HDFC Securities - Praj Industries

HDFC Securities report on Praj Industries:

Key Positives

We see PRAJ transforming itself into a “Global provider” of end-to-end Ethanol distillation equipment and technology. In this process, we see the company exploring newer territories (Europe and Brazil, to be specific), which would tend to significantly improve our Conviction levels on PRAJ’s business growth. We built our opinion on PRAJ’s success in the last few years (Mainly in tapping the US markets).

We expect PRAJ to post >67% earnings growth on a CAGR basis over FY07-09E. We expect exports to increase further, as the company recognizes its US orders as revenues and garners increased business from other export markets, mainly European.

On the long term demand for fuel ethanol (production expected to cross 24 billion gallons by 2010 against 15.5 billion gallons currently), we remain bullish. We expect PRAJ to tap growth opportunities, going forward as it intends to gain a share in key markets including the US, Europe and Brazil, where it plans to enter soon. We believe PRAJ’s European and Brazilian forays will be the catalyst to propel the company, going forward. Our argument is based on the premise that these nations (mainly the US, Europe and Brazil), account for >80% of the current global ethanol production.

PRAJ recently inked a JV in Europe with Aker Kvaerner called BioCnergy Europe B.V. PRAJ owns 60% in the JV and Aker Kvaerner the balance 40%. We believe this JV is strategically advantageous for PRAJ, as this would help it tap the European bio-ethanol market as well.

Outlook & Valuation

We retain our conviction levels on PRAJ’s business growth, especially its strategy of focusing on inorganic and organic expansion initiatives. We believe this would help the company answer its growing business needs. We also believe, PRAJ’s nature of business provides an early mover advantage, in terms of entering newer territories and improving the confidence of the clients in its ability to execute projects. On a PE multiple of 27X & 20X its FY08E & FY09E earnings, we see PRAJ to be an OUTPERFORMER.