Thanks for your comment. I understand the immense possibilities of industrial biotech research and I understand that Praj is scientifically and technologically best placed in India to take the industrial bio-economy forward. The only reason I track Praj is because of these immense optionalities.
The issue is I am not able to see a smooth bridge from 1G ethanol and EBP 20 to revenues from CBG/Diesel blending/RCM/hi-purity water etc and I am also not able to project revenues from these breakthrough technologies. As far as I can understand Praj will run out of 1G ethanol projects in FY25 and from now until FY25 it may do another 5000Cr of 1G Ethanol related revenues in India and abroad. What happens after that? There is no visibility to project Praj’s revenue streams post FY25 -
- Will CBG scale up sufficiently by then? What’s the revenue potential from setting up CBG plants in India?
- Will India sanction diesel blending for static/automotive engines by FY25? Have there been successful diesel blending programs in Brazil or rest of the world at scale? What’s the likely % of Ethanol blending in diesel?
- What’s the potential of fermentation and hi-purity by FY25? Revenues are de-growing/stagnant as of now.
- What’s the potential for SAF by FY25? As per Management comments it doesn’t seem like ethanol based SAF will get commercialised by then.
- What is the potential for RCM by FY25?
There are no answers to these questions so far. And my biggest problem with Praj is in spite of their high science capabilities, almost all of these revenue streams (maybe except hi-purity) are capex revenue streams which involve setting up Plants for clients. There is no pathway demonstrated by Management yet that would lead to opex revenues. A capex business might bring in large revenues for a period of time like Ethanol 1G did, but will it move the needle on profitability and free cash generation? What’s the kind of FCF that Praj will generate at 8% EBITDA levels? Being restricted purely to capex revenues makes Praj orders of magnitude less attractive as a company than if it had a growing component of opex revenues. As on date, Praj’s service revenues are 5-6% of its total revenues and that too are mostly Plant related O&M revenues.
Under these assumptions, if I run a 10Y DCF on Praj, with a generous terminal growth rate of 5% and 10Y exit FCF of 500Cr, I will still probably arrive at an MCap which is about 50% of today’s MCap.
I hope you now appreciate where my dilemma lies with Praj’s valuations. I don’t doubt the science, I doubt two things
- The timelines of the conversion of that science into revenues and profits
- The capex nature of revenues vs opex from those exciting new biotech streams
Would appreciate if you or anybody else can leverage your knowledge of the science to help fill these valuation gaps for me!