Praj Industries


(Hitesh Patel) #1

PRAJ INDUSTRIES.

CMP 80 MARKET CAP 1420 CRORES.

BACKGROUND

CORE BUSINESS

Praj has market share of 65% in domestic and 30% in International ethanol. Company has identified following avenues for growth. Main customers are ethanol producers and breweries.

Internationalisation. Like ethanol company intends to take breweries biz overseas. As of now it caters to domestic players. Recently it has received orders from large beer companies like SAB Miller and Heineken.

Launching second generation ethanol process. Company is putting up a demo plant. This plant would demonstrate second generation ethanol making process which would produce ethanol from cellulose instead of starch or molasses.

Exploring bio Products such as a) Live stock health and nutrients (Pro biotic market size in South east asia for this is 10000 crores). b) Human Health and wellness products like Omega 3 and Vitamin E and c) Industrial Biochemicals like Xylltol and furfural.

Company also expects to monetise its R&D over next 6-9 quarters.

Since past two years company has embarked on a transformation of its business model.

Company has focussed more on emerging businesses namely

Critical Process Equipment business mainly deals with Oil Skids catering to oil companies.

Industrial water and waste water management

High Purity Water for pharma and cosmetics. (PHP) PHP is qualified with most pharma and cosmetic companies globally. Indian high purity water market size is 600 crores and management sees huge opportunity here due to entry barriers.

Management expects these businesses to contribute 50% of revenues by FY 18. In FY 15 it contributed 31% of total revenues.

EMERGING BUSINESS has diverse customer profile (from sugar to beverages to pharma, cosmetics, agrochemicals, high end industrials and Biotech). It has also reduced delivery cycle with emerging biz having shorter cycle. High purity water has 3-4 months, Water has 6-9 months, Process equipment has 5-7 months versus Ethanol which has 12-14 months and Breweries which has 10-12 months.

For FY 15, company breached the order book position of 1000 crores. Out of this ethanol stands at 60%, Brewery 7%, and Emerging business 33%. Domestic orderbook comprises 58% whereas export order book comprises 42%.

BULLISH VIEWPOINTS

Investment in Praj is a bet on the transformation of the business with increasing contribution from emerging businesses. FY 16 could be the first significant year post the company’s decision to walk along the path of transformation. Also operational efficiencies are likely to play out as planned.

With a lot of focus on Climate Change by various countries, there has been a strong movement to increase ethanol blending in various countries. In fact in US, there is a credit of 1.01 dollar per gallon for ethanol blending from 2nd generation cellulosic ethanol plant. Praj has developed a plant for the same and expects good business from it.

Effluent treatment segment is expected to see good traction bcos of stricter pollution control norms and more stress on proper waste water management. The govt has notified stricter pollution control norms for coal power thermal power plants which could provide higher business for the water and waste water management division of Praj.

Praj Hipurity Systems expected to benefit in a major way bcos of strong growth in biosimilars. This division has recently won many breakthrough orders from multiple international markets namely Algeria, Turkey, Myanmar.

With higher revenue contribution from emerging business, dependence on ethanol business will reduce leading to higher stability in business.

Company is a debt free company with cash of 250 crores.

BEARISH VIEWPOINTS

In the immediate future, the Petrobras order remains a key monitorable.

Any adverse regulatory changes in ethanol blending mandate could be an important risk factor.

General economic slowdown could impact the business prospects.

ENTRY BARRIERS

Praj is a dominant player in the ethanol segment which caters to the ethanol plants and breweries. It has many years of track record of successful completion of various ethanol projects across the globe.

The ethanol and other newer emerging business are technological consulting businesses and players with a long track record have a competitive advantage in terms of referrals and expertise.

INTERESTING VIEWPOINTS

Since past two years Praj has embarked upon transformation to reduce its dependence on ethanol business. Now it is at a stage where there are likely to be strong tailwinds due to climate control change stance adopted by various govts. And the newer businesses which were in infancy and facing teething troubles are gradually growing. Company has plans to have revenue share from newer businesses to the tune of 50% by FY 18.

Currently Praj seems to be small fish in a big pond with opportunities in the existing and newer businesses opening up. All the newer businesses are scalable and provide decent growth opportunities.

FINANCIALS AND VALUATION

Co has 17.8 crores outstanding shares of Rs 2 each.

Promoter holding is 34% with no pledging.

For fy 15, sales was 1011 crores and net profit improved from 54 crores in fy 14 to 76 crores in fy 15 providing an eps of 4.3. dividend of Rs 1.62 was paid for fy 15.

Company has debt free balance sheet with cash of nearly 250 crores.

For 9M fy 16, revenues were 705 crores against 685 crores in 9M fy 15.

Net profit for 9M FY 16 was at 35.44 crores against 39.65 crores for 9M FY 15.

Company reported very good q3 fy 16 nos with sales increasing to 290 crores (220 cr inq3 fy 15) and net profit increasing to 25.51 crores (12 cr in q3 fy 15) This was in line with management commentary in concall post q2 fy 16 results which were lacklustre. In that concall management had clearly articulated that second half of fy 16 would be much better than first half.

Order backlog as on Dec 2015 was at 1100 crores which includes Petrobras order which has been on hold and clarity is likely to emerge by end of fy 16. The latter order constitutes 22% of order book.

disc: invested.

This is not a recommendation and anyone contemplating investment should do due diligence and make an informed decision.


Hitesh portfolio
(varun jain) #2

Excellent analysis…
Wonder why an intelligent, informed and visionary investor RJ sold his entire stake in Praj. He must be knowing this as well…don’t you find the business too complex with lots of variables to monitor

Just my initial viewpoint


(Prasanna Sankaranarayanan) #3

Thanks for the detailed write-up Hitesh.

Expanding on the valuation EV = 1420 - 250 Cr; FY 15 profit = 76 Cr; Hence Adjusted PE = 15.4

Any thoughts on what you are projecting forward and how you apply a multiple?


(Sreekanth) #4

@hitesh2710

How is Praj’s standing in comparison to Sugar companies which will benefit both from positive sugar cycle and ethanol blending?


(Nikhil Jain) #5

Hitesh bhai,

On first glance, too many things at once remind me of Diworseification as Peter Lynch says. Of course, Praj may succeed if the management is capable enough.

How good do you think the management is? Can one rely on the management to execute well in all the businesses since most of their businesses don’t fall under the category of “any idiot can run this business”?


(Hitesh Patel) #6

Nikhil,

I think the management consciously chose to pursue the emerging businesses which are also consulting kind of businesses for Praj. The reason behind it was to reduce over dependence on ethanol business and pursue some scalable looking businesses.

About the management I think they did do a good job of the opportunity they got earlier in ethanol business and now how they go about things needs to be seen.

I liked their talk when they clearly mentioned in q1 concall that q2 was also going to be soft and second half was going to be much better. At least here is a management which knows what it is talking about. (which cannot be said about a lot of managements as we at VP know.:slightly_smiling: )


(zulfiqar) #7

sir that petrobras order is significant and has been put on hold, what if that order is cancelled , how it affect FY 17ns


(Abhishek shah) #8

Hi,

Found an investor presentation. investor-presentation.pdf (1.3 MB)


(Hitesh Patel) #9

In q3 concall, management has indicated that more clarity on that petrobras order will emerge in q4. So we will have to wait till then before taking a call and making any assumptions.

Order inflow is in a run rate of around 300 crores per quarter so that should keep the topline going.


(aashish2137) #10

Will the company also benefit from Ethanol blending advancements in India?

http://pib.nic.in/newsite/PrintRelease.aspx?relid=136331

To be honest though, it doesn’t seem a lot at the moment. 5% to begin with and there will be a lot of competition in this space.


(niraj.dugar) #11

A small research i had done few days back on Praj. Just sharing it.

  1. Ethanol and brewery plants –

The Company has an expertise in the Ethanol technology (design and erection of ethanol producing plants) and provides the same for production of Ethanol. Further, the Company is the biggest brewery plant provider in India. The Company is also in the process of setting up the second generation cellulosic ethanol plant which includes the use of agricultural wastes such as corn stover, cobs and bagasse. Cellulosic ethanol is greater than those from first generation crop-based bio-fuels as well as fossil-based fuel and hence this project will play a vital role in reducing carbon footprints.

The Indian government, and the global governments are pushing the use of ethanol. The various links which substantiate the requirement for 1st and 2nd gen ethanol are below –

a. http://in.reuters.com/article/us-india-ethanol-idINKBN0TZ1B320151216

Either you blend ethanol or you run vehicles entirely on them, requirement for ethanol will increase. Though there are concerns currently since crude is cheaper. The reforms are surely going to come.

b. http://timesofindia.indiatimes.com/business/india-business/PM-asks-sugar-industry-to-shift-to-ethanol-production/articleshow/50399229.cms

The use of Ethanol is definitely going to increase in the transport fuels sector.

c. http://www.equitybulls.com/admin/news2006/news_det.asp?id=174831

Demand for ethanol production seen rising in global markets

d. http://www.financialexpress.com/article/industry/companies/will-launch-buses-in-india-that-run-on-bio-ethanol-and-bio-gas/184740/

Slowly and gradually, commercial vehicles will run on Bio-gas.

e. http://www.business-standard.com/article/news-cm/praj-industries-and-gevo-inc-sign-licensing-agreement-joint-development-agreement-115110900971_1.html

The Company is currently looking to expand its brewery business in the emerging markets and has commissioned a couple of projects in Africa. As far as we all know, that India has one of the lowest per capita beer consumption in the world which is only going to grow due to favourable demographics and also the Government’s push for berverages will lower alcohol content.

  1. Waste water management

The Company did not want to depend only on Ethanol per se, and hence the Company diversified and diversified pretty smartly to waste water management solutions which is the need of the hour. Kudos to its research facility, Praj Matrix.

As of the end of FY 15, the Company generated 70% revenue from ethanol and brewery business and 30% from other segments mostly dominated by water treatment.

Disc - invested and buying in small lots


(Kunal shah) #12

prasanna slight error in calculating pe of 15.4, cash of 250 cr. may not be lying in current ac (i dont know but most probably ) so it must be earning 10% return so deduct 20-25 cr from profit . so pe value will be (1420-250) / (76-25)
will be 23 :slightly_smiling:


(whirlingwoods) #13

Hello Varunji …Can you share the link about exiting Rakesh Jhunjhunwala in Praj industries …?

Regards


(midageguy) #14

@whirlingwoods
Came across this on Rakesh Jhunjhunwala and Praj.


(Vivek Kumar) #15

AR 2015 Page no - 73.

Significant change of hands during years 2014 -> 2015 :

  • RJ is holding 15 million i.e. 8.45% of total shares whereas Nil in 2015
    Correction - RJ is holding 15 million i.e. 8.45% of total shares whereas 0.5 million in 2015
    Date of transaction: – 06- Jun - 2014

  • Promoter Parimal Chaudhari increased his holding from 11.16% to 12.17% i.e. 19.80 -> 21.60 million

  • HDFC equity fund - Nil to 9% i.e. 15.97 million.

Disc - Not invested.


(Vivek Kumar) #16

Pramod Chaudhari and Parimal Chaudhari has been buying aggressively through Market Purchase in last 2 years.

Source - Exchange notifications.


(chintri) #17

How can 19.80 be made in going from 11.16 to 12.17


(dr mehul shah) #18

19.80 is the no.of million shares and on t the%


(Praveen Balla) #19

Thank you @hitesh2710 bhai! I am Praveen from The Equity Desk board. Not sure if you remember me but I was an ardent follower of you and your thoughts there.

Found an interesting history and interview of Mr. Pramod Chaudhari here.

“Our share price is going up but the larger picture is also important; otherwise, you are only playing a numbers game”


(Rohit Ojha) #20

-Net profit down 7.4 percent at Rs 34 crore versus Rs 36.7 crore (YoY)
-Total income up 7.7 percent at Rs 329.8 crore versus Rs 306.2 crore (YoY)
-EBITDA up 10.8 percent at Rs 44.2 crore versus Rs 39.9 crore (YoY)