Angel Broking recommends Accumulate on Prakash Industries with a Target Price of Rs 41 (12 months)

During 3QFY2014, Prakash Industries (PIL) reported a 61.7% yoy improvement in net profit due to higher volumes. We recommend an Accumulate rating on the stock.

Higher volumes boost top-line growth: For 3QFY2014, PIL's net sales increased by 10.8% yoy to Rs. 671cr, mainly on account of higher volumes which although were partially offset by lower realizations. Sales volumes of basic steel increased by 182.9% yoy to 42,584 tonnes. The average realizations of Silico manganese, Wire rods and structural steel segment declined by 3.7%, 5.5% and 5.1% yoy respectively.

EBITDA growth in-line with increase in sales: Raw material costs decreased to 70.2% of sales compared to 71.8% in 3QFY2013; however, staff costs rose by 26.3% yoy to Rs. 32cr which resulted in EBITDA increasing by only 24.8% yoy to Rs. 81cr. The interest expenses were flat yoy at Rs. 15cr in 3QFY2014 while depreciation expenses increased by 8.0% yoy to Rs. 30cr. The net profit increased by 61.7% yoy to Rs. 35cr in 3QFY2014.

Outlook and valuation: PIL has slowed down its power expansion plans; nevertheless, we expect PIL's EBITDA to witness a modest growth beginning FY2015 once the benefits of increased capacities of steel commence meaningful production. Although its power capacity expansion is on hold, we believe the current price levels discount it. Moreover, PIL is currently trading at an inexpensive valuations of 3.7x and 3.1x FY2014E and FY2015E EV/EBITDA, respectively. Hence, we recommend an Accumulate rating on the stock with a SOTP-based target price of Rs. 41, valuing its core steel business at 2.5x FY2015 EV/EBITDA and FY2013 CWIP at 0.4x book value.

Source : Equity Bulls

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