1QFY2014 Result Update | Steel

August 12, 2013

Prakash Industries
Performance highlights
Quarterly Highlights (Standalone)
Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit
Source: Company, Angel Research

BUY
CMP Target Price
Investment Period
1QFY13 672 98 14.6 60 yoy (%) (4.7) (9.4) (72)bp (28.3) 4QFY13 602 80 13.3 39 qoq (%) 6.3 11.0 58bp 10.7

`29 `37
12 months

1QFY14 640 89 13.9 43

Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Steel 389 773 1.1 63/24 62,611 10 18,789 5,566 PRKI.BO PKI@IN

During 1QFY2014, Prakash Industries (PIL) reported a 28.3% yoy decline in net profit; however, given cheap valuations we recommend a Buy rating on the stock. Lower realization dents top-line: For 1QFY2014, PILs net sales declined by 4.7% yoy to `640cr, mainly on account of lower realizations which although were partially offset by higher volumes. Sales volumes of structural steel/TMT and Silico Manganese increased by 28.9% and 44.0% yoy to 54,135 tonne and 11,274/tonne, respectively. The average realizations of structural steel, basic steel and wire rods segment declined by 13.7%, 14.7% and 14.8% yoy, respectively. Higher staff costs dent EBITDA margin: Staff costs increased by 24.9% to `30cr and therefore the EBITDA margin slipped by 72bp yoy to 13.9%; the EBITDA decreased by 9.4% yoy to `89cr. Interest expenses increased 10.4% yoy to `14cr. Depreciation expenses also increased by 11.5% yoy to `28cr. Hence, the net profit decreased by 28.3% yoy to `43cr in 1QFY2014. Outlook and valuation: PIL has slowed down its power expansion plans; Nevertheless, we expect PILs EBITDA to witness a modest growth beginning FY2015 once the benefits of increased capacities of sponge iron and power commence meaningful production. Moreover, PIL is currently trading at inexpensive valuations of 2.7x and 2.3x FY2014E and FY2015E EV/EBITDA, respectively. On P/BV basis, it is trading at 0.2x and 0.2x FY2014E and FY2015E, respectively. Hence, we recommend a Buy rating on the stock with a target price of `37, valuing the stock at 2.5x FY2015E EV/EBITDA. Key financials (Standalone)
Y/E March (` cr) Net sales % chg Adj. net profit % chg EPS (`) EBITDA margin (%) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
FY2012 2,107 26.6 268 0.4 18.4 17.4 1.6 0.2 14.6 10.7 0.6 3.3 FY2013E 2,511 19.2 165 (38.5) 11.3 13.0 2.6 0.2 8.1 7.3 0.4 3.4 FY2014E 2,486 (1.0) 200 21.3 13.7 15.2 2.1 0.2 9.1 8.3 0.4 2.7 FY2015E 2,637 6.1 207 3.5 14.2 15.0 2.0 0.2 8.7 8.2 0.3 2.3

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.5 3.8 2.6 47.2

Abs. (%) Sensex Prakash Ind.

3m (6.0)

1yr 6.8

3yr 3.6

(24.3) (52.3) (83.4)

Bhavesh Chauhan
Tel: 022- 3935 7800 Ext: 6821 bhaveshu.chauhan@angelbroking.com

Vinay Rachh
Tel: 022- 39357600 Ext: 6841 vinay.rachh@angelbroking.com

Source: Company, Angel Research: Note: CMP as of August 8, 2013

Please refer to important disclosures at the end of this report

Prakash Industries | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 performance (Standalone)

(` cr) Net sales Raw material % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM(%) Other operating income EBIDTA EBITDA margins (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Adj. Net income % of net sales EPS (`)
Source: Company, Angel Research

1QFY14 640 437 68.3 30 4.6 84 13.2 551 86.1 89 13.9 0 89 13.9 14 28 0 47 7.4 4.1 8.6 43 6.7 2.9

1QFY13 672 460 68.4 24 3.5 91 13.5 574 85.4 98 14.6 0 98 14.6 13 25 0 61 9.0 1 1.0 60 8.9 4.1

yoy % (4.7) (4.8) 24.9 (6.9) (3.9) (9.4)

4QFY13 602 399 66.2 37 6.1 87 14.4 522 86.7 80 13.3 0

qoq % 6.3 9.7 (19.3) (2.6) 5.6 11.0

FY2013 2,511 1,737 69.2 111 4.4 337 13.4 2,185 87.0 326 13.0 0

FY2012 2,107 1,394 66.1 89 4.2 258 12.3 1,741 82.6 366 17.4 0 366 17.4 14 78 2 276 13.1 8 2.9 276 13.1 19.9

yoy % 19.2 24.6 24.1 30.4 25.5 (10.8)

(9.4) 10.4 11.5 (4.7) (22.3) 565.6 (28.3) (28.3)

80 13.3 15 27 1 39 6.5 0 0.6 39 6.5 2.7

11.0 (4.1) 2.9 (61.0) 20.4 1,524.0 10.7 10.7

326 13.0 55 106 2 167 6.6 2 1.3 167 6.6 12.3

(10.8) 299.2 35.9 0.0 (39.5) (73.4) (39.5) (38.5)

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Result highlights
Lower realization dents top-line
For 1QFY2014, PILs net sales declined by 4.7% yoy to `640cr mainly on account of lower realizations which although were partially offset by higher volumes. Sales volumes of structural steel/TMT and Silico Manganese increased by 28.9% and 44.0% yoy to 54,135/tonne and 11,274/tonne, respectively. The average realizations of structural steel, basic steel and wire rods segment declined by 13.7%, 14.7% and 14.8% yoy, respectively.

Exhibit 2: Production volumes

(tonnes) Sponge iron Basic steel Structural steel Wire rod Ferro alloy Power (mn units)
4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014 123,595 138,271 33,198 80,985 10,733 224 137,859 143,993 42,545 95,486 10,481 232 134,978 151,290 42,210 96,737 10,561 213 147,406 152,628 51,044 89,654 10,652 213 154,252 144,891 57,257 91,482 11,440 199 141,691 154,631 53,705 105,477 14,811 236

Source: Company, Angel Research

Exhibit 3: Sales volumes

(tonnes) 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014 31,665 32,380 80,980 8,457 13,180 42,002 94,515 7,830 20,326 40,672 94,848 7,488 15,055 49,250 88,983 7,818 872 55,749 90,580 16,864 2,918 54,135 103,532 11,274

Basic steel Structural steel Wire Rod Silico Manganese

Source: Company, Angel Research

Exhibit 4: Gross realisation

(tonnes) Basic steel Structural steel Wire Rod Silico Manganese

4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014 35,296 41,086 40,369 54,047 36,859 42,619 42,943 61,545 34,635 38,557 40,409 67,121 32,547 38,146 38,513 61,077 35,206 37,769 37,827 30,319 31,426 36,764 36,604 58,595

Source: Company, Angel Research

Higher staff costs dent EBITDA margin

Staff costs increased by 24.9% to `30cr and therefore the EBITDA margin slipped by 72bp yoy to 13.9%; the EBITDA decreased by 9.4% yoy to `89cr. Interest expenses increased 10.4% yoy to `14cr and depreciation expenses also increased by 11.5% yoy to `28cr. Hence, the net profit decreased by 28.3% yoy to `43cr in 1QFY2014.

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Exhibit 5: EBITDA margin trend

120 100 80 77 91 107 98 83 65 80 89 20 18 16 14 12 10 8 6 4 2 0

Exhibit 6: Net profit trend

80 70 60 50
( ` cr)

76 66 55 60 45 39 21 43

15

10
(%)

( ` cr)

60 40 20 0

(%)

40 30 20 10 0
2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

0
4QFY13 1QFY14

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

EBITDA (LHS)

EBITDA margin (RHS)

Adj. Net profit (LHS)

Net profit margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Investment rationale

Expanding steel capacity to address imbalance and enhance integration levels: Currently, PIL sources ~30% of its sponge iron requirement from third parties. In its bid to reduce this dependence on external parties, PIL is expanding its sponge iron capacity from 0.8mn tonne to 1.0mn tonne, the benefits of which will be realized in FY2015.

Captive iron ore production to aid margin growth: During 2QFY2011, PIL had received the mining plan approval for its Sirkaguttu iron ore mine in Odisha. The company will steadily move towards a fully integrated business model with the grant of new iron ore and coal mines along with the existing Chotia coal mine, thus improving its margin drastically. However, given the slow-moving regulatory procedures, we have not factored the benefits from this mine in our model yet.

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Outlook and valuation

We expect PILs EBITDA to witness a modest growth beginning FY2015 once the benefits of increased capacities of sponge iron and power commence meaningful production. Moreover, PIL is currently trading at inexpensive valuations of 2.7x and 2.3x FY2014E and FY2015E EV/EBITDA, respectively. On P/BV basis, it is trading at 0.2x and 0.2x FY2014E and FY2015E, respectively. Hence, we recommend a Buy rating on the stock with a target price of `37, valuing the stock at 2.5x FY2015E EV/EBITDA. A key catalyst for the stock would be commencement of mining operations at PILs Sirkaguttu iron ore mine (not factored in our estimates yet).

Exhibit 7: EV/EBITDA band

4,500 4,000 3,500 3,000
(` cr)

2,500 2,000 1,500 1,000 500 0

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13
Jul-13

2x
Source: Bloomberg, Angel Research

4x

6x

8x

10x

Exhibit 8: P/E band

400 350 300 250
(` )

200 150 100 50 0

Jul-08 Jul-09 Jul-10 Jul-11 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jul-12 Jan-13

3x
Source: Bloomberg, Angel Research

6x

9x

12x

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Exhibit 9: P/BV band

400 350 300 250
(` )

200 150 100 50 0

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
FY15E

0.5x
Source: Bloomberg, Angel Research

1.0x

1.5x

2.0x

Exhibit 10: Recommendation summary

Companies Sarda Energy GPIL CMP Target Price (`) (`) Reco. Mcap Upside (` cr) P/E (x) FY15E P/BV (x) FY14E FY15E EV/EBITDA (x) FY14E FY15E RoE (%) FY14E FY15E RoCE (%) FY14E (%) FY14E

75 66 29 100

98 78 37 125

Buy Buy Buy Buy

270 224 389 662

30 18 27 25

3.0 1.8 2.1 3.0

2.7 1.4 2.0 2.3

0.3 0.2 0.2 0.2

0.2 0.2 0.2 0.2

3.2 3.4 2.7 6.0

2.7 2.7 2.3 4.2

9.5 11.6 9.1 8.3

9.5 13.0 8.7 9.9

8.9 11.4 8.3 5.8

9.3 12.1 8.2 7.7

PIL Monnet Ispat

Source: Company, Angel Research

Company background
PIL manufactures steel, ferro alloys and PVC pipes. During FY2012, 86% of its revenues were derived from steel and power. PILs steel capacity of 0.7mn tpa is backed by a captive sponge iron capacity (0.8mn tpa). Its finished product portfolio includes wire rods (0.45mn tpa), structural/TMT bars (0.3mn tpa) and silico manganese (48k tpa). The company has a captive thermal coal mine for making sponge iron while it is in the process of obtaining various approvals for another coal mine (to feed upcoming power plants) and an iron mine.

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Profit & Loss Statement (Standalone)

Y/E March (` cr) Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net sales) Depreciation EBIT % chg (% of Net sales) Interest charges Other income (% of PBT) Share in profit of asso. Recurring PBT % chg Extra. Inc/(Expense) PBT (reported) Tax (% of PBT) PAT (reported) Add: Earnings of asso. Less: Minority interest Extra. Expense/(Inc.) PAT after MI (reported) ADJ. PAT % chg (% of Net sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2010 1,568 1,568 2.8 1,211 891 195 68 57 357 20.0 22.8 57 300 17.7 19.2 25 3 1.1 278 39.9 (3) 275 7 2.6 268 (1.9) 266 271 36.7 17.3 23.2 20.1 17.4 FY2011 1,664 1,664 6.2 1,324 1,007 188 78 51 341 (4.6) 20.5 67 273 (9.0) 16.4 6 9 3.2 276 (0.6) (2.7) 274 7 2.4 267 267 267 (1.4) 16.0 20.9 18.3 (9.1) FY2012 2,107 2,107 26.6 1,741 1,394 258 89 0 366 7.4 17.4 78 287 5.2 13.6 14 2 0.9 276 (0.1) 276 8 2.9 268 268 268 0.4 12.7 19.9 18.4 0.4 FY2013 2,511 2,511 19.2 2,185 1,737 337 111 0 326 (10.8) 13.0 106 220 (23.5) 8.8 55 2 1.5 167 (39.5) 167 2 1.3 165 165 165 (38.5) 6.6 12.3 11.3 (38.5) FY2014E 2,486 2,486 (1.0) 2,108 1,667 255 94 92 378 15.9 15.2 112 266 21.1 10.7 64 2 1.2 205 22.8 205 5 2.5 200 200 200 21.3 8.0 14.9 13.7 21.3 FY2015E 2,637 2,637 6.1 2,242 1,774 270 100 98 395 4.5 15.0 117 278 4.3 10.5 68 3 1.3 212 3.5 212 5 2.5 207 207 207 3.5 7.9 15.4 14.2 3.5

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Balance Sheet (Standalone)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Share Warrants Minority Interest Total Loans Deferred Tax Liability Long Term Provisions Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Long Term loans and adv. Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 1,783 708 1,075 303 2 523 102 237 184 180 342 16 1,738 1,826 766 1,060 912 308 27 352 63 40 249 228 124 0 2,431 2,497 885 1,612 842 313 50 359 50 38 272 252 108 0 2,925 2,647 991 1,656 892 313 50 483 197 38 247 269 213 0 3,124 2,807 1,103 1,704 942 313 50 557 275 38 242 267 290 0 3,299 2,957 1,220 1,737 992 313 50 659 362 38 258 271 388 0 3,480 1,738 122 1,244 1,366 65 230 77 134 1,584 1,719 0 621 80 11 2,431 134 1,824 1,958 0 874 81 13 2,925 134 1,973 2,108 0 924 81 13 3,124 134 2,157 2,292 0 914 81 13 3,299 134 2,349 2,484 0 904 81 13 3,480 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

August 12, 2013

Prakash Industries | 1QFY2014 Result Update

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Less: Other income Direct taxes paid Cash flow from operations (Inc.)/ Dec. in fixed assets (Inc.)/ Dec. in investments (Inc.)/ Dec. in loans and adv. Other income Cash flow from investing Issue of equity Inc./(Dec.) in loans Dividend paid Others Cash flow from financing Inc./(Dec.) in cash Opening cash bal. Closing cash bal. FY2010 266 57 (4) (26) 24 270 (320) 0.9 1.8 (317) 0 118 118 70 31 102 FY2011 FY2012 FY2013E FY2014E FY2015E 267 67 (148) 4 47 143 (622) (25) 0 (32) (679) 497 497 (39) 102 63 268 76 47 11 99 302 (515) (23) 2 (9) (545) 245 15 230 (13) 63 50 167 106 41 2 313 (200) (200) 50 16 35 147 50 197 205 112 2 5 314 (210) (210) (10) 16 (26) 78 197 275 212 117 (12) 5 312 (200) (200) (10) 16 (26) 87 275 362

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Prakash Industries | 1QFY2014 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book value DuPont analysis EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Post-tax) Cost of debt (post tax) Leverage (x) Operating RoE Returns (%) RoCE (Pre-tax) Angel RoIC (pre-tax) RoE Turnover ratios (x) Asset turnover (gross block) Inventory (days) Receivables (days) Payables (days) WC cycle (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest coverage 0.1 0.4 11.8 0.3 1.6 47.9 0.4 2.1 20.7 0.3 2.1 4.0 0.3 1.6 4.2 0.2 1.2 4.1 0.9 21 22 37 51 0.9 29 18 27 33 1.0 30 15 11 10 1.0 30 15 11 5 0.9 30 15 11 2 0.9 30 15 11 3 19.3 24.6 21.5 13.1 19.6 17.0 10.7 16.5 14.6 7.3 10.8 8.1 8.3 12.9 9.1 8.2 13.2 8.7 19.2 97.4 1.1 19.6 10.1 0.1 20.4 16.4 97.6 0.8 13.3 1.3 0.3 17.0 13.6 97.1 0.8 10.7 1.8 0.4 14.1 8.8 98.7 0.9 7.5 6.1 0.3 7.9 10.7 97.5 0.8 8.7 6.8 0.3 9.2 10.5 97.5 0.9 8.8 7.3 0.2 9.1 23.2 20.1 26.9 117.6 20.9 18.3 24.9 127.8 19.9 18.4 25.8 1.0 145.6 12.3 11.3 20.2 1.0 156.7 14.9 13.7 23.2 1.0 170.4 15.4 14.2 24.1 1.0 184.7 1.4 1.1 0.2 0.3 1.4 0.3 1.6 1.2 0.2 0.6 2.8 0.4 1.6 1.1 0.2 3.4 0.6 3.3 0.4 2.6 1.4 0.2 3.4 0.4 3.4 0.4 2.1 1.3 0.2 3.4 0.4 2.7 0.3 2.0 1.2 0.2 3.4 0.3 2.3 0.3 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

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Prakash Industries | 1QFY2014 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies 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. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Prakash Industries No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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