Buy Prakash Industries - Seeking a mine of growth - Elara Capital

• Rating : Buy
• Target Price : INR200
• Upside : 43%
• CMP : INR141 (as on 12 November 2010)

Seeking a mine of growth

Higher input prices sustain pressure on margin

Prakash Industries (PKI) reported a revenue growth of 11.5% YoY on the back of higher volume sales and better realizations. However, EBITDA during the quarter was flat due to the severe raw material cost pressures. EBITDA margins for the quarter declined to 21.4% in Q2FY11 compared to 23.9% in Q2FY10. The cost of iron ore sourced from external mines increased ~40% YoY during the quarter which was partly mitigated by a higher captive consumption of sponge iron. The net profit for the quarter improved 3.5% YoY despite a flat EBITDA largely due to lower interest expenses.

Highlights of the quarter

- PKI recorded ~111,000 wire rod sales during the quarter registering a growth of 9.4% YoY
- Wire rod realizations during the quarter improved 0.3% YoY to ~INR 27,350/tonne.
- Having repaid entire loans, PKI was a net cash company as of September 2010. The cash and equivalents of PKI stood at INR 15bn.

Valuation and recommendation

We expect margins for PKI to continue to be under pressure as the iron ore mining is facing consistent delays. Although, PKI management has guided for the start of the Orissa mine (~0.5mn tonnes annual mining capacity), we have factored in much lower integration benefits in FY11 as well as FY12. The merchant power project (625MW) remains on track and the first phase of 125MW is likely to commission in Q4FY11. However, considering the delays in the start of iron ore mining, we have reduced our estimates and accordingly lowered the target price to INR 200/share while we reiterate our 'Buy' rating.

Source : Equity Bulls

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