>PRAKASH INDUSTRIES: Story remains unhampered

We hosted a conference call with Vipul Agarwal, Director of Finance, Prakash Industries (PKI). The management of PKI has categorically denied any indulgence in illegal activities as mentioned in the Times of India (9th September 2010 issue) with regard to selling coal in the open market from the Chotia mines. The management ascertained that the whole news article was published with malafide intent and entire allegations are baseless. The management also clarified that the Chotia
mine does not fall in the Hasdeo Arand “No Go” region hence, the company can continue mining coal from it as per the approved mining plan.

■ Mining from Chotia mine to continue undeterred
The management ascertained that mining from the Chotia mine will continue undeterred. It has also applied for two more coal blocks viz Madanpur and Fatehpur, which are under the approval stage. If the approval for these mines is delayed, PKI has the option to continue mining additional coal from Chotia subject to the approval of mining plan from the concerned ministry.

■ Future growth prospects remain intact
The expansion plans of the company in the sponge iron as well as merchant power are progressing on time. The company also has applied for two iron ore and coal mines each. The approval for these mines is at various stages and PKI expects to start the iron ore mining from Sirkaguttu mine (with reserves of ~10mn tonnes) by March 2011 as it has got the approval for the mining plan. It is waiting for the forest clearance. The said mine is under the jurisdiction of State government hence PKI expects to obtain clearances sooner than the Kawardah mine which is subject to the Central government’s approval. Besides, Sirkaguttu mine does not have forest cover as well and hence, can be operational within two months after getting the requisite approvals.

■ Continue to recommend BUY with a reduced target price of INR220 to account for iron ore mining delays.
We believe that the rationalization of steel operations and the foray into merchant power would fuel PKI’s profit margins in the coming years. The iron ore mining once it becomes operational will boost the profitability of the steel business. PKI management has guided for the start of Sirkaguttu iron ore mine from March 2011. To factor in delays in the iron ore mining, we have reduced our estimates for FY11 as well as FY12. Considering the growth prospects in the steel business, foray
into merchant power business and the cheap valuations the stock is trading at, we continue to maintain BUY recommendation on the stock. However, we reduce our target price to INR220 in line with reduction in our estimates.

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