How Prakash Industries managed a turnaround

In an interview with ET Now, VP Agarwal, Chairman, Prakash Industries, says in the last quarter because of better sales realisation and a higher volume and cost savings, Q3 PAT improved from Rs 17 crore last year to Rs 101 crore this year.

Edited excerpts:

What has aided your strong performance in Q3? Where did the growth come from?
As we all know, steel industry is in a multi-year upcycle and this is on the back of China cutting down production and exports increasing from India as well as the domestic demand improvement. With this background, from the last quarter the scenario has rapidly changed. In the last quarter because of the better sales realisation and a higher volume and cost savings, we could vastly improve result from Rs 17 crore PAT from Q3 a year before to Rs 101 crore this year.

How much of your profitability will come from iron ore and how much from pure non iron ore business?
Non-iron ore is our PVC pipe unit and PVC pipe unit has a turnover of about 10% of the total turnover, so the margin from the PVC business is about Rs 25 crore and Rs 76 crore is from the steel business.

Is there any proposal to separate your non-commodity business into a separate company because this is a rumour which keeps on surfacing again and again? Why don’t you use the forum to clear the air once and for all?
Yes, you are right, the company had already gone ahead with a demerger proposal and as I have already announced to the stock exchanges, NSE and BSE have already given in principal approval for going ahead with it. The company is further taking it forward. In the next four to six months, we wish to demerge the PVC business and they would be two companies and both would be listed.

You have an enabling resolution to raise Rs 500 crore via QIP from your shareholders. What is the update here? When did you actually plan to execute this QIP and what do you plan to do with these funds?
The funds were required for retiring the FCCB debts we had last year in July-August. We had given them the option of a conversion price of Rs 110. At that time, they did not take that offer and rather wanted the money directly. We have to raise the funds so that the outstanding FCCB can be retired. Besides, some more debts should be retired and part of it would be utilised for the company’s upcoming expansion programme.

The perception is your business has turned around in a meaningful manner with marquee investors coming in. At one point, there was all that talk about Prakash Industries being a shell company etc, but the change in perception has been meaningful. Could you tell us what discussion you have had with analysts of late or recently and how the business is likely to shape up from here that is convincing them to invest in your company for the long haul?
The company was never a shell company. However, Sebi had inadvertently declared the company as a shell company. After a detailed scrutiny for four months we are happy that they have accepted the company's stand and given a clean chit on that. So with this, the perception of the company was alright with the investors.

Also in the steel industry, on an upcycle, not many companies are healthy at the moment. The debt was very low. At the beginning of the year our debt was Rs 900 crore and we already repaid about Rs 160 crore by December. In this quarter by raising these funds and retiring the loans, another Rs 400 crore would be retired. At the end of the year, by 31st March our debt would be only around Rs 300 crore.

So with the upcycle and the company doing well and also the company having secured long-term coal linkages with a five-year SFA being signed with Coal India. This has given a lot of cost saving to the company.

At present, coal is very expensive internationally and domestically also. So, securing at a stable price for long term the coal linkage has given a very good stability to the company. Further, the company has got into iron ore mines; one is in Orissa which the company got in January 1970 and the company is likely to operate it from April 2018 itself. Another one is in Chhattisgarh which the company is likely to start operating by April 2019.

With these cost cutting measures, the company's margins will improve and the company is also in the expansion mode. The company added the fifth kiln in April 2017. With thatm the company's capacity went up to one million from 0.8 to one million tonne. Now the company is in the process of expanding and by September 2018, we would be at 1.2 million tonnes and the company is firming up its plan to gradually take this capacity to 3 million tonnes in five years. This kind of expansion and good margins attract the investors.

We are sure that the company's QIP whenever it comes, is likely to be in a short period and should be well received.

The other angle is also what the market hopes to see by way of value unlocking. You spoke about the PVC business being demerged in the next six months. What kind of value do you ascribe to those two businesses?
We cannot exactly value our business directly but if we look at the PVC pipe industry and the independent companies which are in that segment, the value should be around Rs 1000 crore or so.

Because we have 35% growth in that and we are doubling PVC pipe capacity in the next two years and margins are very good, we are likely to close this year with above Rs 35 crore net profit in PVC units. The market in time should give good value to that unit as well.