Investing In Praj Can Bring In Healthy Returns

At its current market price, the stock is trading at 30 times its annualised earnings of 9MFY16. It looks little bit expensive currently, though.

Discussions on climate change and global warming have been taking place since long as the planet is getting threatened everyday by these factors. Recent UN climate talks in Paris, officially called as the 21st Congress of the Parties for the United Nations Framework Convention on Climate Change, or COP 21 has culminated into signing of the agreement, which has made an attempt to address those concerns. The US president, Barack Obama, after signing of this historic agreement said, “This agreement will mean less of the carbon pollution that threatens our planet and more of the jobs and economic growth driven by low-carbon investments.”

This agreement will definitely lead to increased use of renewable energy in transport sector including ethanol. It also calls for upgradation of existing production facilities to incorporate energy and water efficiency. Therefore, those companies that will get advantage out of such shift are definitely going to make money for their investors. One such company is Praj Industries (Praj), which is immensely going to benefit out of move towards de-carbonisation.

Praj is an established global player in ethanol and brewery equipment and has more than 600 successful project references under its belt. The company is well equipped with strategic diversification in emerging areas like high purity systems (HiPurity), water & waste water, critical process plants and livestock nutrition businesses and is set to post good growth numbers over the next few years. Over the past three decades, Praj has focused on environment, energy and agri process led applications, which is likely pay in coming years with renewed effort by global community towards conservation of environment.

The journey of Praj began in 1984 as single business, however, since then it has evolved into a leading global player, largely driven by technology innovation and integration capabilities in process engineering in industrial biotechnology domains. The company started its operation as technology solutions provider and project implementation and management services agency to bio-ethanol industry. This still remains the core of the company’s business, nonetheless, it has also developed an additional revenue stream through ‘emerging businesses’ that started in 2009, which contributed 29 per cent of its revenue at the end of Q3FY16. Emerging business areas are an extension of Praj’s core competencies in biotech, engineering, manufacturing, and process and project integration. Its emerging business unit consists of three segments that is water and waste-water treatment, Praj HiPurity Systems (earlier Neela systems), and Critical Process Equipment and Systems (CPES)

The Ethanol/Alcohol plants and brewery business, also called the core business, form almost 70 per cent of the company’s revenue. Company successfully exploited on growth opportunities provided over FY04 –FY09 by the first phase of ethanol blending with petrol with the government’s five per cent blending mandate. It was able to capture around 75 per cent of India’s market and reported revenue CAGR of 53 per cent during FY04-09.  Within the same period, it also expanded in international markets with around 30 per cent market share in the regions that it is present in, i.e the USA, Africa, South East Asia. Considering the fact that India is world’s second largest sugarcane producer and despite being compulsory to blend 5 per cent ethanol with petrol, oil marketing companies (OMCs) are able to do around 4 per cent is below par.

Government of India made 5 per cent blending of ethanol mandatory with a view to take it to 10 per cent and we may soon see this blending with petrol process as mandatory. The fact that crude oil prices are trading at such lower level may raise concern that this might not be implemented strictly. We, however, do not see this happening and moreover, company’s ethanol business is not only dependent on fuelling ethanol plants but a large part is also driven by beverage, alcohol plants and that too not only from India but other parts of the world.

Besides, Praj is almost on the verge of commercialisation of the much anticipated 2G ethanol plant with the help of bagasse, corncobs and corn stover and three-four feedstocks. What is also important to note is that against the anticipated Rs 130-150 crore total cost of the 100 crore ltrs capacity plant, Praj has brought it down successfully to around Rs 110 crore, which is crucial for the plant’s financial viability. The company is trying to reduce the cost further to become more competitive than global peers. In its recent con call after their third quarter results management has said that they are seeing interest in second generation ethanol gaining momentum and has had enquiries from OMCs to invest in a partnership in the domestic market. USA too announced mandates for 2016 – USD 1.01/gallon credit for second generation cellulosic ethanol. We believe that the core business of Praj will continue with its healthy growth rate going forward.
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Emerging Business  

·        Praj HiPurity Systems

Praj’s 100 per cent subsidiary Praj HiPurity Systems (earlier known as Neela Systems) offers equipment and standalone systems for treating wastewater sources from various focused segments. The offerings are customized to the clients’ requirements for treating streams from chemical, hotel, dairy, hospital, and food and beverage industries. For the financial year FY15, this company reported sales of Rs 161 crore while net profit recorded was around Rs 10 crore. Going forward in its effort to increase its revenue from this segment, company has put in place a strategy to increase wallet share by offering integrated solutions that will cover end-to-end process plant, increase international business by focusing on key geographies and accounts, and build a strong services business.

·        Critical Process Equipment & Systems (CPES)

 Praj started this division to explore its fabrication, design and engineering skills. It has almost all the required approvals for business and now is pre-qualified to work with global players.  CPES has now significantly moved ahead on the value chain from the first stream of ‘built to print’ to ‘design to build’ and ‘skids & systems’. The company has now started designing and manufacturing products for oil and gas and other industries which involve high-skill engineering and fabrication with better value addition. The CPES business has clients from the oil and gas industry, global EPC companies, and pharmaceutical manufacturers. Though oil sector is facing challenges in terms of low crude oil prices, company is expecting investment in gas and downstream processing to continue.

·        Water and wastewater systems

Praj offers an entire range of technologies for industrial waste water treatment. After the NDA government came into power, the environmental norms are becoming more stringent and increasing shortage of fresh water, more companies are reducing water usage by re-cycling and re-using. Praj has successfully demonstrated the technology for treating waste water and recycle odourless, colourless and pathogen free for alternate use in textile hub Tiruppur, Tamil Nadu and other parts of India. The “Clean Ganga” river project announced by the central government could also provide immense opportunities for the company. The project will rejuvenate 2,500km long Ganga with 118 towns having waste water treatment, sewerage infrastructure at estimated cost of Rs 51000 crore. 

·        Livestock Health and Nutrition product

It is a new initiative by the company with extension of emerging business. Praj is developing biotech products involving application of modern biotechnology for the industrial production of chemical substances and bio-energy, with less waste and reduced energy consumption. It has experience and expertise in microbiology in its existing businesses of distillery and brewery co-products and using Praj Matrix - the R&D centre for development of biotech products. The company has set up good manufacturing practices (GMP) compliant manufacturing facility at Jejuri, near Pune and has launched products in the poultry and aqua segment as food additives. It has clear roadmap over next five years to develop this business to significant size.

Going forward, we believe the growth rate in emerging business areas will be better than the core business and in next couple of years’ contribution from this segment will jump near about 50 per cent.

Coming to financial performance for the for the 9MFY16 – Consolidated income from operations stands at Rs 685.97 crore, which is around 3 per cent lower over same period last year. The profit in the same period has fallen by almost 10 per cent and remained at Rs 35.44 crore. The reason for such fall is under-performance of from Praj HiPurity Systems in the first half of FY16. However, in the latest quarter for Q3FY16 it has performed well and hence we reflected in the results where we saw consolidated income from operations increasing by 43 per cent over previous quarter and 32 per cent over the corresponding quarter. Of this, exports account for 50 per cent. Business segment wise – 63 per cent is from ethanol, 8 per cent from brewery and 29 per cent is from emerging business. Profit in the same period has more than doubled and stood at Rs 25.51 crore.

Order intake for the third quarter stood at Rs. 300 crore, Ethanol forms 56 per cent, brewery 16 per cent and emerging businesses 28 per cent. Domestic orders form 67 per cent of the total order book. The net order backlog at the end of 31st December, 2015 is Rs 1115 crore out of this export orders are at 45 per cent. In terms of businesses, core business forms 68 per cent, whereas emerging business forms 32 per cent. However, this order-book should be taken with pinch of salt as almost 25 per cent of this is from Petrobras, which is on hold and clarity will come only in the fourth quarter.

At its current market price, the stock is trading at 30 times its annualised earnings of 9MFY16. Although it looks little bit expensive currently, but as Praj has various growth drivers in place that will play itself in coming years, we recommend buying the stock with potential upside of 25 per cent in next one year.