Prakash Industries Ltd. (Prakash)


(VALUE2017) #43

The company had a very strong cash flow from operation during the last Ten Years and this also includes the period of cyclical downtrend in steel industry ,where major steel companies were also affected:

2007-08= 172.94
2008-09= 268.94
2009-10= 270.08
2010-11= 143.10
2011-12= 260.14
2012-13= 193.45
2013-14= 313.59
2014-15= 231.97
2015-16= 242.17
2016-17= 269.23
Estimateded 2017-18 = 454.

The company has consistently generated healthy cash flow from operation during the last 10 years and is expected to have substantial increase in the current year to Rs 454 Cr ( Rs 324 Cr Cash flow from operation during the current 9 months).


(sunilgct) #44

:December SHP:Great Ace Investor Mukul agrawal entered into Prakash Industries buying 23 lac shares in December, 2017 quarter.India Nivesh Fund had increased its holding from 1.10 % to 1.26 % from 16.83 lac to 19.22 lac.These gives big confidence for others to hold Prakash Industries for long term…

One question though with such free cash flow why promoters have pledged their shares


(Raj A A) #45

Anti dumping duty in steel to continue:Steel secretary, GOI


(VALUE2017) #46

Dear Sunil

While going through the Quarterly Shareholding pattern for the last 10 years I have observed that the promoters had not pledged a single share till FY 2013-14, however during the FY 2014-15 due to the default in FCCB payment, the promoters might have been forced by FCCB holders to pledge their share.

As already advised the FCCB repayment default was due cash flow mismatch on account of payment of Rs 250 Crores due to cancellation of Coal Block by Supreme Court


(VALUE2017) #47

With the improvement in financial and as per guidance given by the management the company will be debt free in 2 Years and then there will be no question of pledged shares.

In the last 3 to 4 months substantial amount of shares have been de-pledged by the promoter. Further the promoters have also infused around Rs 105 Cr by way preferential allotment of 7650300 Nos of shares in Dec 2017 which shows the commitment of the promoters.


(VALUE2017) #48

The company and its Directors name was involved in Syndicate Bank Bribery Case in August 2014. The company in its statement had denied its involvement in the bribery case. It was alleged that the company had paid bribe for around Rs 3.5 Cr for sanctioning of ECB loan for USD 20 Million.

I have tried to analyse above issue and have following observation :

As per Annual report dated 31/03/2014 :

“The Company had issued FCCB of USD 110 Million in earlier years, out of which FCCB of USD 32.9 Million got converted into Equity Shares of the Company. Out of Balance USD 77.1 Million, FCCB of ‘ 10,277 lacs (USD 17.1 Million) are due for redemption on 13th October, 2014 and carry interest @5.625% and FCCB of ‘ 36,060 lacs (USD 60 Million) are due for redemption on 30th April, 2015 and carry interest @5.25%.However, the respective bond holders have an option to get their bonds converted into equity shares of the Company on or before the maturity date.Outstanding FCCB are repayable in Foreign Currency and their repayments have not been hedged by any derivative instrument or otherwise by the Company.

FCCB for USD 17.1 million (plus interest) were due for conversion on 13/10/2014 , the conversion price was Rs 170 per share, however the market price was around Rs 50 in March 2014, as the market price of stock was less than Rs 170, it was certain that the FCCB would not be converted into Equity shares and hence the company would be required to pay around USD 20 Million to FCCB holders. The company had told that it had been sanctioned ECB of USD 20 million from Syndicate Bank.

I think the ECB of USD 20 Million was probably for repayment of FCCB which was due for payment in 13/10/2014. Now the allegation was that the company has paid bribe of Rs 3.5 Cr for sanctioning of loan of USD 20 Million approx Rs 120 Cr. Let us analyse ……

On 31/03/2014 , the total debt (Including all FCCB) of company was Rs 725 Cr (Short Term 23Cr + Long term 702Cr) and the Equity was Rs 2232 Cr

Debt to Equity =0.32
Interest coverage ratio = 4.52
Cash Flow from Operation Rs 313 Cr
Net Profit = Rs 173.16 Cr

ECB for USD 20 Million was not an additional debt but simply conversion of FCCB to ECB i.e effectively it was not additional debt but mere conversion. My assumption is that any company (particularly in Steel Industry) that would had approached any Bank for ECB of USD 20 Million with Debt/Equity of 0.32 ,ICR of 4.52, and CFO of Rs 313 Cr, would not be required to pay any bribe. Any Bank would had been more than happy to lend the company with such strong financials.

In the Syndicate Bank bribery case two names were involved one was Bhushan Steel and the other one was Prakash Industries. Bhushan steel was in real stress and it was true that it was getting hard for them to keep their loan accounts standard and raise additional loans from Banks. However as explained above the same was not the case for PRakash Industries as it had very much strong financial position. However, whatever the truth may be, the charges of Syndicate Bribery case on Prakash Industries have not yet been prooved till date and I am also not aware of the present status of the case but this incident has put a permanent blot on management’s integrity and Corporate Governance of the company. People think twice before investing in this company due to above issues, however my perceptions are changing for the company.
(My views may be biased as I am already invested in this company)

I think after this Bribery incident the ECB was not disbursed and within next 2 to 3 months the coal block allotted to the company was also cancelled by Honble Supreme Court and the company had to pay Rs 250 Cr. The company then defaulted in its ECB repayment and after default the management had to pledge all its shares. Subsequently the External rating of the company was also categorized as default and its loans were also restructured.


(VALUE2017) #49

I am analysing the growth opportunity for Steel Industries in India and have came across many interesting fact and would be sharing in the forum shortly…


(yembee) #50

Looks good


(yudiagg) #51

It is an excellent screen. Could you advise the source pl.


(yembee) #52

This stencil I have designed mainly taking data from Screener.in .

It is an access database linked with many external excel files … for EOD, 52W high Low etc

It gives :
Quarterly Results … YoY growth of Topline PAT … % Margins etc
Annual Results … YoY growth of Topline PAT … % Margins etc
Price Momentum and Corresponding PEs
Adding few parameters whenever I have time … such as Annual High and Low PE


(PATURI BAPAIAH CHOUDARY) #53

excellent screen. very good effort to develop it.


(yembee) #54

Thank you Sir … for your encouragement


(kk) #56

HI…can u guide me how to use that tool so that it will help to every one…kindly do reply.


(yembee) #57

No Brother … I can give the stencil free … send your mail Id…I learnt so much from here … Its a way of contributing back… The issue is we need Practical knowledge of MS Access and a lot of ever changing data to be tracked…

If we have the setup done… It takes only few minutes to get the output like this for any company… Screener is a Great source of Data


(VALUE2017) #59

Great effort and I also appreciate that you are freely sharing with others… this is what value investing all about…


(VALUE2017) #63

During screening for value Stocks (as per my criterion) Prakash Industries always use to flash up on the Screen, but I always avoided this stock due to all the negative news which I used to here about it during last 5 to 6 years. My belief was further bolstered when the company was classified as Shell companies and it went for a lower circuit. But during the fall there was a news that Rakesh Jhunjhunwala had increased his stake and bought additional 10 lac shares during the fall. I was then forced to think that why an ace investor like Rakesh jhunjhunwala would increase his stake in a shell company. His first investment was at around 55 and even after the fall he was making a good 100% on the stock and he could have easily trimmed his position at that level , instead he increased his holding. I simply thought that in my comparison RJ is much more visionary and has a deeper sense of valuing stock. I did simple analysis on my own and found the stock attractive at level of 120. I bought at 120 and then it fell till 100 and I added my position. After buying the stock I increased my research and analysis on the stock and is continuing till this date. I had gradually increased my stake in this stock and have bought at almost all levels till 215. Now it forms a substantial part of my portfolio and has reached the upper cap which I have fixed for my single portfolio. I am having profit of around 65% at this stage and I now expect my profits growing substantially from this stage.

The fundamentals of the company were always appealing, however the quality of management was always a concern for me .But after doing all the analysis I am more then willing to give a chance to the management to come out clean.I also could not believe that a company which I never used to look at has now become one of my major holdings…

I think as Porinju Veliyath describes says that there is substantial change in attitude and perceptions of so called “CHOR MANAGEMENT”. India is changing and so is the way of running companies by management.

My learning is that always be flexible and open your mind for new ideas…
Disclosure : As already acknowledged my views are highly biased as it forms a substantial part of my portfolio


(VALUE2017) #68

I have made my valuations for Prakash Industries and have tried to keep it as simple as possible.

The annual capacity of Prakash Industries is 1.1 MT . The company has advised that they will achieve 100% capacity utilization from current quarter. Price for average steel product can be conservatively estimated at Rs 35000/- per ton.
Annual sales @100% capacity utilization @ Rs 35000 Per MT = 1100x1000x35000=3850 Cr
The company has further advised that they will increase their sponge Iron capacity by 0.2 MT by Sept 2018 ( as per Q3 presentation)
Average Sponge Iron price = 21000/- per ton
Annual sales due to additional capacity addition = 200x1000x21000= Rs 420 Cr
So projected sales for 12 Months will be = Rs 4270 Cr.
The Net profit margin for the current quarter was 13.9% and I would like to conservatively trim it to 10% (also because additional capacity is for Sponge iron only and not finished steel)
So at a NPM of 10% net profit comes to around Rs 427 Cr the EPS comes around Rs 28.40.
If a give a conservative EPS of 12 , my valuations for the stock comes at Rs 340/-.

Factor of safety :

  1. I have done valuation for only the steel segment and have not touched PVC segment which is also showing significant growth and has been approved by the management for demerger at a ratio of 8:1 . As advised by the management the PVC segment is BTC (Buisness to Customer) where they Sell PVC Pipes under the brand of “Prakash Pipes”. The brand commands a good brand value in the northern region. The PVC segment is Witnessing Revenue Growth of 16% CAGR in last 5 years and Operating profit margin growth at 26% CAGR since last 5 years (as per Q3 presentaton).

The PVC segment is on a expansion mode and will double its capacity by Sept 2019.

I am not comfortable doing valuation for PVC segment and would therefore request other members in the forum to help me in this regard. The PVC segment valuation (which is not included) is the biggest factor of safety at a price of Rs 340

  1. Margins are expected to further improve because the company has been allocated two captive Iron ore mines, one of it will get to operation from April 2018 and the second one from April 2019. This will help the company in securing its raw material and will also be able to set off volatility in Raw Material price.

  2. The company has reduced its debt by 168 Cr in the current 9 months and has advised that the debt will come down by additional 300 Cr in Q4 i.e total debt reduction of 468 Cr. The company has also given guidance to be debt free in 2 years.

  3. The India steel sector is on a breakout path and I will present interesting and encouraging facts in this forum shortly.

  4. Debt reduction by Rs 450 Cr will itself have significant positive effect in its financial cost.


(Ayush Mittal) #75

Hi @yembee - good to see your efforts and intent to share with public. Request you to continue this discussion in the appropriate thread and not on some particular stock thread. You may upload the files on some common file sharing platform like dropbox or google drive etc.

Regards,
Ayush


(Kshitiz Gupta) #77


(yembee) #78

OK agreed … Thank you