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26 April 2009

PRAJ INDUSTRIES : A FOOD VERSUS FUEL DEBATE

Praj is an Indian company that offers solutions in bio-ethanol, bio-diesel, brewery plants and process equipment & systems. It is a knowledge based company with expertise and experience in Bioprocesses and engineering. 

The world of Biofuels is yet to attain its level of maturity and will continue to generate passion amongst both, ardent believers and detractors, equally. The classic food vs. fuel debate seems to be far from culmination. It presents conflicting ideas of livelihood versus survival. An investment in this company would depend on which side you want to lay your bets on. The price of oil is another reason why such an investment would make economic sense.

BUSINESS
Praj is a 25 year old engineering company based out of Pune. It aims to apply biotech/ bio based tech for a sustainable future. The company is engaged in the design, manufacture, supply and commissioning of fermentation and distillation equipments for the manufacture of ethanol . It has a market share of 60 per cent and is a leader in ethanol plant and equipment manufacture.  The company, in collaboration with Vogellbusch Gmbh, Austria, introduced cascade continuous fermentation process. It also manufactures :-
(a) Plate head exchangers in collaboration with REHEAT, Sweden.
(b) Solvent recovery systems under the brand name 'Ecofine'.
(c) Pressure fermentation breweries in collaboration with Dab Brav Consult Gmbh, Germany. 

In 2005 it's R&D facility Matrix- the Innovation Center developed 'MashTone' a new bionutrient for the ethanol industry. In 2007 it announced a joint venture with engineering and construction company Aker Kvaerner and  with Brazilian Engineering Major for Ethanol Plants.

Its geographic spread across 40 countries on 5 continents creates a natural hedge. An expanding area of influence to include Phillipines, Mexico and partners in Europe and Brazil augment its India and US operations. Exports make up to 55% of its revenues but in the current recessionary scenario managing growth may not be easy. That the existing ethanol plants in the US have either shut shop or are underpowered demonstrates the slowdown in demand. The management expects to offset this against its EU and local operations. Starting 2011, 10% blending of fuel in the EU is to be completed by 2020. This coupled with the local and other global emerging standards on bio-fuels suggest a stable long term revenue projection.

FINANCIALS
On a revenue of Rs 774 Cr, Praj made an operating profit of Rs 158 Cr. Though at the operating level, it has maintained a margin of 20%, its net profit margin has dropped to 16% due to a higher outlay for taxation. This has resulted in a 15% drop in EPS, adequately reflected in the current market price of Rs 72.
Praj has been a debt free company for the past five years, managing its growth through internal accruals and an equity dilution in 07-08. This reflects in its consistently high Return on Equity which currently stands at about 44%.

VALUATION
The trailing twelve month EPS of 7.08 discounts the current market price of Rs 72 by 10.27(TTM PE) times. At a cost of equity of 14.75% the stock is currently valued at Rs 91. 

5 comments:

Charu Gupta's Blog said...

Hey Puneet,

Very well analysed and very informative. I'm researching the company further and thinking about investing in it. My valuation says that the company can be expected to grow at 25% in the long run and thus i feel currently its trading much below its intrinsic value of Rs. 165 (this is according to 25% gr rt).

Thanks and regards,
Charu Gupta.

Puneet said...

@ Charu. Thank you for your comment. Would love to read your analysis. Do let me know if I have missed out on any crucial aspect or gone wrong somewhere.
A 25% growth rate for perpetuity may be a tall order.

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santoshi prasad said...

Securities and Exchange Board of India( SEBI ) has approved the National Stock Exchange NSE’s tie-up with a number of regional exchanges including Calcutta, Vadodara, Jaipur and Madhya Pradesh.
This will help Members from these exchanges to trade on a much wider country-wide trading platform–the NSE a press release issued here said. for more details please visit to:-http;//wwwpuntercalls.com

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