For me if there is one slide that can succinctly make the case for investment in Praj, it is this slide. Thanks to @Worldlywiseinvestors and Mr. Sajal Kapoor
So many optionalities (Ethanol 1G/2G already a reality) + Favourable policy environment in India and globally + Visionary management and consistent focus on R&D. As Sajal Sir says, nobody is using industrial bio-tech in the 360 degree fashion that Praj is.
Yes valuations are probably fair/on-the-higher-side (Basis cashflows that are immediately visible; If any of the key optionalities like ethanol blending in diesel or large scale CBG plays out then these valuations will be dwarfed soon) and there is significant Government risk (Focus moves away from green energy or Atmanirbhar bharat for some reason - low probability). But I think not having Praj in the portfolio today is a much bigger risk than having it. Downside risks can be managed using portfolio sizing.
For the short term, I think this report/targets by ICICI Securities is quite plausible and the numbers should play out in the next 2-3 years
In addition to the answers you have already received, please listen to this interview 24:00 onwards. CEO says after 2 years they may get into manufacturing of RCM products themselves. I don’t think it will be difficult for Praj to move downstream into actual production of some of the bio-tech materials which its technologies help manufacture today. If the IRRs are attractive and the market environments seems suitable to management, they will tap into manufacturing cashflows I am sure.
Praj have a more option to earn through their IP only, when u have patented technology u just need a cmo partner to have less headache on production side capex & maintenance capex, become a asset lite model with a huge cash flow generation will be key, also they r into bio hydrogen so they can go for hydrogen storing also, world wide co like Dedini, gevo, sakeb have been partnered with praj for their technology. Saf, bio hydrogen, cbg, ethonal, marine fuel these all are realty just a matter of time, bio chemicals has arrived already hul, lorial all are moving towards it for EU, USA production of fmcg product, so this is huge , industry 5.0#
It was sometimes in 1976-77 that one IIT Madras Profesor along with a group of mechanical Engg students converted one Fiat petrol car in to a 100% Ethanol Car by changing the carburettor Jet to increase its flow rate and by changing all the robber hoses, seals to metallic ones.They ran the vehicle in the city with a much smoother ride, less noise , less Exhaust emission…the findings were that Ethanol has high octane number at 110, can be MIXED with petrol to enhance octane rating , has lesser carbon dioxide emissions due to presence of only 2 carbon atoms.
However , the project remained as an academic one …Ethanol cost was twice that of petrol at that time… Carbon Emission was not the subject at that time …CO2 was considered as a normal exhaust emission. For octane boosting Lead- TEL- Tetra Ethyl Lead was well accepted in the market place.
Then by early 1980’s, Lead in air in form of lead bromide was a big health concern…lead found in human blood … leading to hypertension, kidney failure, nervous system failure, younger children with mental retardation …and so on…
It was confirmed lead was being added to Gasoline to increase its octane no. in form of TEL(tetra ethyl Lead)which was emitted to air…which we used to inhale …
Lead phase out began gradually… In Europe / USA they found that lead in exhaust pipe damaged the catalytic converters …it almost took a decade to Phase out Lead completely as a Gasoline additive.
As we upgraded from BS-1 to BS-2 to BS-3… It called for more refined HIgh octane fuel to lower emission…Then It was found if petrol can be reformulated with different proportion of Hydrocarbons, e.g. branched chain HC’s , double bond- triple bond compounds, aromatics Such as BTX- Benzene , Toluene, xylene can boost the octane nos of petrol to a great extent …
Later it was Realised that aromatics/BTX are carcinogenic… especially PAH - polycyclic aromatic Hydrocarbons from exhaust pipe…therefore aromatics were minimised …
By 1990, it was discovered that MTBE ( Methyl tertiary butyl ether) is an excellent octane booster…world over it became a big hit …though it was also well known that Ethanol is also an octane booster…
USA had different strategy of using both MTBE and Ethanol as alternate octane booster. E10 was commercialised in 1990 in USA due to it’s Low Carbon content and also as octane booster.
By 2001, USA discovered that drinking water contains MTBE causing various health concern such as nervous system failure, kidney liver failure …and in animal model they found to be carcinogenic …they tested and found MTBE in human blood…So was found out MTBE seepage through underground Petrol reservoir was leading to contamination …later they found out MTBE in air through Automobile exhaust…which is inhaled by public . While they were very quick in banning MTBE in USA … but they continued to export MTBE to many other countries including India. Later Our oil PSU’s started manufacturing in India , but we have been a net importer of MTBE…even today…
What USA did to substitute MTBE ? The only SAFE chemical WHICH can serve dual purpose of (1) Low carbon emission (2) boost octane number of Gasoline is Ethanol… Now what all they did is to boost Ethanol PRODUCTION.
They became the largest producer of ethanol since 2001.
Coming back to our own country, our environmentalists protested for Banning MTBE in our country…citing the example of USA. It went on for few years, finally the Govt appointed a expert committee in 2003, which also Recommended use of 5% ETHANOL…with immediate effect…and reduce MTBE.
But we went slow because of lack of clear Govt policy support and so the implementation had a setback.
Now since last 4-5 years, there is a thrust on reducing Carbon Emissions, we are remembering Ethanol…and we are trying to ignore the fact the amount of health damage it has caused due to continuance with MTBE…
But with so much of noise from our govt authority on Ethanol implementation (not to undermine the efforts of the current Govt during last 2-3 years), we still continue to be net importer of both Ethanol and MTBE from USA. we imported 750 million litres of ethanol during 2020-21. Our Ethanol production is just 2% of global production - USA stands at no. 1 position with 53% global market share and Brazil no. 2 with 30% of global market share!
Let us look at the following statistics:
#With 1400 million people, India is the 2nd largest populous country in the Planet Earth after China.
#India is the 3rd largest Energy consumer in the world after (China no.1 & USA. no 2 )
India is 3rd biggest importer of petroleum/crude oil…our Import bills last year was USD 62 Billion (INR over 4.5 lakh Crores)
No wonder, India is the 3rd largest Carbon emitter to mother Earth’s atmosphere (after China no.1 & USA no.2)
So not only we are spending 62 Billion USD for oil imports , but we are burning this fuel for our energy needs which consequently results in to Increased Carbon Emissions and needless to say
we continue to add MTBE to boost octane requirement which damage our health…
that our coal burning thermal plants adding to the overall carbon emissions …Apart from wood, coal burning in rural area for domestic cooking contribute to carbon emission …deforestation further indirectly Increases carbon emission…
So, what are the alternatives we have to achieve the dual objective of reducing Carbon emissions, avoiding MTBE and reducing Huge import Burden of crude petroleum?
(1) Our major push has already begun for Wind , Solar , Hydro, Green Hydrogen. While Solar , wind, Hydro are making rapid progress, but EV …the transition is gradual and can take Up to 5-10 years to have a substantial impact on carbon emissions, considering that we have just 1-2% EV in our current vehicle Population, though it is expected to Penetrate very fast…
(2) CNG - is the next best fuel with Methane molecule CH4 with one atom of carbon producing 8-16 times less carbon emissions when compared with petrol diesel - Efforts are on for CNG penetration through expansion of CGD’s across the country…even extending to Rural areas…but here again we are not self sufficient in Methane / CNG …we need to import LNG to a great extent and convert to CNG…
Bio gas out of bio mass can also be used in place of CNG as a fuel. This area requires a lot of investments , but we can be self reliant …the kind of bio-mass we are generating in India …
(3) The next best is Ethanol…Ethanol Molecule C2H5OH With two carbon atoms can produce 2 molecules of Carbon dioxide …which is the next best after CNG … (Diesel petrol produces 8-16 times more CO2 when compared with CNG )
Today we have transitioned directly to BS-VI from BS-IV…which did create a disruption.
Though BS-VI would substantially reduce many pollutants such as NOx, HC, PM10/PM 2.5 RSPM…However, BS-VI has very little impact on CO2 Emissions… after all it is the same petrol diesel which is getting burnt -Whether it is BS-IV or BS-VI (petrol/ diesel for example contain upto 8-16 carbon atoms/ molecule) …
So rightly we are talking of Ethanol, Bio ethanol , 1G/2G, Flexi fuel… E10, E15, E20,…E85 to quickly fulfill our dual objective of reducing our import bills towards crude and help reduce carbon emissions…though there are some challenges to convert BS-VI to a flexi fuel Capability in as it is condition, but it is possible after upgrading some parts of the engine with increase in cost…
What is a flexi fuel engine?.. It is basically to run various% of Ethanol blended with petrol. To understand more on flexi fuel engines…Please read the 2nd article…
There are 20 countries today are using E10 or less…USA and Brazil have gone flexi up to E85-E100. If you want to know the countries which use E10 to E85…you may please refer the attached wiki.
Ethanol can be considered Carbon neutral !
To Extract Ethanol from Sugarcane, Crops , Grains, we need to grow More of these crops/ Grains/Sugarcane (keeping aside for our own requirement of food grains for our living) …
These Crops / Sugarcane need water and with the help of absorbing CO2 from atmosphere these crops make carbohydrate in presence of Sun light through a process called photosynthesis…
carbohydrate from food crops after meeting our food requirement can be converted in to Auto fuel Ethanol… Ethanol when burns as Auto fuel produce much less CO2 carbon dioxide than petrol diesel and which in turn can be absorbed by food crops that we grow during photo synthesis …Cycle continues… So, if we consider the above cycle Standalone, Ethanol could be considered as carbon neutral… it can be considered as a renewable source of energy …So there should be no limit to Ethanol production…If the thrust and support from the the Govt continues…
Yes, it is possible to do so…with India’s arable land at 162 million Hectares which is 2nd largest in the world after USA (215 million Hectares)
Arable land is the land which can be cultivated to grow different crops…
Out of Our 162 Million Hectares arable land, at the end of 2020 fiscal we could use only 127 Million Hectares for our agriculture food crops includes Sugarcane…
And 50% of 127 million hectares are Rain-fed…again it is the highest in the world in terms of Rain-fed Agriculture…which you may think we are lucky that Rain God is very kind to India …but the answer is both Yes and No …what happens when Rain God is angry some years leading to dry spell, drought…moreover all the rain-fed land spread across the country don’t receive uniform rain, in spite of normal rainfall in a particular year … so there should be alternatives in case of rain failure …or else our economy gets damaged with so much dependence on rain …so we need to use our arable land to its full potential, adopt modern methods of irrigation, Encourage crop rotation, rain water conservation, ground water extraction, drip irrigation, desalination plants at seas…
What USA could achieve 30 years back with E10 fuel introduction we are trying to achieve that now…Took 3 decades…
It is no doubt that Auto Industry plays a major role in our economy…however it also contributes towards worsening of ambient air quality …and hence all eyes are on technology upgradation which though in the past has caused some kind of intermittent disruptions…
However, bad days for Auto Industry seems to be behind us, though recent semiconductors shortage currently created havoc when the industry was in its recovery path …
Please find a couple of articles on Ethanol, Flexi fuel … Very interesting, informative & educative with regards to status on Indian Govt road map …and how current efforts are on to pushback deadlines to bring it closer than the Niti Ayog expert recommendation on Ethanol policy 2020-2025.
In case you need any further info or you want me to Substantiate any of the statement that I have made , please do let me know, I will try to connect with you with details!
Discl: For information and education purpose only.
I have investments in a basket of renewables, Green Hydrogen, EV, CNG,Ethanol story that includes Praj.
This is not an investment advice. Please do your own assessment before investment
I must thank you for such a detailed note covering the entire lifecycle of fuels, emissions,pollution et all.
In one message, I got a good primer to research further. Hats off to VP community for sharing abundant knowledge
On similar lines, please go thru the below interview of Mr Gadkari …in the first 10 to 20 minutes, he is emphasising the urgency of ethanol blending, flex fuel,EV and green hydrogen. In the next 5 to 7 years, he wants all petrol pumps to shut down
To achieve 25% Ethanol Blending by 2024-25, Centre Approves 859 CR Ltr Grain based 196 Ethanol projects!
This appears that the Govt is determined to continue supporting the Ethanol Blending program leading gradually to Flexi Engine vehicles program.
This will go a long way by (1) reducing crude import bills proportionately (2) Reduce carbon emissions by 75% when compared with petrol (3) enhance increasing Octane number of petrol and eliminate usage of MTBE- a deadly pollutant
(4) Support farmers to earn more
(5) Stop importing ethanol
If so much are the benefits of Ethanol , should we not emphasise on producing surplus food grains from our vast Agricultural land bank ? To do that, we need to reduce our dependency on Rain water and ensure supporting irrigation schemes, ground water extraction by Solar pumps, canals from perennial water bodies like lake , River , massive Rain water harvesting projects , drip irrigation, incentives for farmers crop rotation etc etc.
We have Seas all around our country, if required we should put up desalination plants at large numbers …currently we have very few of them in Chennai and Gujarat coast.
The top 5-countries in the world which are making best use of vast sea water by putting desalinising plants are Australlia, Israel, Saudi Arabia, USA, & China… Spain is the leading country which has put up a lot desalinising plants exclusively for Agriculture !
Hopefully, some budgetary support may be forthcoming in our next budget to achieve surplus food grain production !
Petrol not blended with Ethanol to attract additional excise duty of Rs 2 per litre.
I had a wrong impression that the entire country has switched over to Ethanol-Petrol blend.
During one of my recent Tour to North East on one of my official trip , I found that still petrol being sold without ethanol blending…
Later on my further research , I found that while oil PSU’s mandatorily sell blended petrol in all its outlets all across the country…
However , Govt has Deregulated petrol diesel for the last few years and today there are at least a dozen of pvt players in the market who are still selling petrol without blending with ethanol and there are consumers who keep buying petrol without blending
Rightly , the govt has levied a kind of penalty of Rs2 per litre in form of excise duty which means Petrol without blending will be more expensive than the blended petrol
Today , in India we have just achieved 8% blend…
With 25% target by 2025, there is still great runway for growth of ethanol.
I think we are not understanding the business of Praj…
Praj is not an Ethanol producer… It is the Sugar Companies that are producing Ethanol. Praj is having the technology which can produce Ethanol. Ethanol blending is mandatory and it will required lot of ethanol plants which are going to be supplied by Praj or any other Ethanol technolgy company.
Praj is also devloping many other technology which will produce energy from different sources. They are working very hard to develop clean fuel technology. Result might be seen in coming years.
Great to see that you are trying to connect the dots.
Few points from my side
Praj is not a pure ethanol play. Its like the wearable Jeans / Pick & shovel play for the Gold mining rush. So its providing the things necessary to build an ethanol plant.
Indian Government has asked for ethanol not only from sugar but also other grains. Not only corn as on the above example.
Praj is not a pure ethanol play. Its is various other industries like bio-diesel where its again like a jeans / pick & shovel play.
I also hope you have seen the Sujal Kapoor video on Praj Matrix.
Means, Praj has many optionalities to its business and not only dependent on ethanol.
Thanks for sharing. However, I do think that the ethanol story unfolding in India might have more merit because of the real and urgent need to increase production of Ethanol to meet the 2025 deadline. The current capacity vs needed capacity has to be fulfilled to meet the demand and hence it is a real opportunity for all players involved here. Praj industries, Balampur Chinni mills etc. stand to benefit because of their current foothold in this market. So atleast for the next 2-3 years, I think there is some money to be made in this market but ofcourse only if you back the right company which can execute well. Praj in particular looks like a good bet to me because it is the market leader in ethanol plant and equipment manufacture, has some relevant patents and is well diversified (Bio Gas, Bio plastic etc.).
Note - I am a novice to investing, just started my journey. My views and opinions come from the realm of my very limited knowledge I have begun to accumulate.
With all due respect for all authors of various books that are published, normally authors want to make his book very exciting …and consequently they try to mention many stories based upon their past experience with an event or a situation which may not be always relevant.
While Praj is a pure Biotechnology company with multiple futuristic verticals and many of them would play out sooner or later , but for me the immediate story is still ethanol…Ethanol is here to stay…
If Green Hydrogen/ EV is the ultimate answer for automobiles , but will take very long lead time 5-10 years even more…so in the mean time, Ethanol Petrol blend and CNG woul be the preferred Automobile fuel at least for India.
All the Govt intiatives so far is based upon clear logic and reasons which they are determined to execute/ implement the ethanol petrol blend.
(1) with 25% ethanol blend , they are going to save 15 Billion USD In foreign exchange in a year which works out to more than 1,10,000 Crores in INR per annum. (our oil imports bill is 61 Billion USD )…and to that extent, it reduces our dependency upon other oil exporting countries which many times try to Arm-twist India…to that extent we are also insured against crude volatility in the Globe.
(2) Cut carbon emissions proportionately … imagine ethanol reduces Carbon emissions by at least 75%, when compared with Petrol, which the Govt can not ignore as India has committed in all world forums to cut carbon emission in targeted time lines
(3) Ethanol is a sustainable fuel…even if it emits Carbon at much reduced level, the carbon gets recycled or used up by the Sugarcane Crops and other crops through photosynthesis…so to some extent it can be considered as carbon neutral.
(4) Due to its anti knock quality, ethanol petrol blend has higher octane number than normal petrol and we can avoid the use of the pollutant Additive MTBE with petrol…we also import MTBE
However, the only negative I could see is as I mentioned in one of my posts above…that we depend too much on Rain water …50% of our arable land are monsoon dependent…in case of a couple of monsoon failure , then the entire ethanol story gets affected
So the need of the hour is to plan alternatives water irrigation, proper incentives to farmers for growing multiple crops.
Discl : invested for long term…I don’t look at QoQ results for this stock.
I may be biased. Please do your own assessment before you invest
Thank you, watched the Praj portion of it. The potential for Praj seems good but it could also take a while to play out. Ethanol could provide an immediate tailwind while the rest of the product line up can come good in 5 years from now. My takeaway is that Praj is most definitely the best placed in the Biotech space but it is yet to perform (financially). Hopefully, this year can be its breakout year.
America’s ethanol ecosystem can not be compared with that of India’s.
America depended mostly on corn for making ethanol and that is not the case with India.
Also, Praj is a proxy play on ethanol theme.
They are the ones with highest moat and are best placed on competitive advantage metric.
There is a reason why they have 60% plus market share in setting up plants for ethanol.
Also, 10% of world’s ethanol is produced using Praj’s technology. It is a technology behemoth and not a commodity manufacturer.
300+ patent is enough to bring huge revenue & cash flow through IP only, only thing to be considered is D&D weather they can delivered it with more precision, it’s a decadal play
Praj announced Q3 results. EBITDA remains flat Q-o-Q at 8.7%, revenue has grown by 10% Q-o-Q. At the end of Q2 they had an order book of 2200 Cr. Order execution seems to be slow. Input cost challenges continue.
Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018 Mar 2019 Mar 2020 Mar 2021 TTM
Sales1,003 919 986 1,012 1,024 915 917 1,141 1,102 1,305 2,071
OPM % 12% 8% 9% 9% 8% 9% 11% 8% 6% 7% 7% 9% 10%.
The operating margins have hovered at an average of around 9-10% . Many commodity business fetch a better margin then that of Praj.
Inspite of sales improvement during last 3 to 4 quarters there is hardly any improvement in margins.
Disclosure: Exited my position as numbers were not matching with narratives, however great respect for the promoters and Company.
