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.
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