to find such stocks. A list of screeners can be foundhere.

One such stock was Prakash Industries Ltd.Prakash Industries is a steel maker with facilities in Champa and Raipur in Chhattisgarh. Besides producing steel (0.7 million tonnes per annum or mtpa), the units also make sponge iron (0.6 mtpa) and billets (0.5 mtpa). The company also has a 100 MW captive power unit.However, Prakash does not sell billets or sponge iron, as these are further processed into value-added products such as structurals, thermo-mechanically treated (TMT) steel and wire rods (higher margin products, typically). The company also has a coal mining capacity of 1 mtpa.

The company is expanding its sponge iron and billets capacity to 1 mtpa by FY13. Not only this, the company is planning on doing backward integration by getting into iron-ore mining which would reduce its cost by a substantial percentage (estimates range from 40-60%). They are also venturing into merchant power business by setting up a power plant with 625MW capacity over the next 5-6 years.(I am kinda skeptical towards these 3 year and 5 year plans. Variables might change so dramatically over these time periods (like change in environmental policies, license policies, macroeconomic factors like steel prices etc.) that some of these ‘planned’ exercises might not turn out to be practical. Since I am not a seer, I shall restrict myself to the past data and the capability of the management to produce higher returns given any economic condition (typically the past 5 years. Assuming a going concern than all these fancy plans, we now move on to the analysis).

Moving on to the more boring part of financials than the interesting strategic part of planning,

CMP: Rs. 100.05

Market CapINR 1,236.2 cr

Book Value per share 117.57

Enterprise Value per share 120.49

Total Foreign Holding 14.75%

Total Institutions Holding 3.34%

Total Non Promoter Corporate Holding 16.03%

Total Promoters Holding 50.29%

Total Public & others Holding 15.59%

Again, Walter Schloss’s criteria of Promoter holding >= 50% is satisfied.

Moving along,

Parameter Value Industry Median Industry Weighted Avg

Price-to-Book 0.86 2.08 4.91

EV / EBITDA 4.12 15.18 17.32

Price-to-Sales 0.79 2.63 2.97

Financial Leverage 1.16 1.66 1.73

Interest Coverage 11.72 5.62 4.94

Adj Price-to-Earnings4.38 37.96

Debt to Equity 0.15

Back to our fundamental criteria,

Low P/B (0.98), Low P/E (4.38), High interest coverage (11.72), Low EV/EBITDA (4.12), Low D/E (0.15).

The current parameters look excellent. Let’s go back for the past 4-5 years to check on operating margins, return on capital etc.Letas look at the history of managementas performance, rather than a single snapshot (just to ensure we are not under the influence of some accounting shenanigans or one time fad market).

Variable FY06 FY07 FY08 FY09 FY10

Net Profit Margin 8.94 14.23 15.86 13.37 17

Operating Profit Margin 19.10 21.29 22.70 19.50 17.2

Asset Turnover 0.70 0.80 0.96 1.17 0.94

Return on Assets 6.29 11.39 15.20 15.59 16

Return on Equity 13.62 19.99 21.05 19.43 18.6

Capital Employed 1128.81 1161.67 1307.03 1309.82

ROCE 9.39 15.37 18.41 20.25 22

Debt to Equity 1.15 0.75 0.38 0.25 0.15

ROCE has been consistently increasing on an average at 20% over the past 5 years (inspite of increase in capital employed - extremely good sign). Debt is reducing consistently over the years (and close to zero, except for the FCCB bonds). Return on Assets has been increasing consistently and so are Operating and Net Profit margin (except for a slight dip last year).

The above analysis suggests that the company is extremely healthy at an extremely attractive price. The past 5 year data suggests that management has the capability to ride through cycles and recessions pretty comfortably. On top of that, Promoter holding is greater than 50% which is, most of the time, a very comforting sign.

Risks

  1. They primarily operate in the steel business. They are diversifying (or backward integrating, if you want to call it) into iron ore mines and power. These businesses are extremely sensitive towards licenses, govt. policies on environment and in general, the macroeconomic demand for steel.

  2. The management credibility has been questioned by a CBI enquiry on the use of captive coal mines (the rumor is that the management has sold a lot of coal on a private party basis for thousands of crores). The management has however clarified that the company has produced 2.44m tons of coal from Chotia mine till FY09. Of this, it has utilized 1.27m tons for production of sponge iron, and the remaining washed RoM and middlings were used for power generation and all these records were verified by Coal Controller to the Under Secretary of Ministry of Mines, Govt of India. However, doubts remain in the short term.

Opportunities:

  1. There were talks that Prakash Industries wanted to buy out Nova Iron and Steel (which has a sponge iron plant near Prakash Industries plants). This might boost capacity. However, both managements declined to comment on this.

  2. There were also rumors that Arcelor Mittal was interested in a stake of Prakash Industries way back in March. However, no other details are available. If any such rumors surface again, we might see an upshot in the stock.

I would term Prakash Industries as a Value Buy at current levels. Inspite of an extremely healthy business and decent outlook, it is quoting at 52wk lows (52wk high is approx Rs. 240). I would see a healthy return of 20-25% from current levels over the next year, if not more.

[As an aside, I analysed some of the peers of Prakash Industries - Welspun Corp, Nesco and Balmer Lawrie. Balmer Lawrie is an excellent stock (analysis by Rohit Chauhanhereandhere). I don’t trust Welspun Corp’s management and hence am not comfortable investing in that stock although it has decent numbers. Nesco is an interesting company. Excellent numbers. Very good Free Cash Flow. However, its more of a real estate play than a steel play. Analyzing real estate stocks is beyond my competence as of today (although am learning bit by bit). Unlocking of real estate might take a ton of time too. If someone could (or already did) analyse Nesco, please point me out to the analysis. I’d be grateful to you]

_Disclosure:_I donat hold any Prakash Industries stock as of today. And more importantly, this is not investing advice. Please do your due diligence before investing in Prakash Industries.


(Hitesh Patel) #2

On the financial parameters Prakash looks appealing. Two problems though:

As you pointed out, promoter suspect

And secondly the group is going for power and that too at around 600 MW might entail a lot of investment. I have seen a similar story go wrong on Nav Bharat Ventures where somehow all the initial euphoria of the Power Story seems to have worn off and stock has grossly underperformed the index since almost one year.

Adhunik Metaliks in the metals space might be an interesting idea with good revenues and profits now coming from its mining venture – I think the name is Orissa Mine and Mineral Ltd and whats more it has manganese ore mines which might be re rated after the MOIL issue. Plus the power venture of 520 MW which is APNRL Adhunik Power and Natural Resources ltd which is set to be commissioned by Jan 12-Mar 12. According to icici estimates, company is likely to report EPS of around 19 for fy 11 and 28 by fy 12 whereas cmp is around 100. d/e is higher than prakash at around 1.

regards

hitesh.


(Kiran) #3

Hitesh,

I think 600MW is the aim, and that too by 2015. I am not too sure whether that would be practical enough considering the competition from other players (and who knows, the supply might exceed demand by 2015). 2015 is too far off to predict anything. I think its a fad since they own coal mines. I don’t think they’d go for 600 MW. Most probably, enough to sustain their company power requirements I guess. (and reading Deepak Shenoy’s blog today slightly tilts my hypothesis in the positive territory).

Promoter suspect - I agree - it might be a rumor or it might be true. But the performance of the business has been impeccable (hopefully they did not cook numbers and only sold coal mines :)).

Again, I have not bought into the story completely. I was putting my analysis out there so that I can learn, evaluate and re-evaluate based on arguments in this group. Thanks for pointing out the 600MW argument though. I need to check management’s history of following up with their crazy visions :slight_smile:

Adhunik Metaliks - I am too scared of the debt they have (D/E > 4) and Interest coverage is less than 1.5. Their NPM, RoE and ROCE (compared to its peers) are not too spectacular for me to consider the stock. Again, the amount of debt rules me out of the stock - any squeeze in commodity prices will put this company under immense pressure. And what’s with the P/E multiple of Adhunik? Don’t you think the market is attaching a high P/E to it? (33 compared to less than 20 for its peers)


(Kiran) #4

Another interesting info I found from their AR -

“The expansion plans are to be funded (Rs33 billion) without any additional debt. The total debt, as of March 2010, was Rs1.3 billion, or 0.1x equity. Of the Rs33 billion required for expansion, Rs8 billion is for steel, Rs23.5 billion for power and Rs1.5 billion for mines. There is no need for any more land acquisition as Prakash already has about 800 acres and only 300 acres is occupied by infrastructure currently. It would require another 250 acres for the expansion.”

Any comments?


(Elusionist) #5

Any views on this stock as of now?

I am finding the stock very cheap at current valuations.


(Abhinav Sharman) #6

It does look very cheap.

My concern has been around the fact that while steel expansion has boosted topline, margins from steel have been in lower single digits. Power has been the key driver for the bottomline.

So, expansion on the power front/ backward integration in steel are the right strategic moves but when execution will happen, remains to be seen.

Coupled with overall headwinds in the power sector as well as the negative news (raids) late last year, I can understand why the stock is trading cheap.

Decent results or announcement of execution should show an upmove.


(TCX) #7

Some reports on Prakash Industries

http://breport.myiris.com/ESIPL1/PRAINDU1_20110531.pdf

http://www.business-standard.com/content/research_pdf/prakas_12_0211_01.pdf

http://www.moneycontrol.com/news_html_files/news_attachment/2010/PKI-20100108-MOSL-DR-PG016.pdf

https://www.sushilfinance.com/Upload/ResearchProductsAll/Prakash%20Industries%20-%20Q3FY11%20Update-Feb%2011.pdf


(Almighty Buddha) #8

Just wondering what can be fresh views on this stock given that it is reaching its historic lows. Looks like the company is still talking about that 625MW power project. Other than that I see that it has lost the Chotia coal mine in bidding last year. Any views are appreciated.


(bbbhutra) #9

Q2 FY18 seeing strong traction; expect sharp uptake: Prakash Industries


(Mridul) #10

a. According to coal ministry reports, about Rs 1,274 crore have been sanctioned and some of it has been disbursed to several companies till May this year. Of this, Rs 17.55 crore was allocated to Prakash Industries in May alone with respect to Chotia block previously owned by them.


b. Now, here is an excerpt from 1q1FY18 results -


Are these two related? If so, as per the result notes, Prakash has not received the compensation against Chotia block, but the DNA article says 17.55cr has been disbursed??


By the way, how serious is this fresh case filed by CBI, taking into consideration, the Chotia coal block has already been taken away from the company? Claims are made based on sponge iron capacity which Prakash claimed to have, but production figures didn’t match.


Some recent developments on the business side

At the moment, Prakash Industries is rocking due to industry tailwinds (Steel, Power and PVC) and fresh allocation of iron ore mines for 50 years along with coal linkages from coal India for next 5 years. These would entail direct savings of 60 odd cr in FY18. Iron ore mines were allotted to the company ion Jan this year and are supposed to come online shortly as per FY16-17 Annual Report.

Prakash has also done some capex which would result in volumes rising by 30%.

The Steel Melting Shop capacity was also enhanced during the year by replacing the existing furnaces with higher energy efficient furnaces.

The Company also re-commissioned its Heavy & Medium Structural Mill at Raipur, as a step towards expanding its product range in the finished steel segment.

It has also added 15 MW captive power plant this year.

The division recorded highest ever production during 2016-17. The robust market demand contributed to consequent higher operating margins in the division. Encouraged by the performance of the division and taking into consideration the future growth potential in the sector, the Company has undertaken capacity expansion at its PVC Pipe plant, which is in advanced stages of implementation. This debt free division is supposed to be demerged (could result in value unlocking).


FCCBs (future dilution and unpaid interest liabilities)-

a. Explanations response to Point (b) of Independent Auditors Report

The Company had restructured FCCBs of US $ 35.70 mn as per terms accepted by FCCB holders. The Company has partly paid interest on the same upto 30th September, 2015. The Company has initiated discussions with the bondholders for waiver of the interest and restructuring of these FCCB for further period of five years, which is in advanced stage. Accordingly, no provision of interest has been made in the books of accounts on these FCCB towards unpaid interest dues and matured FCCB of 15756 Lakhs are continued to be shown as “Non-Current Liabilities”.

b. CONVERISON OF FCCB IN TO EQUITY CAPITAL
During the financial year 2016-17, your Company had allotted 4557817 Equity Shares fully paid-up of the face value of 10 per share at 60/- per share after receiving of Conversion Notices from various FCCB’s holders. Accordingly, the paid-up Equity Share Capital of the Company increased to 139.05 crores post the conversion of FCCB into Equity during the financial year 2016-17. The Board has approved the issue of New FCCBs with a tenure of 5 years 1 day in lieu of all its outstanding obligations on the 5.25% April 2015 FCCBs subject to all necessary approvals and compliances.


Major threat -
Major threat to the steel industry in India continues to be the glut of cheap exports from countries like China, Japan and Korea at predatory low prices. Although the Indian Government has taken series of steps like imposition of MIP to create competitive grounds for the domestic steel players, these import barriers are transient in nature and are already under attack by exporters like Japan, which have recently dragged India to the WTO citing that imposition of such minimum import (MIP) prices has flouted global trade rules. There is a threat that these steps may not be sustained for long.


#11

I did some preliminary analysis and found that it to be good growth and value candidate. Cyclical upturn in steel and demerger story looks good. This Shell controversy seems to be unnecessary stick but the company is not helping itself either.


(cool_gaurav) #12

Yes, clear lack of corporate governance by Prakash Industries and it will act as a double whammy.


(Rahul2015) #13

(Manohar T. Patil) #14

AR - http://prakash.com/pdfs/Annual-Report-2016-17.pdf

At least the AR is painting a rosy picture by way of 30% volume growth & PVC pipe’s demerger in coming year.


(Yogansh) #15

Hi All,

While going through the AR2017 of Prakash Industries Ltd. I found the undertone to be pretty strong. Below is a screenshot of my notes.

Further in H1FY18, management seems to be delivering in line with their commentary in Annual report 2017. Numbers of both Q1 & Q2 look good and if the company is able to continue such growth and delivers numbers as per its guidance given so far (please see below screenshot), then it can turn out to be really interesting.

You can read the latest press release & quarterly results form here.

Another interesting development is that promoter is bringing in money (though it is through warrant). A sum of 125 Cr will be raised through allotment of warrant issue to promoter & non-promoter entities, at a price of 137.25/share. You can read the announcement from here.

Regards,
Yogansh Jeswani
Disclosure: Invested


(indirachitra) #16

SEBI has revoked the order
sebi.gov.in/web/?file=../../../sebi_data/attachdocs/dec-2017/1513937225388.pdf#page=15&zoom=auto,-27,685
With debt reduction pledge release rakeshji increasing stake 100% coal linkage FCCB conversion to 2023 with8% reduction in shares conversion the corporate goverance looks clear.
Steel price firming power Pat margin improving and demerger of the pvc pipes division looks possible seems this can give a decent recent.
With ebita expected to be nearing 500 cr in coming year at the present market cap looks on the safer side.
Views invited on OPM improvement chances.
Disl. Invested recently.


(rahulshares) #17

Monday Jan 8th are the results. Believe such early results point out to a blockbuster results. Q4 too should be above expectations.

Any views on fair value for Prakash considering huge run up already. Have entered at 205.


(Lakshmi Narayana) #18

Blockbuster Q3 results by Prakash industries

9M Fy18 profit =230Cr.

see the forward guidance and expansion plans

http://www.bseindia.com/xml-data/corpfiling/AttachLive/31ca52b8-4912-467e-a59c-5f2edcffc09a.pdf


(Manohar T. Patil) #19

Extremely upbeat outlook by management - They are planning to expand steel capacity 2.5 times over next 5 yrs. funded with internal accruals and new PVC pipes capacities coming onboard during 2019.Targetting to be debt free in next 2 yrs. Refer to press release on below link.

http://www.moneycontrol.com/stocks/reports/prakash-industries-financial-results-q3fy18press-release-10298121.html


(Ayush Mittal) #20

Summary of the interview on latest results:

Steel prices have gone up by 20% in this quarter
We feel its sustainable. In this quarter we did 21% OPM but in next quarter we aim to do 25% OPM.
We are likely to Orissa mine in April 2018 and Chattisgarh mine in April 2019. With these measures, our margins should improve.
We are operating at 100% capacity utilization vs 80% earlier.
In 9 month we have done 2100 Cr turnover which was turnover for full year of 2017. We hope to cross 3000 Cr turnover this year.
Hope to do 40% growth in 2019
We are doubling our PVC pipe business over next 2 years.
As of now we are doing 250 Cr capex for an year. We are also reducing debt, have already repaid 160 Cr in 9 months. In this quarter should reduce another 300 Cr as we have repay some FCCB and some will get converted to equity.

Why do you feel its sustainable, as its commodity? - Trends seem to be very favorable as China has decided to reduce the capacity. They have already decided to reduce 150 Mln MT, of which already 100 Mln MT has already been reduced and another 50 will be done. Plus there is robust demand. India is already exporting. Hence we feel coming year may be better and we are very well placed.
What about coal requirement - Our’s is sponge iron route where we don’t need coking coal. Others need coking coal and the same is imported and the prices have been sky-rocketing. We have 5 year linkage with Coal India with stable price. Based on that our prices will be stable in a volatile and uptrend. Hence we expect substantial saving