Prakash Industries Ltd. (Prakash)

VALUE2017 · March 24, 2018, 3:49pm

The upfront payment is 25% and not 10%, the Promoters have earlier forgone their right to buy warrant at 138 , promoters are not buying the shares directly from the market at lower price because that will not infuse any capital into the company .

As per my findings the steel demand in India is very robust and the prices are also very strong, (however the uptrend in price have stabilised) . The margins at the current price are very good. There is shortage of Wire rods(one of the finished goods) and demand for other long products is also very good.

The successful resolutions of Bhushan Steel and the revised buddings for Essar Steel by global players is an indication that the steel cycle will remain robust for next 2 to 3 years,otherwise why would large steel companies evince their interest in stressed steel assets.

In my opinion Just like in a long flight, we will be having a perfect journey and there will be turbulence for short periods like the current one and we will be coming out of it.
However, we only need to ensure that the plane in which we are boarded is a sound one.

Past corporate governance issues are still there with the company and is sitting fresh in the minds of all investors .The promoters will have to do a lot in this direction to come clean. Its good that they are coming in buisness channels to clarify on various issues but still if they can held investors concall after the results which will help the investors to clarify their doubts.

The comfort at this turbulent time is infusion of Rs 208 Cr by the promoters and as per my understanding the promoters are insiders who are aware of all the merits and demerits of the company and in all probability they are anticipating a turn around other wise, I do not see any reason as to why would the promoters infuse capital in the company.

Extra shot : One thing I have noticed that while going through the balance sheet of last 10 to 12 yearsI have observed that the promoter/company has never availed significant credit facilities from Banks. The reason for mentioning this fact is that one of the trait of fraudulent promoters in India is to avail significant credit facilities from Banks especially from Public Sector Banks by inflating Project Cost and then siphon off money to subsidiaries and associates. From of 2008 to 2012 was the period of rampant funding of Expansion projects in Steel and Power sector by Banks (especially Public Sector), the result of which is the present NPA problem with Banks.
Prakash Industries had also expanded its capacities in power and Steel during the same period and in one of the past interviews (Dec 2009 https://www.youtube.com/watch?v=LoQVX7OoVA8) the management had intended to increase its power generation capacity to 625 MWW and that to from internal cash accruals and without availing any debt. Ironically in Dec 2009 the share was trading at the same level at which it is trading now.
I will give clean chit to the promoters at least on the matter of not availing un necessary debt from Public sector Banks .

Disclosure : Invested and would like to have contrary views from other members so that we can have better analysis on the company

deep86 · March 25, 2018, 12:02pm

If I am not wrong,Price is calculated based on SEBI defined formula. Even that is what is mentioned in the notification as well. so I doubt if Management has any role in it. I think only thing is that they want to put in money in the stock now or wait for it later.

VALUE2017 · March 25, 2018, 1:57pm

The Indian steel demand is robust and prices are low when compared with global prices prices(thanks to China). Demand is going to outpace production in future which is very much positive for Indian Steel companies.

The current trade war will definetely have a strong impact on the Equity markets globally but I feel that as of now the impact is more on sentiments then on grounds. The ground effect of trade war will percolate slowly with a time lag, may be 6 to 12 months. The sentiments of Equity markets have been impacted more or less with the same amount accross the markets whereas the actual impact will differ from country to country. In my opinion India is more of a consumption economy and will be impacted far less as compared to other emerging markets.

So if we asses the impact of global trade war on level of 1 to 10 with 10 being the severest the impact at the country level will be some where around 2.5 to 3.5.

Now if assess the impact on steel sector I will assign the impact level at 1.5 to 2.5, because Indian steel demand is going to outpace production and if the exports are trimmed it will infact ensure supply to the local increasing demand.

Now if we asess the impact at the company level I will assign an impact level of 0.5 to 1.5 for Prakash Industries because the companies export portfolio is nil for the last 3 to 4 years.

So once the sentiments settles down, a top to bottom down analysis will be done by investors and value will emerge in all stock which will be least impacted.

The only CAVEAT here is that no one knows when the sentiments will start improving as there is continuous flow of negative news.

maven26 · March 27, 2018, 4:45am

https://www.macquarieresearch.com/rp/d/r/publication.do?f=E&pub_id=7344306&file_name=MacquarieCommoditiesComment190318xe296206.pdf&pid=d731a787-b413-4298-b0a0-259f74f51320

maven26 · March 27, 2018, 4:59am

IndiaSteelSector-CorrectionOverdone;ChinaTripSuggestHealthySentiments20180320 (1).pdf (791.9 KB)

hashims · March 28, 2018, 8:18pm

Committee of the Board of Directors of the Company in its meeting held on 28.03.2018 has allotted 98,96,278 Convertible Equity Warrants at a price of Rs.210.18 per warrant

learning · March 29, 2018, 6:42am

Any past data on How does company perform post warrant issuance - does this provide a price support or not?

BGattu · March 30, 2018, 10:42am

ffaizan · March 30, 2018, 1:04pm

This could support Indian steel prices to remain firm and sentiment booster for industry.

Interesting fact to know that a single city of China has capacity more or less of Indian production.
“
Handan has an annual steelmaking capacity of about 113 million tonnes”

maven26 · March 30, 2018, 3:47pm

Steel-MarketBulletien.docx (36.9 KB)

I have packed a few articles on a website. One article states that the steel prices which went up due to ferocious cut in steel capability, could easily come down. How much down is anybody’s guess. The second one states interesting things:

The illegal industries (which is not included in the chinese data of rebars) use to manufacture mostly rebars and they have gone down.
If you look at the profitability of big companies in China (Baosteel) then they have improved with illegal capacity been closed. It states that big companies (whose data is included in China steelmaking capacity) market share has gone from 62% to 70+ % and they have taken advantage of the situation and made profits.
This gap has made rebar prices go high … although they have fallen but still much higher than lows of 2016. See rebar future prices on Shanghai exchange (Nasdaq Data Link)

image1226×719 80.3 KB

Now the question is what is the illegal capacity that has gone down in China which will never come up.
Secondly, I have read that China will be achieving its target for 2020 of reducing the steel making capacity by 150 million tonnes by 2018 itself, so why more cut are announced (may be pollution)

VALUE2017 · March 30, 2018, 4:37pm

Pollution is one of the single most biggest factor which I have already discussed in my earlier post in this forum. Steel sector will be in sweet spot for the next 2 to 3 years, however the macros of our economy are far from comfortable at this stage. The current fall in the market can be attributed to the weakening macros of the country and i do not see improvement in the market sentiments for next 12 months. in my opinion any decisive move in the market will come only after 2019 election results although I am a firm believer that the incumbent governments (from 1947 to 2019) have hardly played any role in the growth of this country. The economy of India is growing due to its inherent strength and because of its great citizens.

Major headwinds for next 12 to 18 months:

Political uncertainty and Election results of States and General Election.(Biggest factor although it effects only sentiments and not fundamentals as per my perception)
NPA problems of Bank.( The problem is now percolating downward from Banks to SME and other industries and I tell you the problem is really very very very serious, I would like to elaborate on this point however it would not be permitted by the moderators in this forum)
Falling GST collection and fiscal deficit.
Rising interest rates.( It will make debt more attractive then equities for big investors thereby reducing the flows to equity further to this the CAPITAL GaIn exemption has also been taken away)

The weakness in the macros of economy will remain in medium to short terms.

All in all i feel that markets will be range bound till next general election and if the current government can secure majority in next general election then we will definitely see what Rakesh Jhunjhunwala says MOTHER OF ALL BULL MARKET.

The only silver lining in the current scenario is the improvement in the earning which the market had been waiting for the last several quarters. Its really ironical that when the macros were strong the earning was weak and when the earnings are improving the macros are weakening.

My post is not directly related to Prakash Industries and would therefore seek ratification from moderators.

maven26 · April 2, 2018, 8:27am

http://www.xinhuanet.com/english/2017-08/02/c_136494629.htm

http://www.chinadaily.com.cn/business/2017-08/03/content_30341103.htm

The above 2 articles mentioned that
Inferior-quality steel bars are low-quality products made of junk steel. Statistics showed that during the first half of this year, China closed down more than 600 companies with the total inferior-quality steel bar production capacity of 120 million tons.

So 120 million tons of inferior quality steel bars are put down. That is a big one. Now the question is how much of this was included in China steel production figures by CISA.

https://www.thestar.com.my/business/business-news/2017/07/31/china-shut-424-million-tonnes-of-steel-capacity-in-the-first-half/

This article states that 100 million tones low grade steel production was closed (by July 2017) and it is not included in the annual capacity cut target.

The capacity cuts made this year do not include a nationwide campaign to shut down illegal low-grade steel production, believed to amount to around 100 million tonnes a year, which was completed by the end of June.

I guess that these cuts which are announced for current timeframe the main reason is pollution.

VALUE2017 · April 5, 2018, 1:34pm

Prakash Industries Limited-04-03-2018.pdf (396.4 KB)

Prakash Industries has been allotted BB rating by CARE with stable outlook.

VALUE2017 · April 5, 2018, 1:49pm

We earlier had discussion in this forum as to why Prakash Industries is not borrowing from Banks and from other NBFC. I think one of the main reason behind this is the Credit Rating of the company. The company’s earlier rating was suspended by rating agencies and prior to that it had a Default rating (due to defaults in credit facilities from Rural Electrification Corporation and Corporation bank and FCCB have also been restructured due to delays in serving of its debt obligations).

The rating of the company is still BB that is one notch below investment grade of BBB-. No Bank in present day scenario will lend to a company whose credit rating is below investment grade. It is for this reason the company has to approach NBFC to borrow money (probably at higher interest rate).

All those who are investing in this company are playing a contrary bet where on one side the Banks are not finding the company as investment grade for lending as secured creditors (where they can have all Assets of the company as collateral and also Promoter as Guarantors) and on the other hand we are investing in the company as a share holder (without any security to fall back on).

But I am confident that there will improvement in rating of Company to A grade within next 12 to 18 Months.

Disclosure : My views may be biased as I am Invested in this company and it forms a major part of my Share holding.

Mayank_Narula · April 9, 2018, 5:42am

BB to A doesn’t happen in 12-18 months. Even BBB- will be a stretch.

VALUE2017 · April 9, 2018, 10:13am

I do agree that it has to travel a long journey of BB+, BBB-,BBB,BBB+ and then to A-. The Credit ratings apart from other factor are majorly dependent on financial and Industry parameters and if the financials improve at a faster rate, then the ratings are also bound to improve at the same pace.For steel sector the demand/Supply and Industry outlook is already positive.

Looking at the current scenario for Steel Industries, I would not be surprised if the financials of Prakash Industries improve to such extant that they warrant up gradation of Rating to A in next 12 to 18 months.

I would just like to give example how ratings change in a short period of time:

05/04/2018 Godawari Ispat rating upgraded to BBB-

As on 05/02/2018 rating was CARE BB+; Stable

As on 22/07/2016 rating was CARE D

As on 07/07/2016) rating was CARE BBB+

As on 10/07/2015 rating was CARE A
(Source CARE RATINGS).

VALUE2017 · April 9, 2018, 10:35am

The TATAs, JSW, Arcellor, Vedanta, Liberty of UK, Numetal, are out on shopping for Steel Assets not because they are available at cheap price but because they foresee robust growth in steel demand globally and particularly in India for the next 3 to 4 years.
The above named companies are not small players but global steel giants and they are all positive on steel. They are optimistic about Indian steel Industry not just in their thoughts but also in their action which is quite evident in the way the stressed assets are being bidden. I think the writing on the wall about the steel sector is loud and clear and we cannot ignore that .

The only reason for being optimistic IS ONE AND ONLY ONE AND THAT IS CHINA.

CHINA CUTS STEEL PRODUCTION IN A BIG WAY

What a ‘steel-free’ town in China really looks like
China has come under criticism — including by the Trump administration — for flooding global markets with cheap steel, pressuring steelmakers in other countries.
Chinese Premier Li Keqiang, at the opening of the National People’s Congress, said China was reducing steel capacity and pledged to do more.
Baoding, about a three hour drive from Beijing, was recently declared "steel-free."
Eunice Yoon | @onlyyoontv
Published 8:56 PM ET Thu, 8 March 2018 Updated 1:47 AM ET Fri, 9 March 2018
CNBC.com
CNBC reporter escorted out of ‘steel-free’ town in China CNBC reporter escorted out of ‘steel-free’ town in China
8:51 AM ET Thu, 8 March 2018 | 03:00
Chinese Premier Li Keqiang, at the opening of the country’s National People’s Congress this week, said China is reducing steel capacity and pledged to cut it further. CNBC looked at one newly “steel-free” town to get a look from the ground level.

China has come under criticism — including from the administration of President Donald Trump — for flooding global markets with cheap steel, pressuring steelmakers in other countries such as the United States.

CNBC visited the town of Baoding, in the heart of China’s steelmaking industry about a three hour drive from Beijing, was declared “steel-free” in November.

China is shutting down steel mills
In its heyday, Baoding had eight steel mills, all contributing to China’s status as the world’s biggest producer. However, as part of the government’s efforts to clean up the environment around Beijing and reduce steel capacity, Baoding’s mills were shut down.

In November, the city declared that it was completely free of steel production after authorities inspected the last remaining mill and determined that it had been officially closed.

Hebei province, where Baoding is situated, aims to continue to cut iron and steelmaking capacity by 20 million metric tons in 2018.

Capacity is still a problem
Despite Beijing shutting down mills in Baoding, the steel company that owned the last remaining one in the town, Ao Yu Steel, had organized a deal to transfer capacity to a firm in Fujian province in southern China.

That sort of practice is one of the reasons so many of China’s trading partners including the United States are frustrated with the Chinese and argue that Beijing should do more.

Social concerns determine the pace of steel cuts
The last operating mill had employed 2,000 workers, many of whom still live in the town. Most we met are jobless.

As in many of China’s steel towns, the workers were older and lacked skills to compete for other jobs. And with little social safety net, they felt the company’s severance — at $800 for every year employed — was insufficient.

One worker said he and several others blocked the road to the mill when they first learned of the amount of compensation. He was detained for 10 days and eventually agreed to the deal, he said.

He is still angry though — highlighting the serious social challenge China’s leaders face when they close factories.

China remains touchy
Baoding boasts about its steel-free status, but that doesn’t mean the officials there want the international community to see it. After a few hours in the town, the police stopped a group from CNBC and escorted it to the station to verify press credentials.

The officers acknowledged that as accredited journalists, the CNBC crew had the right to do reporting there. The police offered the team an escort out of town regardless.

Mayank_Narula · April 9, 2018, 11:04am

Downgrades can happen very fast because rating agencies are mostly last to know in case of defaults

Upgrades usually happen for one notch in a year or may be two at max. Any more than that should be taken with pinch of salt.

maven26 · April 10, 2018, 9:10am

The article also talks about steel capacity is moved to somewhere else (away from Beijing). This is why Trump is furious about the China claim. As clearly highlighted in the video that Chinese authority would not let the reporter talk to workers (who worked in inhuman condition and with so less payment) and also escorted those reporter out of town. China’s numbers are not to be taken seriously. Despite cutting so much of steel capacity its production has still matched last year production… something that puzzles me. That means most of the illegal capacity is been cut is for environment purpose only which is biting it currently… that is why its production data say a different story all together.

maven26 · April 10, 2018, 2:46pm

India (Delhi/NCR): TMT rebar price of last 6 months. The prices rose to 38K to 40K range and stayed there for the quarter

from steelmint.com
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