Mid-cap Scanner: Prakash Industries

Capacity expansion could bring good growth in volumes and margins for the steel maker over the next couple of years

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 ferro alloys (0.048 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. The company also has a coal mining capacity of 1 mtpa.

The company has quite a few positives. First, it plans to expand steel capacity to 1mtpa which would make it a volume growth story to watch. Edelweiss Securities, in a recent report on Prakash Industries, said it expects the company's sales volumes to increase from 0.51mtpa in FY10 to 0.83mtpa in FY12, a CAGR (compound annual growth rate) of 28%.

The current sponge iron capacity is less than what the company requires and as a result the company outsources billets and direct reduced iron (DRI). It plans to also expand its sponge iron capacity to 1.2mtpa by March 2013 (about 0.2mtpa every year through FY11-13). This should help it meet its requirements for captive billets and DRI and result in margin expansion.

Prakash is setting up a 625MW power plant. Angel Broking has said that the company's management has indicated a modification in the plan for the power plant. About 125MW will be commissioned between November 2010 and March 2011 and two units of 100MW each will come on-stream by March 2012 and March 2013. (The earlier plan was for two 125MW units). The rest 300MW (two 150MW units) will come on-stream by March 2014 and March 2015.

Prakash has also been operating a coal mine in Chotia, Chhattisgarh, since 2006. The mine has B grade reserves of about 50 million tonnes (mt) with current extraction of about 1 mtpa. The company has also been allocated the Madanpur coal mine (C & D grade), which has reserves of 50 mt, in a consortium with seven companies. The operations are expected to commence by August 2011. It has also been allocated coal mines at Fatehpur, Chhattisgarh, but the reserves here are said to be inferior (E&F grade) and would not be useful for processing steel. This mine will not be operational for another three years.

Prakash is also close to getting clearances for its captive iron ore mine at Kawardha, Chhattisgarh, Edelweiss said in its report, and the company aims to be a hundred per cent integrated by FY12. This would result in potential savings of nearly Rs6 billion. The iron ore reserves (a high Fe grade that is above 65%) are estimated at 75 mt. The company has indicated that it would begin mining here by March 2011.

Prakash has yet another mine in the Sirkaguttu district of Orissa with reserves of
10 million tonnes and a 65% Fe content. The management expects to
commission the mine in December this year.

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.

Angel Broking expects EBITDA to register a 35% CAGR over FY10-12. The brokerage has a 'buy' on the stock, with a target price of Rs232 (current market price Rs180). Edelweiss Securities values the stock at 5x FY12E EV/EBITDA for the steel business and on discounted cash flow (DCF) for the first 125 MW power unit. It has put the fair value at Rs 261.

The two-week average volume traded on the BSE was around 300,000 shares. Prakash has a market cap of Rs22 billion. In the quarter ended June 2010, sales were Rs4.6 billion against Rs3.6 billion in the previous corresponding period, while net profit was Rs697 million against Rs586 million in the year-ago period.

It has been reported that Prakash Industries is in talks to buy Nova Iron and Steel, but the company has denied this. The biggest risks to the performance of the stock would be a delay in capacity expansion or delay in clearances for mines.

The stock had a mild bullish breakout mid-August, but it has stayed flat since then. 

 It is now trading far lower than the April-May high of about Rs 240.




7 years ago

We have shocked to see on Times of India tt Prakash Inds has indulged in fraud by selling Coal In black market and this issue has been brought to the knowledge in assembly recently. In your recent Midcap scanner, u hv also recommended this counter. how u have not come to know about these things which had happend for such a long time and CBI also pointed abt this. If an innocent and small time investors invest in this stock based on your recommendation, definitely will get trapped into it n wl lost all the money n wl loose all hard earned money. Pls share your thought about how these things could not be smelled by you while making your analysis. What is your opinion abt this stock. If v hv already bought this stock, should v exit? need yr immediate comment on this.



In Reply to SHANKAR 7 years ago

Shall we continue to hold this or not?
I am in big loss in this scrip. Please inform at the earliest whether we should book loss or average out at this price?


7 years ago

There is an article in TOI dtd 8th Sep 10, about this company's scam in coal mines. Would have expected Moneylife with it's investigative instinct and skill instead to expose this. Would you still recommend a buy on this ?



In Reply to Prakash 7 years ago

you are absolutely true.The scam reported by ToI should be taken seriously. many more companies may come into trouble if this news is correct.

EPFO Trustees' decision final on PF investments: Harish Rawat

New Delhi: The labour ministry today said it would abide by the decision of the Central Board of Trustees (CBT) on whether a portion of Rs5 lakh crore of provident funds should be invested in stock markets or not, reports PTI.

"The CBT decision would be final on whether Employees' Provident Fund Organisation (EPFO) should make investment in stock markets or not. The board would soon take up the issue," minister of state for labour Harish Rawat told reporters here at a PHD seminar.

There are differences between the ministries of labour and finance on the issue. The finance ministry wants the labour ministry to follow the investment pattern that it is has notified, which provides for up to 15% of the corpus in stock markets without approval of the EPFO's apex decision making body — Central Board of Trustees (CBT).

The ministry of labour and employment has forwarded the advice of the finance ministry to the EPFO's board for consideration and the trustees are likely to take up the issue in its next meeting scheduled on 15th September.

Earlier, labour secretary P C Chaturvedi had also said that the "decision of CBT would be final and supreme".

"We are careful in investing money of our workers. People call us very conservative, but paramount thing is safety of principal amount (deposits) of workers," he had said.

In a recent letter to Mr Chaturvedi, finance secretary Ashok Chawla had referred to the changes made in EPF schemes earlier without any discussion with CBT and said it (labour ministry) could take a similar view on the issue of investment pattern of provident funds.

On the letter, Mr Chaturvedi had said, "There are many missing links in the advice of finance ministry (to invest in equity). There are many issues in that."

He added, "When you say equity, it is not face value. It is not that you are getting Rs10 share for Rs10. You are getting that at Rs100. Tomorrow this Rs100 could become Rs120 or Rs80."

Mr Chaturvedi said there were several issues, operational as well as about the returns, involved in the case. "You don't get anything by way of interest (by investing in equity). It is only when you liquidate that share only then you get return."

He had also said the finance ministry's advice is based on the experience of New Pension Scheme (NPS) where they have admitted that there is no data available to establish that "what labour ministry is doing is inferior to what they are advising."

Mr Chawla's letter said that while NPS for central government employees could generate a weighted average investment return of 14.82% in 2008-09, EPFO has been giving only 8.5% returns to its subscribers for many years.

The EPFO has been giving 8.5% return annually to its subscribers since 2005-06.

Countering Mr Chawla's views, EPFO said the income earned on EPF investments are actually realised, while the returns declared in NPS are notional and subject to market conditions.

Later last month on 25th August, CBT's advisory body Finance and Investment Committee (FIC) stuck to its stand against investment of EPFO money into stock markets--either in shares or indices.

Whereas the Employees' Provident Fund Organisation commands a corpus of Rs3 lakh crore, other provident funds, which follow the Fund's investment pattern, have another Rs2 lakh crore.


Govt to make cancer drugs available at minimal prices

New Delhi: The government is in talks with pharmaceutical companies for ensuring availability of cancer drugs at a minimal price at their low-cost pharmacy chain Jan Aushadhi stores across the country, reports PTI.

"We are motivating companies, which make cancer drugs that they should supply cancer drugs at a minimal rate to the Jan Aushadhi stores," minister of state for chemicals and fertiliser Srikant Jena told reporters on the sidelines of a CII conference here.

Aiming to make available quality medicines at affordable prices for all, especially the poor and the disadvantaged, the Jan Aushadhi store scheme was launched in 2008.

At present, 231 medicines are being supplied in the 44 Jan Aushadhi stores in Punjab, Haryana, Uttarakhand, Orissa, Rajasthan, Andhra Pradesh, Chandigarh and Delhi.

Under the scheme, states provide space within government hospital premises for running the outlets.

The Department of Pharmaceuticals, under the aegis of chemical and fertiliser ministry, has been entrusted with the task of setting up these stores across the country.

The minister said that the modalities of procurement and pricing of drugs would be decided by early next week.

"Discussions with pharma companies are not yet over. It is in the process. In the next couple of days, I will be able to tell you the detail about the procurement process and the pricing of the drugs," he added.

Mr Jena said that after reaching to a conclusion, the price of cancer drugs, which are more in use, would be comparatively less, but the critical ones may not be available below the market price.

On increasing the number of Jan Aushadhi stores, he said with the states more forthright now, the number would go up now.


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