Management Speak: Prakash Industries (Unrated) - Focus on core business to enhance growth

Prakash Industries (PKI IN), promoted by Mr Ved Prakash Agarwal, is a mid-sized, long-steel products company. The company is located in Chhattisgarh and has a capacity of 1.1mtpa. PKI is present across the value chain and manufactures sponge iron, billets, TMT bars and wire rods through captive power. We met the management to understand PKI’s operating environment, volume growth and deleveraging plans and present key takeaways.

Company expects ~10% yoy steel volume growth in FY20 with improved product mix: The company has guided 10% yoy sales volume growth in FY20 to ~1.05mt, after clocking 30% yoy growth in FY19. PKI is in the process of revamping its 0.2mtpa rolling mill (expected in May 2019), due to which, the company expects to sell less of billets in FY20, thereby improving its product mix. On average, as PKI earns incremental EBITDA of ~Rs2,500/t by selling wire rods, this will help accrue additional Rs400m EBITDA in FY20, assuming additional wire rod volumes of 150kt.

Increasing backward integration, starting of iron ore mines can inflate margins: PKI reported EBITDA/t of ~Rs9k in 9MFY19 on higher steel prices and superior volume growth. Expected commissioning of its 0.2mtpa DRI plant by May 2019 will help cut down scrap purchase, which management believes will save Rs700-750m in FY20. Additionally, the company is hopeful of starting operations at its allotted 0.5mtpa iron ore mine in Odisha in 1HFY20. Use of captive iron ore will help in reducing iron ore cost by ~Rs2,400/t from current purchase price of ~Rs6,200/t, implying annualised savings of ~Rs1.1bn at full iron ore production.

PVC pipes division de-merged: Management has opted to demerge its PVC pipes business into a separate entity, given its small size (7.5% of PBT; Rs357m PBT in FY18) and in a bid to give it more focus. Additionally, the separate business will help in unlocking value for shareholders. The record date of the demerger is 24 Apr 2019; the shareholders of the demerged entity will receive 1 share each of Prakash Pipes for every 8 shares of Prakash Industries.

Outlook benign: Management expects earnings recovery to continue in FY20, primarily on volume growth, improved product mix, better raw material integration and lower interest cost. PKI has a strong balance sheet with net debt (ex FCCB) of ~Rs5.5bn as at FY19. The demerger of its PVC pipes business should unlock value for shareholders. At CMP of Rs88, the stock trades at 2.5x 12M trailing EV/EBITDA.