Praj Industries - Well-positioned to become a major player in environment, energy, and agri processing

Summary

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• Praj’s ethanol technology serves various applications in different parts of the world
• Established market position in the ethanol project and process engineering business
• Well-positioned to benefit from the increasing demand for cleaner fuels
• Better performance expected on the back of increased order inflows and higher utilization levels

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Praj Industries is a leading bio-based technology and engineering company in India. The company has a history dating back to more than three decades and a presence all over the world. Praj had humble beginnings starting out as a supplier of ethanol plants. The company has today evolved to become a globally leading company with a range of solutions for bioenergy, pure water, critical process equipment, breweries, and industrial wastewater treatment. Praj is a market leader in developing and deploying innovative technology solutions for sugar as well as starch-based ethanol plants. 

 

The company has six national and international subsidiaries - Praj HiPurity Systems and Praj Engineering & Infra in India, and Praj Far East Co., Praj Far East Philippines Ltd, and Praj Americas, and Praj Industries (Pty) Ltd. in Thailand, The Philippines, USA, and South Africa. 

 

Recent achievements include signing a Construction License Agreement with Gevo, USA to commercialize the technology to produce Isobutanol using sugar-based feedstocks and becoming a top 8th company from 34th place in 2018 in the list of Top 50 hottest companies in Advanced Bio-economy for the year 2019 by Biofuel Digest.

 

Praj Industries’ Pros

 

i) Large presence across five continents - Praj serves both national and international markets. It has an established market position in the domestic ethanol plant installation and equipment business and the domestic breweries installation segment. The company has operations in more than 100 countries across five continents and over 750 customer references. Exports account for ~30%-40% of Praj’s total revenues. It has manufacturing activities in four factories, R&D in two Research Centers, 65 project sites, totaling 73 national locations as of 31 March 2021. The largest two of its manufacturing facilities are in Pune and Kandla (Gujarat).

 

ii) Diversified product portfolio - Praj Industries is engaged in the manufacture of other Special - Purpose Machinery. Three key products/services that the company manufactures/provides are Bioenergy Plants (~60% of consolidated revenue) - 1st and 2nd Generation ethanol and renewable biogas that can substitute fossil fuels and promote sustainable decarbonization through Circular Bio-Economy, Engineering Businesses (~40% of consolidated revenue) - Critical Process Equipment & Skids, Processes & Systems, Brewery Plants, Water, and Wastewater Plants, and R&D.  

 

 

Source: Praj’s Quarterly presentation

 

iii) Lucrative and futuristic businesses - Praj is well-positioned to benefit from the evolving ethanol technology in the world given its expertise which spans across a variety of sugar to starch-based feedstock or 1st generation feedstock. Praj is one of the few companies in the world to develop 2nd generation ethanol technology using agri-residue. Praj Hipurity Systems, a wholly-owned subsidiary caters to a reputed clientele in the Indian and global pharma industry, as well as the biotech, cosmetics, and wellness sectors. In addition, Praj offers integrated wastewater treatment systems and has an established name in the industrial sector with a wide range of solutions as well as brewery plants producing beers at optimum costs.

 

iv) Healthy Pipeline and Visible Cash flows - Praj Industries’ performance in 2H’21 is expected to improve on the steady order book. The company is also expecting increased execution of international orders. Praj collects advance payment in most of the fixed price contracts which reduces the impact of any fluctuations in raw material prices.

 

 

Source: Praj’s Quarterly presentation

 

v) Capacity Expansion - As a result of its deal with GBL Karnataka, Praj will expand its existing ethanol manufacturing capacity to 600 KL per day from 400 KLPD, using sugarcane syrup. When commissioned, this plant is expected to become the largest capacity syrup based ethanol plant in India.

 

Praj Industries Challenges 

 

• Exposure to cyclical capital goods industry - Praj operates in the cyclical capital goods sector. Its profitability is dependent upon the growth prospects of end-user industries.
• Project risks - Since the company undertakes turnkey projects, it is exposed to various project-related risks such as fluctuations in input prices.  

 

Future Opportunities

 

Praj has developed technologies for several clean, renewable fuels and chemicals such as  BioCNG, Bio-butanol, etc. which have the potential to redefine the global energy matrix. Volatility in international crude prices and exchange rates has further emphasized the importance of energy self-reliance for India. New deals with Gevo USA, Sekab E-Technology Sweden, and a strong focus on Compressed Biogas should drive growth over the medium term. 

 

Praj has bagged an order to set up India’s largest capacity syrup-based ethanol plant from Godavari Biorefineries Ltd (GBL) in Karnataka. Laurus Labs has also tied up with Praj Hipurity for its bio-manufacturing plant. Praj has become a major player in Pharma grade water and has good growth potential in Pharma manufacturing in India. The company also bagged an Rs. 226 cr order from IOCL for the execution of a zero liquid discharge system in an IOCL branch in Gujarat.

 

Praj’s Bio-Mobility platform uses renewable resources to produce carbon-neutral transportation fuel across all modes of mobility (surface, air, and water). Praj deploys its biofuel technologies for the transportation sector and plays a role in mitigating the dangers of climate change as the Transportation sector is the second-largest emitter of GHG. 

 

India has also announced investments worth Rs 2 lakh crore in setting up 5,000 plants to produce gas from bio and crop wastes by 2023-24. The progressive National Biofuel Policy has an objective of reaching 10% ethanol blending by 2022 and 20% by 2030. This has further created a demand for an additional capacity of 1000 cr liters of ethanol. All these factors act as strong tailwinds for Praj’s future growth. The company is already using Agri residues in its plants for ethanol production and has brainstormed the technology that can store concentrated cane juice to be used when the mills are not crushing.

 

Valuation

 

Praj Industries has a market capitalization value of more than Rs. 6,400 crores and is currently trading near Rs. 350 mark, just 14% below its 52-week high. The stock has returned nearly 1500% since 2005 and has climbed ~350% in the last year. The promoter holding is low at ~32%. It has maintained a healthy dividend payout of 58% over the years. Praj has delivered poor sales growth of ~5% over the past five years. The stock is trading at 8x its PB which looks quite expensive.

 

Praj Industries is almost debt-free though profits have not registered a decent growth over the years. The company has a strong capital structure and adequate liquidity to support business growth. 

 

The company’s sales, OPM, PBT, PAT, and EPS (consolidated) over the last ten years.

 

Year ended	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	TTM
Sales (in Cr.)	734	665	1,003	919	986	1,012	1,024	915	917	1,141	1,102	1,305	1,561
OPM %	12%	8%	9%	9%	8%	9%	11%	8%	6%	7%	7%	9%	10%
Profit before tax (in Rs. cr.)	128	66	119	92	77	86	105	68	53	88	83	113	157
Net Profit (in Rs. Cr.)	120	58	68	68	55	76	82	45	39	68	70	81	114
EPS (in Rs.)	6.47	3.13	3.73	3.83	3.08	4.3	4.63	2.49	2.18	3.73	3.85	4.42	6.21

 

Data Source: Screener.in

 

Bottom Line

With an increasing demand for cleaner fuels and reducing dependence on crude oil, there is a strong focus on ethanol production. India is emerging as a sourcing hub for engineered products and Praj’s critical process equipment and systems are strategically positioned to address that demand. The company is also well-positioned to benefit from the momentum in 1G, CBG, and 2G orders that will support growth over the next two years. Moreover, biofuels and ethanol have become the main focus of the Indian government as well. Praj has been recognised as a valuable contributor towards developing and deploying sustainable decarbonisation solutions using innovative technologies that help preserve the environment. Investors having a long term horizon might consider this stock.

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Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.