Praj Industries

Shareholders can continue to remain invested in the stock of Praj Industries. While the company’s last quarter and full year performance have not been impressive, easing credit conditions worldwide and Praj’s established position in the field of bio-ethanol technology make the stock a good long term investment.

The stock was beaten down following the almost vertical plunge in crude oil price, led by concerns that low oil price may trim the spends by Praj’s user companies.

While that has proved to be true, what with the company seeing lower yearly and quarterly sales and tepid growth in order-book, what lends comfort is that the lower sales was driven more by the postponement or slowed investment by companies than any loss in sheen of investing in bio-ethanol facilities. At the current market price of Rs 72.6, the stock appears reasonably priced at about 10 times its likely FY10 per share earnings.

With the credit conditions beginning to look up, the company could see a revival of enquiries and order intakes in the coming quarters. Shareholders can wait a couple of quarters before adding or cutting their exposure to the stock. Till such time, trends in order inflows may bear a close watch.
US to go slow

The company has an entrenched presence in the global markets of the US, EU, Brazil and South-East Asia; exports make up for over 55 per cent of its revenues. However, with the recessionary trends in the US and EU, managing growth in these markets may no more be easy.

The management has said that the overall contributions from its US operations, where it had a couple of years back acquired the US-based CJ Schneider to establish manufacturing presence, is likely to drop this fiscal. That the existing ethanol plants in the US are not using up their capacities in full — a few have shut operations — also validates the anaemic demand trends in the country.

While, overall, the biofuels production levels in the US are expected to remain buoyant — likely production of 38 billion litres this fiscal as against 35 billion last year — Praj appears likely to see a slowing of its US operations. The management, however, expects to offset this by focusing more on the EU and domestic markets.
Growth avenues

Praj expects a significant increase in revenue contribution from the EU. EU’s directive that requires motor fuels to be 10 per cent ethanol-blended by 2020, starting 2011, offers an immense growth potential for Praj, which has a market share of about 30 per cent in the region.

This directive, when implemented in totality, will require an additional biofuel production of over 12-14 billion litres whereas Europe currently has a total production capacity of 3.5-4 billion litres only. In this regard, that the company has a presence in the EU through a joint venture BioCnergy Europa B. V., with Aker Solutions (60:40) lends comfort.

The joint venture company is operational and had previously even bagged an order (valued at Rs 120 crore) for the design of an ethanol plant for Vivergo Fuels.

But even as the favourable regulatory developments suggest a stable long-term revenue outlook for Praj, challenges such as funding constraints and fall in demand may weigh on performance in the near term.

It is in this context that the company’s diversified revenue base (in terms of global markets) provides relief. Praj’s strong presence in South-East Asia (50-55 per cent market share) and the domestic (75 per cent) market belie fears of any significant slowdown in revenues to a great extent. The company’s order books of over Rs 800 crore (roughly executable over the year) also assuage concerns.
Results card

Praj’s latest earnings scorecard appears to have mirrored the tepid business environment. For the financial year ended March-09, the company reported 10 per cent growth in sales, while its bottomline shrunk by 15 per cent.

Forex losses, higher depreciation and a three percentage points fall in operating margins to about 20.3 per cent were reasons for the fall in profits. On a consolidated basis too, the performance has been far from impressive. While the company managed to grow its topline by 26 per cent, its profits fell by bout 20 per cent.

For the coming year, the company expects more order inflows from the international markets vis-À-vis domestic markets. This may prove beneficial as international orders enjoy higher margins.

As for the existing contracts, the company may have little room to manoeuvre its margins since most of them are fixed price contracts. That the company books its raw material requirements as soon as it gets order also rules out any positive impact on the margins from a further fall in commodity prices.