From the badshah of D-street Rakesh Jhunjhunwala to Dolly Khanna, all of them are rushing to buy the stock of a small cap company, which is on the cusp of a major turnaround. What is that in the stock that has made these stalwarts make a beeline for this counter. Dolly Khanna has purchased 400000 shares of this company. This is touted as a potential multibagger stock in 2018.
Letl’s Understand the Business
Prakash Industries Limited is a fully integrated steel company. It works in mainly two segments: Firstly, it makes TMT bars, coils, and rods and secondly, it manufactures PVC pipes and fittings that are used in residential buildings for plumbing needs and in irrigation. It has its own captive iron ore mines and 100% linkage from coal mines.
Now Understand How It’ll Benefit
# 1 Captures Margin at Each stage
Because of being a 100% backward integrated steel company, it captures the margin at each stage. For example, for most non-integrated steel companies, the price of coal has gone up, whereas for Prakash Industries it has gone down because it has own captive mines. Similarly, they have now better sourcing of iron ore mine that helps it produce sponge iron at the lower cost than its competitors. This sponge iron is later used in manufacturing of TMT bars and rods.
The fifth Sponge Iron Rotary Kiln has been successfully commissioned. With this, the Company has become self-reliant with respect to its requirement of Sponge Iron in its Steel Melting Shop Division. The new Rotary Kiln has also enhanced the power generation capacity by additional 15 MW through the Waste Heat Recovery route by harnessing the effluent gases of the Kiln. The price of coal will further go down for the company. (Annual Report: 2017)
Further the Sirkaguttu Iron Ore Mine was allotted to the Company in the state of Odisha and the Company has already executed the mining lease with the State Government during the last quarter of the financial year under review and the mine is expected to be operational in the current year, which shall improve the performance quotient of the Company to a significant extent. (Source: Annual Report: 2017)
All of this has helped the company improve margins from 9% to 12 % in 2017 from 2016 and in 2018, this will improve even further once iron ore lease process will be over. EBITDA and Net Margins should improve further.
# 2 No More Tag of a Shell Company
The company suffered a lot because of the tag of a shell company, which has been revoked now. That has helped restore its respect in the market.
# 3 Further FCCB Restructuring
$36 million of total $60 million FCCB loan has already been restructured. The company is trying to restructure remaining loan. Once the loan is fully restructured, the price will further increase.
# 4 Demerger of PVC Pipes Business
Demerger of the pipes business is expected to take place. Company has deputed Price Water House Coopers. It’ll help unlock values of these two segments. However, it’s not going to happen soon as they’ll have to take approval from SEBI as well, which is time-consuming.
# 5 Ride on Faster Sales Growth
Company has witnessed sharp increase in both segment sales because of the boom in the steel and affordable housing sector. The growth in the pipe segment has been even higher (45%) in the latest quarter, along with the fact that profit has jumped from 27 crore to 124 crore.
The Company is targeting 30% volume growth, which is not difficult to meet considering strong demand for the product. The supply disruption caused by cut in the production of steel from China will continue that ensures steel sector will be in the multi-year upcycle.
All of these positive developments have made these ace investors optimistic about the future of the company and that’s why they are sitting tight on it.