Performance review of Prakash Industries:
OPERATING PROFIT MARGIN:
The operating profit margin has been continuously improving for the last 10 quarters which is positive
Sept 15 - 8.63%
Dec 15- 10.91%
Jan-16 – 11.38%
Mar 16- 9.73%
June 16 – 11.12%
Dec – 16- 13.90%
Mar -17- 16.61%
Sept- 17 -18.31%
Dec -17 – 20.73%
Further the company has advised that due to higher realization in the current quarter the margins are going to further improve in Mar-18 to 25% . Also with the commissioning of Iron ore mines the margins are expected to improve further or even if it stabilizes at 22 to 25% there will be a huge positive impact in the bottom line.
NET PROFIT VS CASH FLOW FROM OPERATION :
Cumulative CFO for the last 10 years is Rs 2365.61 Cr and total Net profit for the last 10 years is Rs 1656.05 Cr. Depreciation and Interest expenses for the same period is around Rs 822.61 Cr & Rs 463.40 Cr. The cash flow from operation should be higher than the Net Profit over a long period which is a healthy sign. It gives a comfort that the profits are not merely book profits but are actually being converted in to cash. The cash generated from operation are being invested in fixed assets which is also a good sign. However large amount of funds are blocked in CWIP (Capital Work in Progress), which is definitely a matter of concern.
Debtors Level and Debtor days
The debtor level as on 31/03/2017 is RS 76.33 Cr where as on 31/03/2008 it was Rs 114.78 Cr. The rise in debtor level should be commensurate with the rise in sales figure. The annual sales as on 31/03/2017 were Rs 2173.50 Cr and as on 31/03/2008 it was Rs 1253.71 Cr. Although the sales has increased by 73% the debtor levels instead of rising have actually fallen by 34% which is good sign.
During the last 10 years the debtor days has also significantly fallen from 33.42 days to just 12.82 days. This is also a positive sign and in fact I was going through the data of other steel companies and I found that it is amongst the lowest of all Indian Steel companies.
Debtor days as on 31/03/2017 of other steel companies for comparison:
Tata Steel = 36.02 Days
JSW Steel = 27.24 Days
Sarda Energy = 17.77 Days
Kalyani Steel 119.86 Days
Inventory and Inventory Turnover:
The inventory level as on 31/03/2017 is RS 187.75 Cr where as on 31/03/2008 it was Rs 98.63 Cr. The increase in inventory should be commensurate with the rise in operations/sales figure. The annual sales as on 31/03/2017 was Rs 2173.50 Cr and as on 31/03/2008 it was Rs 1253.71 Cr. The sales has increased by 73% and the inventory levels have increased by 90%. As the inventory level is low the 90% rise in inventory level against increase in sales of 73% is in line.
The inventory turnover in 31/03/2008 was 12.71 and as on 31/03/2017 is 11.58. The inventory turnover is amongst the highest when compared to other Indian steel companies which is also a positive sign.
Higher ratio indicates that a company is able to rotate its inventory faster and its capital is not stuck in inventory.
Ideally, Inventory turnover ratio should be stable or increase with improving performance. Declining Inventory turnover ratio should raise the flags and an investor should delve deeper to understand its cause. If the investor is not satisfied with the outcome then he/she should avoid investment in such company and look for other opportunities.
Inventory Turnover as on 31/03/2017 of other steel companies for comparison:
Tata Steel = 2.34
JSW Steel = 1.91
Sarda Energy = 0.98
Kalyani Steel = 10.55
The Debt to equity of any company should be ideally less than one. In case of Prakash Industries the Debt/Equity ratio as on 31/03/2008 was 0.51 and as on 31/03/2017 it is 0.42. The debt to equity ratio is comfortably below 1 and over the period of time it has reduced which is a good sign.
Debt/Equity ratio as on 31/03/2017 of other steel companies for comparison:
Tata Steel = 4.73
JSW Steel = 4.88
Sarda Energy = 4.06
Kalyani Steel = 0.32.
With the management target of reducing debt level down to the level of Rs 500, the Debt /Equity ratio is expected to further improve to 0.20, which will be amongst the lowest in the Steel industry.
INTEREST COVERAGE RATIO: the interest coverage ratio is also comfortably above 3.5 which is expected to improve further with reduction in DEBT
FIXED ASSET TURNOVER RATIO
The companies fixed asset turnover ratio is very poor and the main reason behind it could be the large amount of CWIP of Rs 1141.15 Cr which is almost 42% of the total fixed assets. This can be treated as matter of concern and also as an opportunity. The company should expedite to commission all the CWIP so that additional revenues can be generated. It would have really been beneficial if the company would have given details of the CWIP to share holders for better analysis.
The company however poorly ranks in ROE and ROCE, comparitive anlaysis of which I will be submitting later.
Data Source : Screener