In an interview to CNBC-TV18's Surabhi Upadhyay and Anuj Singhal, SP Tulsian of sptulsian.com shared his reading and outlook on the Prakash Industries.
“Probably the kind of revival which we are seeing in the steel sector is phenomenal – I am referring the ferrous steel stocks and they are going to perform very well. We are looking to the visibility which we have been seeing for the next couple of years. So in that background, I have chosen Prakash Industries.
They are making 1.1 million tonne of steel. That is an integrated steel plant and they are not into flat products, they are only into the long products that is from iron ore to billets, wire rods and all sort of things and the best part is that in last six months they have got the coal linkage of 13 lakh tonne per annum which suffice for their 230 megawatt captive power plant plus some surplus. For iron ore, you require a lot of coal and management has said that this 13 lakh tonne per annum coal linkage from Coal India has been obtained for five years which will give them a saving of about Rs 70 crore annually because all along, they have been buying this coal on a spot basis which was 20 percent higher.
Apart from that, company also got the mine linkages from Orissa government for 50 years for iron ore, manganese ore and ferro alloys and that is again a very positive because all three raw materials – so you have all your raw material, iron ore, manganese ore and coal – having tied up for next five to fifty years and if you see the company, probably this is having the least debt amongst the steel stocks. The debt is only Rs 600 crore and if you take the net worth of the company, it is at Rs 2,200 crore. So debt to equity ratio is working out at 0.25 and if I take the financial performance of a company for FY17, they have posted a topline of Rs 2,400 crore with operating profit of Rs 88 crore against Rs 23 crore of FY16.
If you see this Rs 88 crore operating profit, of this Rs 42 crore has been contributed in Q4. So the revival in the steel sector is being seen in this last three-four months is likely to continue.
So I won’t be surprised to see the EPS which was at about Rs 6 for FY17 against Rs 1.75 for FY16 may rise to about Rs 9-10 for FY18 as well.
Apart from that, they also have the PVC pipe, Rs 55,000 tonne per anum, which contributes to the extent of about 10 percent of their total topline and EBIT of about Rs 33 crore, that division or that segment promoters are thinking of hiving off or maybe to a different company. So if all those things happen but main thesis of taking a buy call on the stock is lowest debt of about Rs 600 crore, huge upside potential is seen because of the revival in the steel sector, restructuring and the better performance maybe of EPS of closer to about double digits or maybe between Rs 9 and Rs 10 for FY18.
So taking all this into consideration and with respectable promoter holding, I am expecting shares to move to about Rs 135 in next six months or so,” he said.
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