Stock Market Result Update on Prakash Industries for 1QFY2012

Stock Market Result Update on Prakash Industries for 1QFY2012 with a Buy recommendation and a Target Price of `72 (12 months).

Higher realisation drives top-line growth: For 1QFY2012, PIL’s net sales declined by 7.3% yoy to `499cr on account of higher realisation across product categories. Gross realisation of structural steel and wire rods increased by 34.4% yoy and 41.8% yoy to `35,621/tonne and `37,583/tonne, respectively.

Higher costs dent EBITDA margin: EBITDA margin for the quarter dipped by 180bp yoy to 18.2% on account of a sharp rise in iron ore and coal costs, despite increased realisations. Hence, EBITDA decreased by 2.3% yoy to `91cr. Further, on account of lower interest costs, net profit increased by 2.0% yoy to `71cr.

125MW power plant delayed by a quarter: PIL has delayed the commissioning of the first 125MW unit (5x25MW) to December 2011 (earlier September 2011). On account of slow-moving regulatory hurdles, the company’s Fatehpur coal mine could take longer time than the company’s anticipation of two years.

With rise in coal prices via the e-auction route and subdued power realisation, the company might further delay its power expansion plans.

Outlook and valuation: We expect PIL’s EBITDA to witness strong growth over the coming five years as the benefits of increased capacities of sponge iron and power commence production. PIL is currently trading at inexpensive valuations of 3.1x and 2.7x FY2012E and FY2013E EV/EBITDA, respectively. On P/B basis, it is trading at 0.4x and 0.3x FY2012E and FY2013E, respectively. We maintain our Buy recommendation on the stock with a revised target price of `72, valuing the stock at 3.0x FY2013E EV/EBITDA.