Buy Prakash Industries - Time to iron out integration issues - Elara Capital

• Prakash Industries
• Rating : Buy
• Target Price : INR245
• Upside : 41%
• CMP : INR174 (as on 6 August 2010)

Time to iron out integration issues

Volume rises, realization too

Prakash Industries (PKI) reported a revenue growth of 27% YoY on the back of higher steel sales volumes (up 25% YoY) and better realisation. The EBITDA for the quarter increased 30% YoY and 1.7% QoQ due to higher revenues despite a hike in the cost of production. The EBITDA margins during the quarter, however, declined to 20.0% from 21.8% in Q1FY10 and 21.3% in Q4FY10. The adjusted PAT for the quarter increased 18.7% YoY to INR704mn thanks to higher EBITDA and lower interest expenses. The company has repaid the entire loan on its balance sheet, and is completely debt free now.

Highlights of the quarter

- Wire rod sales during the quarter stood at 114,000 tonnes and the realisation for the same stood at INR 28,100/tonne as compared to INR 29,500/tonne in March 2010 quarter.

- PKI sold 10,000 tonnes of structurals during the quarter and the realisation for the same was INR 28,140/tonne.

- The management has indicated that the Sirkagattu iron ore mine is likely to start by December 2010 while the Kawardha mine is expected to start by FY12. Once operational, these mines will reduce the sponge iron cost of production by ~46%, improving the EBITDA margins of the company.

Iron ore integration delayed, but others on track: Maintain Buy

We have factored in the delays in the iron ore integration for the company. However, other projects (steel and power expansion) remain on track. First of the 125MW is expected to be commissioned progressively from November 2010. We value PKI on sum of parts basis and continue to maintain our BUY recommendation on the stock with a target price of INR245.

Source : Equity Bulls

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