Prakash Industries Limited (PIL) BSE Code: 506022 NSE Code: PRAKASH

CMP (BSE): Rs. 51.50

CMP (NSE): Rs. 51.45

Industry: Power, Steel and PVC Pipes (Diversified)

Prakash Industries Limited (PIL) was started in the year 1980. With focused vision in the core competence areas of mining, steel, power and even PVC pipes, PIL is rapidly carving its niche in the Indian steel industry and has emerged as one of the key producers of value added steel products at competitive prices. In quest to capitalize first mover's advantage in a challenging space with technology intensive products, PIL has always introduced innovative ways to cut costs and maximize resource allocation. For highest value addition, PIL has always emphasized on forward and backward integration.

Level of Integration in PIL:

In the present scenario, the key to success and growth of steel players lie in the level of integration, which is achieved by them in their operations. Power, iron ore and coal are the three key inputs for manufacturing steel. PIL has been making concerted efforts to become self reliant with respect to these inputs. It has achieved significant success by procuring the coal mines to meet its requirements of coal. Captive coal mines at Chotia in the state of Chhattisgarh is already in operation with modern methods of mining, resulting in operational excellence. It has been allotted three coal blocks at Chotia, Madanpur and Fatehpur in the state of Chhattisgarh. It is also operating a captive power plant to meet the power requirements of its steel operations. Further, PIL is also in the process of implementing additional power capacities to take care of its existing gap in the power requirements.

The only concern for PIL continues to be sourcing of iron ore, which is another major input in steel making and constitutes significant portion of the cost. The iron ore prices have continued to spiral which affects the steel margins. In order to mitigate the impact of iron ore, PIL has got itself sanctioned captive iron ore mines in the state of Chhattisgarh and Orissa, however, the inordinate delays in regulatory approvals is a major concern before the mines become operational.

Product Range of PIL:

(1) Coal Mines: With expansion plans in Sponge Iron and Steel making in its integrated steel plant and towards backward integration of the processes for being self reliant in raw materials, PIL has also decided to get into coal mining as one of its operational verticals.

(2) Iron Ore Mines: PIL, as a part of its backward integration policy, has always insisted on being self- reliant to strengthen itself and to ensure uninterrupted supply of quality raw materials to its integrated steel plant at Champa. It has been allotted Iron ore mines in the state of Chattisgarh and Orissa, which will ensure consistent availability of quality iron ore for the integrated steel plant.

(3) Sponge Iron: Being an integrated Steel and Power company, PIL has used the high quality sponge iron produced in the sponge iron kilns for its internal consumption in its own steel plant. This not only enables cost effective manufacturing of steel but also ensures consistent availability of quality raw materials for its finished steel products. has always insisted on being self reliant to strengthen itself and to ensure uninterrupted supply of quality raw materials to its integrated steel plant at Champa.

(4) Power: From its captive power plant, power generation has developed as a full fledged business adding profits vertically to the company. It is presently operating a 100 MW captive power plant using waste heat recovery boilers and fluidized bed boilers and harnesses energy by using waste resources and other innovative and creative ideas. PIL is also on its way to expand its power generating capacities from existing 100 MW to 725 MW.

(5) Steel Melting Shop: It manufactures high quality steel billets/ blooms in steel melting shop. The raw materials used are sponge iron, pig iron and MS scrap, out of which the majority of sponge iron is sourced from the sponge iron kilns of the company. This not only ensures availability of quality sponge iron for steel operations but also results in cost effective operations.

(6) Ferro Alloys: As ferro alloys are the primary raw materials used for manufacturing steel, PIL has also forayed into production off ferro-alloys to ensure supply of quality input to its steel operations.

(7) Wire Rod Mill: Towards forward integration of the processes, PIL has set up Wire Rod manufacturing and Wire Drawing facilities at Raipur for manufacture of high quality wire rods. Since the raw materials i.e steel billets/ blooms is manufactured in the steel melting shop, it is able to produce high quality wire rod and H.B. wire in an efficient and cost effective manner.

(8) TMT Mill: With growing demands of TMT bars due to substantial increase in construction and infrastructure projects in the country, PIL has also set up a TMT mill with most advance technology equipment to manufacture high quality TMT bars to further enhance its product range.

(9) Rigid PVC Pipes: This division was started in the year 1981 to cater and fulfill market demand for irrigation, sewerage and other purpose. With superior quality and aggressive market penetration, it has steadily grown in size over the years. Today it enjoys the status of being one of the largest manufacturer and supplier of PVC pipes in the country. It is the lowest contributor to profit with just 5% share.

(10) Wind Power: PIL has also entered into this zone of non-conventional method of power generation. It has set up wind power generating farms at Muppandal in the state of Tamil Nadu. Because of the favourable wind conditions, the location is very suitable for highly efficient operations.

Expansion Plans:

• PIL is undergoing massive expansion of 625 MW in the power division. This expansion is taking place in a phased manner. 1st phase of 125 MW is under advance stage of implemetation and is expected to be complete in this quarter. The subsequent phases have been taken for implementation and will be completed in due course of time. This will take care of the long term power needs while the surplus power will be sold to potential customers through open access. Power is the highest contributor to profits with almost 80% share. With more capacity addition, more profits from this division are set to flow in.
• PIL has new capacity expansion in the sponge iron division as well and is expected to be operational by this month itself. This expansion is meant to achieve high level of integration.

Opportunities that lie ahead of PIL:

• Although the Indian Steel Industry has stepped up to the 4th position with its total steel production of close to 78 million MT in 2011 and is aiming for the second place by 2015. The per capita steel consumption in the country still continues to be as low as 40 kgs in urban India and 2 kgs in rural India as against the average consumption of close to 350 kgs in the developing countries.
• Government has framed its policies, to inject funds in various industries such as construction, infrastructure, automobile and power, which will double the steel consumption by 2020.
• The outlook for the Indian Steel Industry appears to be bright in the coming years due to its strong domestic economy, massive infrastructure needs and expansion of industrial production. In recent times, the Indian Steel Industry has earned a central position in the global steel market with global acquisitions, continuous modernizations, improving energy efficiencies and backward integration into global raw material sources.

Threats:

• In midst of such enormous opportunities, the major threat to PIL is the rising input costs. The impediments in the growth potential on account of rising input cost, which may impact the cost structure of the infrastructure projects and other major users of steel.

Risks and Risk mitigation:

• The cyclical nature of the steel industry is one of the major concerns and the risk to the company. In order to counter it, PIL has made foray into power, where the cashflows and profits are steady. Power sector is one such sector where there are positive growth forecasts owing to the fact that there are huge gaps between demand and supply. Basic most important thing is that there are no potential risks in this sector.
• Managing uninterrupted supply of raw materials is another major concern and risk against which PIL has made attempts to insulate itself with respect to probable swings in prices of coal and power. However, iron ore still continues to be an area of concern, since iron ore prices have been witnessing highly volatile trend coupled with short supplies. However, it has taken the necessary steps to guard itself against the risk.

Well, PIL is a huge equity capital base company compared to most of my other recommendations. Its equity base stands at Rs. 134.49 cr. Its reserves stand at Rs. 1584.29 cr. Compared to this its its debt stands at Rs. 676.61 cr.Its debt equity ratio stands at 0.43, which is well within the acceptable limit of 2.

Its market capitalization stands at Rs. 692.62 cr. In comparision to this, its sales (TTM) stands at Rs. 1880.12 cr, which is almost 2.71 times more than its current market cap. Its EPS (TTM) stands at Rs. 19.65 and its cash EPS (TTM) comes to about Rs. 24.75. Comparing its EPS to the CMP, its PE comes out to be a mere 2.62 compared to an industry PE of almost 15.91. Even if we take a conservative figure, still a lot of upside is possible here on. Its book value stands at Rs. 116.54. Comparing this to the CMP, the price to book value comes out to be just 0.44 and it points out to a large margin of safety (a little more than 50%), indicating a value buy after checking and confirming its financials.

PIL's interest outgo (TTM) amounts to a total of Rs. 10.42 cr. Comparing this to its PBIT (TTM) of Rs. 349.9 cr, PIL's interest coverage ratio stands at a very comfortable spot of 33.57 times, which again displays the high margin of safety in the stock with respect to its debt position.

One damperner wrt this stock is that it has not paid any dividend to its investors except for the last year.The main reason being it is on its way to growth and expansion and has reaped most of its profits back into the company to take care of its planned expansion plans as well as its much planned backward and forward integration. If you compare its last year dividend (10%) to its CMP, the dividend yield comes to about 1.94%, not very impressive at the moment, but its expansions are quite ambitious and it has very huge potential to reap in good profits in the future, which eventually will lead to an increase in the shareholder's value in the future.

The promoters hold about 46.49% of the total equity shares. About 8.02% is held by FII's and the remaining is with the public.

As per the latest quarter results, power generation has been higher by more than 38% during the quarter as a result of new capacity additions. The 1st phase of the expansion programme taken up by PIL in power generation capacity is now almost complete and is expected to be fully operational in the current quarter. The performance of steel division, wire rod division, and ferro alloys division has also been satisfactory with improvement in prices. Capacity additions in sponge iron is also nearing completion and expected to commence operations from this month itself.

So here is a company, that is highly diversified, into those industries that cater to the infrastructural needs of the country, ample growth prospects, well within a high safety net, huge reserve, highly comfortable in servicing its debt, on a path of massive expansion whose profits are yet to be roped in, highly ambitious and as per my view highly safe stock. Once its expansions are complete, profits flow will be immense and the stock will realize its true value. Patience will be rewarded because sooner or later value always gets realized.

The stock had very recently been battered to almost Rs. 25 per share and had even reached a recent high of Rs. 63.30. Currently it is traded at Rs. 51.5. Even at this price, it seems very attractive. If it goes down beyond this point, it is just going to get more attractive. So take your calls accordingly.

Happy Value Investing,

Purvi P. Shah