Prakash Industries. Steel & power play. Coal. Coal. Coal 625MW. Iron-ore. Initiating Coverage

Transcription

1 Initiating Coverage SECTOR: METALS Prakash Industries Coal Coal Coal 625MW Iron-ore Steel & power play Sanjay Jain Tushar Chaudhari

2 Contents Page No. Rs33b capex over five years Minerals: A strong base for growth Leverage to remain low due to staggered capex... 8 Prakash Industries: An integrated steel producer Robust business model, attractive valuations Financials and valuation

3 Base Report SECTOR: METALS Prakash Industries STOCK INFO. BSE Sensex: 17,540 BLOOMBERG PKI IN Buy S&P CNX: 5,245 REUTERS CODE PRKI.BO Initiating Coverage Rs220 Y/E MARCH E 2011E 2012E Net Sales (Rs m) 15,265 15,666 16,826 21,422 EBITDA (Rs m) 2,976 3,654 4,709 7,945 PAT (Rs m) 2,041 2,682 3,203 5,639 EPS (Rs) EPS Growth (%) BV/Share (Rs) P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) RoE (%) RoCE (%) RoIC Rs33b capex over five years: The company will spend Rs33b over five years to nearly double its crude steel production, expand its sponge iron capacity to capitalize on iron ore integration and put up a 625MW power plant. Increasing integration for insulation from input price risks: The company's steel making capacity will increase from 550,000tpa to 1mtpa by March 2012 and its sponge iron capacity will increase from 400,000tpa to 1mtpa. Consequently, its dependence on the purchase of raw material will fall. 625MW power plant to generate surplus power from FY12: The first unit of a 125MW unit of the planned 625MW project was ordered in CY09 and is expected to be commissioned by FY11. Thus, the power capacity will rise to 237MW. The company's surplus power will be available for merchant sale. KEY FINANCIALS Shares Outstanding (m) Market Cap. (Rs b) 30.5 Market Cap. (US$ b) 0.6 Past 3 yrs Sales Growth (%) 24.1 Past 3 yrs NP Growth (%) 42.0 Dividend Payout (%) - Dividend Yield (%) - Minerals - a strong base to build growth: Captive mines have reserves of 150m tons of coal and 85m tons of iron ore. Prakash Industries is extracting nearly 1mtpa of coal from the Chotia mine to feed its 100MW CPP and sponge iron kilns. The Madanpur coal block and Kawardha iron ore mines are expected to start production in mid subject to getting statutory clearances. Valuations attractive, Buy: Over FY09-12, we expect EBITDA to grow at 39% CAGR to Rs7.9b due to raw material integration. We expect PAT growth of 40% CAGR to Rs5.6b. The stock trades at a PE of 5.4x FY12E. Valuations are attractive and the business model is robust and our target price is Rs285 (30% upside) based on 5.5x FY12E EV/EBITDA. We initiate coverage with a Buy recommendation. STOCK DATA 52-W High/Low Range (Rs) 232/35 Major Shareholders (as of September 2009) (%) Promoters 54.6 Domestic Institutions 2.8 Foreign 11.8 Public/Others 31.0 STOCK PERFORMANCE V/S NIFTY (1 YEAR) Prakash Inds Sensex - Rebased Average Daily Turnover Volume ('000 shares) Value (Rs million) /6/12 Month Rel. Performance (%) 40/64/223 1/6/12 Month Abs. Performance (%) 44/93/ Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

4 Rs33b capex over five years PIL's Rs33b capex will launch it on a strong earnings growth path Founded in 1980, Prakash Industries (PIL), began operations by making PVC pipes. Since then, it has come a long way: In the early 1990s, it entered the steel business with funding from an initial public offer. Strong steel cycles and captive coal mining helped PIL to repay its debts and with a strong balance sheet and cash flows, PIL plans capex of Rs33b over five years to add significant power, sponge iron and steel capacities. PIL will generate significant earnings from the sale of surplus power from captive power capacities. Captive iron ore and coal mines will insulate the company from input price rises. Therefore, we believe the Rs33b capex will launch PIL on a strong earnings growth path. GROWTH PATH Started with PVC business Heavy steel structure mill Chotia coal mine allotted Iron ore mines allotted Deleveraging with US$50m FCCB Rs33b capex spread over for 625MW CPP and doubling of steel capacity to 1mtpa PAT (RS B) IPO and listing Debt trap and restructuring Chotia mine started, second coal block allotted Third coal block allotted Expect start of iron ore mine Sale of surplus power -5 Source: MOSL PIL will increase its sponge iron capacity to 1mtpa by March 2012, giving it volume growth of ~25% CAGR over FY10-13 Increasing integration to insulate from input price rises PIL produces steel through the induction furnace process, in which sponge iron and steel scrap or pig iron is used as input. With a steel making capacity of 550,000tpa, its sponge iron capacity of 400,000tpa meets only 50-60% of its metallic requirement. Since its captive iron ore mine at Kawardha is expected to start production in 2010, PIL will increase its sponge iron capacity to 1mtpa by March 2012, giving it volume growth of ~25% CAGR over FY PIL will also increase metallic integration to meet its sponge iron requirement from its own production. Complete integration will boost margins and insulate it from input price rises. 4

5 SPONGE IRON PRODUCTION TO GROW FASTER 800 DRI production Crude Steel production ('000 TONS) FY08 FY09 FY10E FY11E FY12E FY13E FY14E Source: MOSL Investment needed for steel expansion will be Rs8b, which will be funded through internal accruals PIL will also increase its steel making capacity to 1mtpa by FY12, which will grow at a 22% CAGR. Total investment needed for steel expansion will be Rs8b, which will be funded through internal accruals. After commissioning its third sponge iron kiln (of 200ktpa) by 4QFY10, metallic capacity will be 0.6mtpa. With DRI and steel making capacity increasing steadily over FY10-13, we expect PIL to end its exposure to external inputs, capturing the entire value chain. PIL will set up a 625MW thermal power plant in Chhattisgarh to be selfsufficient in power and generate a steady source of income from the sale of surplus power Surplus power expected from FY12 In 4QFY08, PIL entered into a memorandum of understanding (MoU) with the Chhattisgarh government to set up and operate a 625MW thermal power plant with an investment of Rs24b. The rationale behind investing in this power project was to be self-sufficient in power and generate a steady source of income from the sale of surplus power. The project will be set up in phases over 3-4 years. The foundation has been laid for the first unit and PIL ordered turbines and boilers in 2QFY09. The first phase of a 125MW unit is expected to be commissioned in December 2010, raising total capacity to 237MW. We expect PIL to sell excess power from FY12 and expect revenue to grow significantly. We expect revenue from power to contribute 24% to the top line by FY14. POWER AVAILABLE FOR MERCHANT SELLING (MW) Captive Requirement Pow er Generation FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E Source: MOSL 5

6 Minerals: A strong base for growth PIL's steel making facilities are located at Champa, in the mineral rich state of Chhattisgarh. With the objective of becoming an integrated steel player, PIL started working towards getting captive mine allocation in It has been allotted three coal mining blocks and two iron ore mines. Captive mines have reserves of 150mt of coal and 85mt of iron ore. PIL: OPERATES IN THE MINERAL RICH STATE OF CHHATTISGARH Chotia Est. 50mt reserves Superior quality B-grade coal Producing coal since FY07 Capacity 1mtpa ~130km from Champa Kawardha Est. 75mt reserves High grade ore 66-67% Fe content Ops start by May 2010 ~150km from Champa Champa 0.4mtpa DRI plant 0.55mtpa steel plant 100MW CPP 48ktpa ferro alloys division Madanpur Est. 50mt reserves C&D grade coal Prod to start from June 2010 Capacity 1mtpa ~100km from Champa Fatehpur Est. 46mt reserves E & F grade coal Raigarh Prod to start from March 2012 Allocated for power project Raipur 0.45mtpa wire rod mill 0.3mtpa structural mill ~185km from Champa INDIA CHHATTISGARH 150m tons of coal reserves PIL meets its coal requirement for power generation and sponge iron units through coal produced from its captive mine at Chotia (130km away from the plant). The coal is of superior, B grade quality. The mine has been operational since FY07 and has capacity of 1mtpa. The use of captive coal reduces production costs of sponge iron and insulates PIL from market volatility. 6

7 SELF SUFFICIENT IN COAL SINCE FY07 ('000 TONS) Captive coal produced Coal requirement ,011 1, FY07 FY08 FY09 FY10E PIL was allotted two coal mines in Madanpur North (in Chhattisgarh, 100km from its plant) and Fatehpur (Chhattisgarh). Allotted along with six joint venture partners, the coal from Madanpur North is of C&D grade. Coal production is expected to start by May 2010, contingent on its getting forest and environment clearances. The Chhattisgarh government allotted Fatehpur mine jointly to two partners for PIL's proposed 625MW power plant. The coal is more suited to power generation (E&F grade). Significant savings expected due to iron ore integration Iron ore production expected in 2010 PIL was allotted iron ore mines in Kawardha (Chattisgarh) and Sirkagattu (Orissa). The Kawardha mine has reserves of ~75mt of iron ore with rich 66-67% Fe grade. The mine is ~150km away from its plant, (near Raipur). Production from this mine is expected to start from June Captive iron ore mining is expected to meet up to 50% of its requirement in FY11, and when the Sirkagattu mine starts production in FY12, PIL will be able to achieve 100% integration. With its captive iron-ore production kicking in, the cost of steel production is expected to fall further, boosting margins. The landed per ton cost of iron ore is expected to fall by Rs1,500-2,000 (depending on the market price at the time), which will result in higher margins. OPERATING COST STRUCTURE FOR SPONGE IRON (RS PER TON) CONSUMP- LANDED COST OPERATING COST FOR A TON % SAVINGS TION (RS/TON) OF SPONGE IRON (RS) FOR RATE PURCHASE CAPTIVE PURCHASE CAPTIVE PIL Iron ore 1.7 4,500 2,000 7,650 3, Coal 1.3 2, ,250 1,024 0 Other Overheads 1,550 1,550 0 Total Costs 12,450 5, With its plant's proximity to raw material deposits and a captive power plant, PIL will remain insulated from rising raw material prices in future. Well planned capacity expansion Well equipped with basic infrastructure at Champa PIL's steel manufacturing facilities at Champa are equipped with basic infrastructure like land and water, for a large steel plant. PIL has ~632 acres of land, where the capacity addition program is planned. The Husdeo River flows on the west of the plant. 7

8 Leverage to remain low due to staggered capex Modular capacity addition will keep the balance sheet healthy PIL is adding induction furnaces of 0.45mtpa, backed by four sponge iron units of 0.2mtpa each. The capacity addition is planned in such a way that it will be able to execute it with internal accruals and modest debt. The 0.2mtpa DRI unit will be ready for commercial production by 4QFY10. The first unit of 125MW will be commissioned in 4QFY11 and from FY12 PIL will be able to sell the excess power generated. CAPACITIES AND GROWTH PLAN PRODUCT UNIT EXISTING PROJECT POST INVESTMENT STATUS EXPANSION (RS M) Raipur Structure mill/ TMT ktpa Fully operational Wire Rod ktpa Fully operational Champa Sponge Iron ktpa ,200 5, ; ; Steel ktpa ,000 1, ; Ferro Alloys ktpa Fully operational Power MW MW , ; WHRS, ; 625MW ; coal based ; Investment for this capacity addition will be Rs33b, which will be largely funded from internal cash flows because the project has a modular structure. Thus, PIL's steel making capacity will rise to 1mtpa by the end of FY12 with modest debt on its books. This augurs well for the company compared with its peers, which have far higher leverage ratios. PIL has the lowest debt and the highest gross block among peers Peer comparison of leverage levels Among similar sized steel producing peers, PIL has the lowest debt (Rs2.6b in FY09) and highest gross block (Rs13.1b after adjusting revaluation, done in FY05). It repaid Rs800m of debt in YTDFY10. With captive coal and iron ore mines in its portfolio, PIL is best placed to weather a storm during its capacity expansion program. PEER COMPARISON OF DEBT V/S GROSS BLOCK 13.1 Gross Block (Rs b) Debt (Rs b) Prakash Godaw ari Monnet Jai Balaji Adhunik 8

9 Prakash Industries: An integrated steel producer PIL has emerged as an integrated steel producer with steel making capacity of 0.55mtpa, backed by 0.4mtpa sponge iron units and 100MW of captive power Prakash Industries (PIL), promoted by BD Agarwal, floated an initial public offer in 1991 to part-finance its first sponge iron unit of 0.2mtpa. Since then, keeping its focus on backward integration and technology, PIL has emerged as an integrated steel producer with steel making capacity of 0.55mtpa, backed by 0.4mtpa sponge iron units and 100MW of captive power. Most of the crude steel produced is converted into value added products like structural/tmt and wire rods, with a capacity of 0.3mtpa and 0.45mtpa respectively. Its steel making operations are at Champa, in the mineral rich state of Chhattisgarh. Milestones 1980 Incorporated as Prakash Pipes & Industries at Hissar (Haryana) 1984 Started manufacturing PVC window profiles, used in building construction 1987 Second unit of PVC pipes and fittings set up at Kashipur (Uttranchal) 1991 Initial public offering (IPO) and third PVC pipe unit at Rayya (Punjab) 1993 Started steel business with a 0.2mtpa sponge iron unit at Champa (Chhattisgarh) 1995 Forward integrated with a medium and heavy structural steel rolling mill at Raipur (Chhattisgarh) 1997 Doubled capacity of sponge iron to 0.4mtpa Debt trap 2003 Chotia coal mine allotted 2005 Set up a wire rod rolling mill at Raipur 2006 Coal production started from Chotia; second coal block allotted 2007 Kawardha and Sirkaguttu iron ore mines allotted 2008 Fatehpur coal block allotted for 625MW power plant 2009 US$50m FCCB for deleveraging 2010 Third sponge iron kiln, 0.15mtpa of steel & 12MW of captive power 2011 Captive power capacity to increase by 125MW to 237MW; steel expansion by 0.15mtpa to 0.7mtpa At present, PIL's power consumption is higher than its captive generation of 100MW PIL was among the first companies in India to set up a waste heat recovery boiler (WHRB) in the main process line of its sponge iron plant. Power is generated from the steam produced from the WHRB; which in turn is used to run the sponge iron plant. At present, PIL generates 25MW power from waste heat. PIL also has a ferro-alloy unit with a capacity of 48,000tpa. It meets its own raw material requirements and has long term contracts with other steel majors. At present, PIL's power consumption is higher than its captive generation of 100MW (25MW WHRB + 75MW coal based). Once the first unit of its 625MW (5x125MW) power project is commissioned in FY11, PIL will be self-sufficient in power. To increase integration, PIL is expanding its sponge iron capacity and developing its allotted iron ore mines Since PIL has to buy nearly 48% of its metallic requirement in the form of steel scrap and billets, it is susceptible to volatility in raw material prices. To increase the integration, PIL is expanding its sponge iron capacity and investing in the development of its allotted iron ore mines. 9

10 PROCESS FLOW CHART REVENUE COMPOSITION Ferro Alloys 9% Wire rods 45% FY09: Revenue Composition Others 6% Steel Billets 14% Structurals 26% Others (inc Pow er) 18% Ferro Alloys 8% Wire rods 41% FY12E: Revenue Composition Steel Billets 15% Structurals 18% PHASED POWER CAPACITY EXPANSION (MW) Coal WHRS FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E 10

11 Robust business model, attractive valuations PIL's earnings will be driven by margin expansion due to the start of its iron ore mines, expansion of sponge iron capacity and top line growth on account of volume growth in the steel business and sale of surplus power from its 625MW over five years. Steel production is expected to grow 18% CAGR to 750,000tons over FY09-13 and sponge iron production is expected to grow 28% CAGR. PIL has to buy nearly 48% of its metallic requirement in the form of steel scrap and billets, which will come down to 5-10% as sponge iron production ramps up. PRODUCTION TREND OVER FY10-14E 1,000 Sponge Iron Steel Billets Pow er (MW - RHS) Steel production to grow at 15% CAGR and power at 44% over FY09-12 '000 tonnes FY08 FY09 FY10E FY11E FY12E FY13E FY14E 0 RAW MATERIAL COST ASSUMPTION AND SAVINGS EXPECTED DUE TO INTEGRATION (RS/ TON) FY10E FY11E FY12E FY13E FY14E Iron ore 5,500 4,750 3,250 2,500 2,500 Coal Iron ore requirement ('000 tons) ,079 1,349 Captive Iron ore assumed ('000 tons) ,079 1,349 Incremental savings (Rs m) , PIL will have EPS of 32% CAGR over FY09-12 Over FY09-12, we expect net sales to grow 12% CAGR to Rs21.4b and EBITDA at 39% CAGR to Rs7.9b. The strong EBITDA growth will be because of margin expansion from 19.5% to 37.1% due to raw material integration and sale of power. We expect PIL's PAT to grow at 40% CAGR to Rs5.6b over FY Equity capital of Rs1.15b (as on 31 March 2009) will expand to Rs1.39b on conversion of FCCB (US$50m) and warrants (10m) priced at Rs170 and Rs81 respectively. The stock trades at a PE of 5.4x FY12E. Valuations seem attractive and the business model is robust. We initiate coverage with a Buy rating, and a target price of Rs285 (30% upside) based on 5.5x FY12E EV/EBITDA. 11

12 EBITDA MARGINS SET TO IMPROVE Net Sales (Rs b) EBITDA Margin (%) FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E VALUATIONS: INDIAN COMPANIES RATING PRICE MKT CAP EPS (INR) PE (X) EV/EBITDA (X) P/B (X) (INR) (US$ M) FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 STEEL JSW Steel Buy 1,148 4, JSPL Buy , Tata Steel Neutral , Sesa Goa Buy 412 7, SAIL Sell , NON FERROUS Sterlite Inds. Buy , Hindustan Zinc Buy 1,230 11, Nalco Sell 475 6, Hindalco Sell 171 7, MID CAPS Monnet Ispat Buy Godawari Buy Sarda Energy Neutral Tata Sponge Buy N.A N.A N.A N.A. Adhunik Metaliks Buy Bhushan Steel Buy 1,509 1, Jai Balaji Buy Prakash Industries Buy Source: MOSL 12

13 Financials and valuation INCOME STATEMENT (CONSOLIDATED) (RS MILLION) Y/E MARCH E 2011E 2012E Net Sales 9,329 12,534 15,265 15,666 16,826 21,422 Change (%) Total Expenses 7,343 9,688 12,289 12,011 12,117 13,477 Margins to expand in FY12 due to surplus power and iron ore production EBITDA 1,987 2,845 2,976 3,654 4,709 7,945 % of Net Sales Depn. & Amortization ,079 EBIT 1,527 2,369 2,552 3,191 3,942 6,866 Net Interest Other Income PBT before EO 1,528 1,992 2,048 3,047 3,859 6,794 EO Income PBT after EO 1,340 2,081 1,980 3,047 3,859 6,794 Tax ,155 Rate (%) Reported PAT 1,141 2,077 1,974 2,682 3,203 5,639 Adjusted PAT 1,300 1,987 2,041 2,682 3,203 5,639 Change (%) BALANCE SHEET (RS MILLION) Equity dilution via FCCB and warrants conversion in FY10-11 Y/E MARCH E 2011E 2012E Share Capital 1,081 1,155 1,155 1,255 1,387 1,387 Reserves 5,607 7,943 9,137 12,528 17,362 22,434 Share Holders Funds 6,687 9,098 10,291 13,783 18,749 23,821 Loans 4,972 3,631 2,593 2,593 3,593 4,593 Defferred tax Liability (net) Capital Employed 10,878 12,729 13,587 17,079 23,045 29,116 Gross Block 13,415 13,836 15,242 16,434 22,959 29,984 Less: Accum. Deprn. 5,499 6,067 6,370 6,833 7,599 8,678 Net Fixed Assets 7,916 7,769 8,872 9,601 15,360 21,306 Capital WIP 495 1,760 2,413 4,613 4,613 4,613 Investments Curr. Assets 2,796 4,186 4,153 4,439 4,726 5,166 Inventories Sundry Debtors 929 1,148 1,085 1,502 1,613 2,054 Cash and Bank Loans and Advances 836 1,207 1,935 1,935 1,935 1,935 Curr. Liability & Prov ,194 2,064 1,788 1,867 2,182 Sundry Creditors 493 1,111 1,349 1,073 1,152 1,467 Other Liabilities & prov Net Current Assets 2,234 2,992 2,089 2,651 2,859 2,984 Application of Funds 10,878 12,729 13,587 17,079 23,045 29,116 E: MOSL Estimates 13

14 Financials and valuation RATIOS No history of dividends FY12 valuations attractive Track record of high RoIC Y/E MARCH E 2011E 2012E Basic (Rs) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) EBITDA Margins Net Profit Margins RoE RoCE RoIC Working Capital Ratios Fixed Asset Turnover (x) Asset Turnover (x) Debtor (Days) Inventory (Days) Creditors (Days) Low leverage Growth (%) Sales EBITDA PAT Leverage Ratio (x) Current Ratio Debt/Equity CASHFLOW STATEMENT (RS MILLION) Healthy operating cash flows Y/E MARCH E 2011E 2012E Pre-tax profit 1,340 2,081 1,980 3,047 3,859 6,794 Depreciation ,079 (Inc)/Dec in Wkg. Cap Tax paid ,155 Other operating activities -3 1, CF from Op. Activity 1,798 3,705 2,586 2,757 3,899 6,441 (Inc)/Dec in FA + CWIP ,686-2,058-3,393-6,525-7,025 (Pur)/Sale of Investments CF from Inv. Activity ,687-2,080-3,393-6,525-7,025 Equity Raised/(Repaid) ,250 Debt Raised/(Repaid) -1,068-1,341-1,038 1,000 1,000 Dividend (incl. tax) CF from Fin. Activity -1,079-1,267-1, , (Inc)/Dec in Cash Add: opening Balance Closing Balance E: MOSL Estimates 14

15 NOTES 15

16 For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) Fax: (91-22) Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Prakash Industries 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.