Elara Capital's Take on : Prakash Industries indulging in illegal coal mining

• Sector: Metals
• Prakash Industries
• Bloomberg Code: PKI IN
• CMP: INR 156
• Market Cap: USD 507mn

News item detailing the illegal mining from the Chotia coal mine of Prakash Indsutries.

- A mainline newspaper yesterday reported that Prakash Industries Limited (PKI) has indulged in illegal mining of coal. The newspaper has alleged that the company has mined in excess of its approved licenses and sold the excess quantity in open market accepting black money.

- The issue has been raised in the state legislative assembly by the opposition leader Mr. Mohammad Akbar.

- The company has clarified that it is not indulging in any such activities and in fact is buying coal from outside for its expanded sponge iron capacity.

Our take

The news certainly is a dampener for the stock. Apart from Chotia mine, the company also has applied for Madanpur and Fatehpur coal blocks (with reserves of ~50mn tonnes each) which are at approval stage right now. The coal from these new mines was to be used for the expansion in the steel business as well as merchant power.

Considering the current happenings in the mining sector and the problems being faced for opening new mines, we believe, the approval process for these mines will be prolonged than expected. Similarly, the iron ore mining as well has been delayed for more than a year now and the clarity for the same remains bleak. As the broader story of PKI is based on iron ore as well as coal integration, we believe, the expansion in EBITDA margin and thereby in absolute EBITDA will be delayed.

Although, the stock is available at cheap valuations, we believe, the current news flows will act as a negative sentiment for the stock in the near term. We keep the target price as well as recommendation "Under review" and await further clarity from the management.

Source : Equity Bulls

Keywords