Reiterate Buy on Prakash Industries - Motilal Oswal

PRAKASH INDUSTRIES: Clarifies utilization of captive coal; Mainly used for sponge iron and power generation

- We attended conference call of Prakash Industries (PKI IN, Mkt Cap US$525m, CMP Rs163, Buy) to clarify doubts created by a newspaper article on CBI enquiry and utilization of captive coal.

- The management clarified that the company has produced 2.44m tons of coal from Chotia mine till FY09. Of this, it has utilized 1.27m tons for production of sponge iron, and the remaining washed RoM and middlings were used for power generation.

- As per the letter issued by Coal Controller to the Under Secretary of Ministry of Mines dated 8th October 2009, the records of coal production and dispatches (and for extraction of coal, its quantity, grade and usage) were verified by the Coal Controller, Government of India. Following are the details of the same.

- The management has also clarified that the Chotia coal block does not fall in the "No-Go" zone (of Hasdeo Arand region) declared by the Ministry of Environment and Forests. PKI has been allocated the block for its sponge iron capacity by Ministry of Coal in 2003. The extraction of coal started after obtaining all necessary approvals from Central and State Governments.

- We continue to believe that the company has strong growth prospects with its planned modular capacity expansion in steel and power. Its expansion plans in both steel and power remain on track although it has faced delays in the starting of iron ore mine in the recent past. Steel capacity has been increased to 0.7mtpa and expected to reach 1mtpa by December 2011. First unit of phase I (5*25MW) of 625MW is expected to get commissioned by January 2011. The entire 125MW is expected to start power generation from 1QFY12. We expect 550m units (~70MW) of power to be available for merchant sale in FY12.

- Over FY10-12, we expect EBITDA to grow at 37% CAGR to Rs6.6b. Company has repaid its remaining debt on balance sheet in July 2010; thus Prakash is a debt-free company (excl US$110m FCCB), with steel capacity set to increase by 43% in next 18 months and power generation capacity to increase by 200% (to 338MW). We expect steel volumes to grow at a CAGR of 10% over FY10-14, and margins should get boosted because of higher production of sponge iron.

- The stock trades at a PE of 9x FY11E and 5.5x FY12E, and EV/EBITDA of 6.4x FY11E and 4.2x FY12E. We reiterate Buy.

Source : Equity Bulls

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