2QFY2012 Result Update | Steel

November 8, 2011

Prakash Industries
Performance Highlights

BUY
CMP Target Price
% chg (yoy) 1QFY12
8.8 (15.5) (483)bp (22.7) 499 91 18.2 71

`46 `61
12 months

Particulars (` cr) Net sales EBITDA EBITDA margin (%) Net profit

2QFY12 2QFY11
458 77 16.8 55 421 91 21.6 71

% chg (qoq)
(8.1) (15.3) (141)bp (22.9)

Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Steel 613 1.2 155/42 112458 10 17,570 5,289 PRKI.BO PKI@IN

Source: Company, Angel Research

Higher realization drives top-line growth: For 2QFY2012, PILs net sales grew by 8.8% yoy to `458cr mainly on account of higher realization across product categories, partially offset by the decline in sales volumes. Gross realization of basic steel and wire rods increased by 26.1% yoy each. Basic steel sales volumes increased by 55.1% yoy to 27,923 tonnes, while wire rod sales volumes decreased by 28.9% yoy to 78,969 tonnes in 2QFY2012. High input costs dents PILs profitability: Raw-material costs increased by 21.8%

yoy to `306cr on the back of increased input costs, mainly iron ore. Consequently, EBITDA margin slipped by 483bp yoy to 16.8% and EBITDA decreased by 15.5% yoy to `77cr. Interest expenses grew by 573.0% yoy to `2cr. Hence, net profit decreased by 22.7% yoy to `55cr in 2QFY2012.
125MW power plant delayed again: PIL has delayed the commissioning of the first 125MW unit (5x25MW) to 4QFY2012 (earlier December 2011). On account of slow-moving regulatory hurdles, the companys Fatehpur coal mine could take longer time than the companys anticipation. Outlook and valuation: While PIL has slowed down its power expansion plans, we expect PILs EBITDA to witness strong growth once the benefits of increased capacities of sponge iron and power commence production. PIL is currently trading at inexpensive valuations of 3.0x and 2.6x FY2012E and FY2013E EV/EBITDA, respectively. On P/B basis, it is trading at 0.3x each on FY2012E and FY2013E, respectively. We maintain our Buy recommendation on the stock with a revised target price of `61, valuing the stock at 2.9x FY2013E EV/EBITDA. Key financials
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)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.2 3.8 11.0 39.0

Abs. (%) Sensex Prakash Ind.

3m 3.4

1yr (15.7)

3yr 73.6 (5.1)

(22.2) (69.8)

FY2010
1,568 2.8 271 36.7 20.1 22.8 2.3 0.4 21.5 19.3 0.5 2.1

FY2011
1,664 6.2 267 (1.4) 18.3 20.5 2.5 0.4 17.0 13.0 0.8 3.7

FY2012E
2,220 33.4 273 2.3 18.7 18.6 2.4 0.3 14.7 11.3 0.6 3.0

FY2013E
2,271 2.3 316 15.6 21.6 20.8 2.1 0.3 14.7 11.5 0.5 2.6

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

Please refer to important disclosures at the end of this report

Prakash Industries | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 performance

Y/E March (` cr) Net sales Raw material % of net sales Manufacturing expenses % of net sales Staff cost % of net sales Other expenditure % of net sales Total expenditure % of net sales Operating profit OPM (%) Other operating income EBITDA EBITDA margin (%) Interest Depreciation Other income Exceptional items Profit before tax % of net sales Tax % of PBT Adj. net profit % of net sales
Source: Company, Angel Research

2QFY12 458 306 66.9 43 9.3 20 4.4 12 2.6 381 83.2 77 16.8 77 16.8 2 17 57 12.4 2 3.6 55 12.0

2QFY11 421 252 59.8 49 11.6 17 4.0 13 3.0 330 78.4 91 21.6 91 21.6 17 1 74 17.5 3 3.6 71 16.8

yoy % 8.8 21.8 (12.7) 20.8 (6.7) 15.5 (15.5)

1QFY12 499 328 65.8 49 9.8 18 3.6 13 2.6 408 81.8 91 18.2 -

qoq % (8.1) (6.5) (12.8) 13.5 (9.9) (6.5) (15.3)

(15.5) 573.0 1.0 (44.9) (22.7) (23.9) (22.7)

91 18.2 16 1 74 14.8 3 3.6 71 14.3

(15.3) 632.4 5.2 (17.3) (23.0) (24.2) (22.9)

November 8, 2011

Prakash Industries | 2QFY2012 Result Update

Result highlights
Higher realization drives top-line growth
For 2QFY2012, PILs net sales grew by 8.8% yoy to `458cr mainly on account of higher realization across product categories, partially offset by the decline in sales volumes. Gross realization of basic steel and wire rods increased by 26.1% yoy each to `32,221/tonne and `37,482/tonne, respectively. However, basic steel and wire rod production volumes decreased by 26.5% yoy and 32.6% yoy, respectively. Basic steel sales volumes increased by 55.1% yoy to 27,923 tonnes, while wire rod sales volumes decreased by 28.9% yoy to 78,969 tonnes in 2QFY2012.

Exhibit 2: Production volumes

(tonnes) Sponge iron Basic steel Structural steel Wire rod Ferro alloy Power (mn units) 2QFY11 103,917 135,163 112,944 10,951 159 3QFY11 114,354 117,986 100,990 8,091 162 4QFY11 1QFY12 2QFY12 107,765 10,535 156 yoy % qoq % 3.7 (3.8) (1.5) (7.5) (13.8) (17.3) 7.3 (3.8) 92,729 116,511 95,966 115,252 14,000 75,066 9,455 150 23,411 92,019 9,814 162

99,358 (26.5) 76,135 (32.6)

Source: Company, Angel Research

Exhibit 3: Sales volumes

(tonnes) 2QFY11 18,000 111,000 8,500 3QFY11 4QFY11 13,006 98,598 6,160 5,114 12,455 76,242 8,295 1QFY12 2QFY12 8,687 23,806 91,144 8,197 27,923 767 8,488 yoy % qoq % 55.1 221.4 - (96.8) (0.1) 3.6

Basic steel Structural steel Wire Rod Silico Manganese

78,969 (28.9) (13.4)

Source: Company, Angel Research

Exhibit 4: Gross realization

(tonnes) 2QFY11 25,545 29,729 53,200 3QFY11 26,465 29,883 57,419 4QFY11 30,876 35,383 36,296 55,999 1QFY12 31,438 35,621 37,583 56,000 2QFY12 yoy % qoq % 32,221 34,289 37,482 55,184 26.1 26.1 3.7 2.5 (3.7) (0.3) (3.5)

Basic steel Structural steel Wire Rod Silico Manganese

Source: Company, Angel Research

High input costs dent EBITDA margin

During the quarter, raw-material costs increased by 21.8% yoy to `306cr due to increased input costs, mainly iron ore. Blended average iron ore cost stood at `7,000/tonne during 2QFY2012. Consequently, EBITDA margin slipped by 483bp yoy to 16.8% and EBITDA decreased by 15.5% yoy to `77cr. Interest expenses grew by 573.0% yoy to `2cr. Hence, net profit decreased by 22.7% yoy to `55cr in 2QFY2012.

November 8, 2011

Prakash Industries | 2QFY2012 Result Update

Exhibit 5: EBITDA margin trend

120 100 80 30 25 20

Exhibit 6: Net profit trend

80 70 60 15 10 5 0 50 30 20 10 0 20

(`cr)

(%)

40 20 0

10 5 0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

EBITDA (LHS)

EBITDA margin (RHS)

Adj. Net profit (LHS)

Net profit margin (RHS)

Source: Company, Angel Research

Source: Company, Angel Research

125MW power plant delayed again: PIL has delayed the commissioning of the first 125MW unit (5x25MW) to 4QFY2012 (earlier December 2011). Also, on account of slow-moving regulatory hurdles, the companys Fatehpur coal mine could take longer time than the companys anticipation. With rise in coal prices via the eauction route and subdued power realization, the company has slowed its power expansion plans.

Investment rationale
Expanding 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 0.6mn tonnes to 0.8mn tonnes by FY2013. Net long on power from FY2012: PIL is expanding its power capacity from 100MW to 775MW by CY2015E. The company is setting up a 625MW coal-based power plant, with each unit being set up in 12 months starting from 4QFY2012. Captive iron ore production to aid margin growth: During 2QFY2011, PIL had received the mining plan approval for its Sirkaguttu iron ore mine in Orissa. 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.

November 8, 2011

2QFY12

(%)

60

15

(`cr)

40

Prakash Industries | 2QFY2012 Result Update

Outlook and valuation

While PIL has slowed down its power expansion plans, we expect PILs EBITDA to witness strong growth once the benefits of increased capacities of sponge iron and power commence production. PIL is currently trading at inexpensive valuations of 3.0x and 2.6x FY2012E and FY2013E EV/EBITDA, respectively. On P/B basis, it is trading at 0.3x each on FY2012E and FY2013E. We maintain our Buy recommendation on the stock with a revised target price of `61, valuing the stock at 2.9x FY2013E EV/EBITDA. A key catalyst for the stock would be commencement of mining operations at PILs Orissa mine.

Exhibit 7: Change in estimates

(` cr) Net sales EBITDA EBITDA margin (%) PBT Net income Net margin (%)
Source: Company, Angel Research

Earlier estimates FY12E FY13E 2,219 418 18.9 288 280 12.6 2,312 470 20.3 321 313 13.5

Revised estimates FY12E FY13E 2,220 414 18.6 282 273 12.3 2,271 472 20.8 326 316 13.9

Upgrade/(downgrade) (%) FY12E FY13E 0.1 (1.0) (21)bp (2.1) (2.5) (33)bp (1.8) 0.6 49bp 1.3 0.9 37bp

Exhibit 8: EV/EBITDA band

4,500 4,000 3,500 3,000 2,500
(`cr)

2,000 1,500 1,000 500 0

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

2x

4x

6x

8x

10x

Source: Bloomberg, Angel Research

November 8, 2011

Prakash Industries | 2QFY2012 Result Update

Exhibit 9: P/E band

400 350 300 250

(`)

200 150 100 50 0

Apr-07

Oct-08

Apr-10

Jul-09

3x

6x

9x

12x

Source: Bloomberg, Angel Research

Exhibit 10: P/BV band

400 350 300 250 200

(`)

150 100 50 0

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Oct-07

Oct-08

Oct-09

Oct-10

0.5x

1.0x

1.5x

2.0x

Source: Bloomberg, Angel Research

Exhibit 11: Recommendation summary

Companies CMP Target Price (`) Godawari Power 122 Sarda Energy Prakash Ind. Monnet Ispat (`) Reco. Mcap Upside (` cr) P/E (x) FY13E P/BV (x) FY12E FY13E EV/EBITDA (x) FY12E FY13E RoE (%) FY12E FY13E RoCE (%) FY12E FY13E (%) FY12E

190 61 549

Buy Buy Buy

385 436 613 2,802

56 12 34 25

3.5 9.3 2.4 9.1

2.2 8.4 2.1 6.9

0.5 0.6 0.3 1.2

0.4 0.6 0.3 1.0

3.8 6.7 3.0 8.6

2.6 4.9 2.6 6.3

14.8 7.0 14.7 13.8

20.0 7.3 14.7 16.6

14.8 4.5 11.3 8.7

122 46 436

137 Accum.

Source: Company, Angel Research

November 8, 2011

Oct-11

Oct-11

Jan-08

Jan-11

18.2 5.3 11.5 11.0

Prakash Industries | 2QFY2012 Result Update

Profit & Loss Statement

Y/E March (` cr) Gross sales Less: Excise duty 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 FY2008 1,420 166 1,254 1,254 34.4 960 720 149 44 47 294 48.0 23.4 48 246 61.2 19.6 41 4 1.8 209 62.6 (9) 199 0.2 199 199 208 92.1 16.6 18.0 18.0 72.6 FY2009 1,710 184 1,526 1,526 21.7 1,228 964 162 54 49 298 1.3 19.5 42 255 3.6 16.7 61 4 2.0 199 (4.8) 6 205 1 0.3 204 204 198 (4.9) 13.0 17.1 17.1 (4.9) FY2010 1,691 123 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 (2) 266 271 36.7 17.3 23.2 19.5 13.5 FY2011 1,821 157 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) (3) 274 7 2.4 267 267 267 (1.4) 16.0 20.5 17.7 (8.9) FY2012E 2,426 205 2,220 2,220 33.4 1,806 1,440 211 89 67 414 21.6 18.6 109 305 11.7 13.7 29 5 1.8 282 1.9 282 8 3.0 273 273 273 2.3 12.3 20.3 18.7 2.3 FY2013E 2,476 205 2,271 2,271 2.3 1,799 1,413 216 102 68 472 14.1 20.8 111 361 18.3 15.9 41 6 1.7 1.0 326 15.6 326 10 3.0 316 316 316 15.6 13.9 23.5 21.6 15.6

November 8, 2011

Prakash Industries | 2QFY2012 Result Update

Balance Sheet
Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Share warrants Minority interest Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Goodwill Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. exp. not written off Total assets 1,384 607 777 176 419 85 121 213 85 333 21 1,307 1,524 637 887 241 2 415 31 193 191 185 230 19 1,380 1,783 708 1,075 303 2 523 102 237 184 180 342 16 1,738 1,826 780 1,046 877 27 710 63 398 249 234 476 50 2,476 2,226 889 1,337 977 27 833 282 311 240 275 558 50 2,949 2,576 1,000 1,576 1,027 27 908 349 318 241 272 635 50 3,315 115 794 910 34 363 1,307 115 914 1,029 21 259 70 1,380 122 1,244 1,366 65 230 77 1,738 134 1,584 1,719 677 80 2,476 134 1,857 1,992 877 80 2,949 134 2,173 2,308 927 80 3,315 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

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Prakash Industries | 2QFY2012 Result Update

Cash flow statement

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. FY2008 FY2009 FY2010 199 48 (11) (38) 25 173 (169) (2) 3 (167) 135 (66) 69 75 9 85 204 42 31 (8) 1 269 (233) 1 2 (230) (92) (92) (53) 85 31 266 57 (4) (26) 24 270 (320) 0.9 2 (317) 118 118 70 31 102 FY2011 FY2012E FY2013E 267 67 (148) (37.8) 6 143 (622) (25.0) 3.8 (35.6) (679) 15.8 481 497 (39) 102 63 282 109 137 8 519 (500) (500) 200.0 200 219 63 282 326 111 (10) 10 417 (400) (400) 50.0 50 67 282 349

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Prakash Industries | 2QFY2012 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 0.3 0.9 5.9 0.2 0.8 4.2 0.1 0.4 11.8 0.3 1.7 47.9 0.3 1.4 10.7 0.2 1.2 8.8 0.9 50 33 30 43 1.0 31 26 32 31 0.9 42 19 39 23 0.9 40 20 35 21 1.1 30 20 35 17 0.9 30 20 35 17 20.5 23.7 24.6 19.0 23.7 20.5 19.3 24.6 21.5 13.0 19.0 17.0 11.3 18.9 14.7 11.5 19.9 14.7 19.6 99.8 1.1 21.3 9.6 0.3 24.8 16.7 99.7 1.2 19.8 19.4 0.2 19.9 19.2 97.4 1.1 19.6 10.1 0.1 20.4 16.4 97.6 0.8 13.2 1.2 0.3 17.3 13.7 97.0 0.9 11.7 3.6 0.3 14.0 15.9 97.0 0.8 12.4 4.4 0.2 14.4 18.0 18.0 22.2 81.7 17.1 17.1 20.8 91.0 23.2 20.1 26.9 117.6 20.9 18.3 24.9 127.8 20.3 18.7 28.4 148.1 23.5 21.6 31.8 171.6 2.5 2.1 0.6 0.6 2.7 0.6 2.7 2.2 0.5 0.5 2.5 0.5 2.3 1.7 0.4 0.5 2.1 0.4 2.5 1.8 0.4 0.8 3.7 0.5 2.4 1.6 0.3 0.6 3.0 0.4 2.1 1.4 0.3 0.5 2.6 0.4 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

November 8, 2011

10

Prakash Industries | 2QFY2012 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 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 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 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 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 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 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 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%)

November 8, 2011

11