PRAJ IND LTD : Passionate for Green Fuel !!!

Scrip Code: 522205 / PRAJIND

CMP:  Rs. 79.90; Buy at current levels.
Short term Target: Rs. 92, 6 month Target – Rs. 120; STOP LOSS – Rs. 75.44; Market Cap: Rs. 1,476.38 cr; 52 Week High/Low: Rs. 113 / Rs. 63.90

Total Shares: 18,47,78,723 shares; Promoters : 4,77,00,000 shares –25.81 %; Total Public holding : 13,70,78,723 shares – 74.18 %; Book Value: Rs. 30.25; Face Value: Rs. 2.00; EPS: Rs. 4.13; Div: 63 % ; P/E: 19.35 times; Ind. P/E: 12.68; EV/EBITDA: 20.79.

Total Debt: ZERO; Enterprise Value: Rs. 1,478.22 cr.

PRAJ INDUSTRIES LTD: The Company was founded in 1985 and is based in Pune, India. Praj Industries Limited engages in process and project engineering activities in India and internationally. The company offers turnkey alcohol and fuel ethanol plants, as well as a range of specialized services to alcohol and fuel ethanol plants, including license and technology for liquefaction, fermentation, and distillation; technology and engineering audits for bio-fuel plants;  contract research and pilot plant scale facility for fermentation & biotechnology applications; engineering services; project management; manufacture, procurement, and inspection services; engineering and supervision of civil and structural work; supervision of erection and installation; and after-sales services. It also provides brewery engineering/technology services consisting of mash kettles, lauter tans, mash filters, wort kettles, Whirlpools, and wort cooling and aeration products; engineering and design services; and project services. In addition, the company offers water and wastewater treatment solutions consisting of biological treatments; energy efficient evaporation plants; solvent recovery plants; membrane based solutions; and chemical treatments UV treatment, ozonation, and chlorination. Further, it provides EFFYTONE range of products for use as fermentation performance enhancers; and designs and manufactures various equipment, such as distillation columns pressure vessels, fermentors, reactors, tanks, heat exchangers, evaporators, condensers, re-boilers, skid mounted equipment, and customized fabrication / fabricated equipment; and offers agri energy consultancy services for bio-fuels. The Company's subsidiaries include Pacecon Engineering Projects Ltd. (PEPL), BioCnergy Europa B. V., Netherlands, Praj Jaragua Bioenergia S.A., Brazil, Praj Americas Inc., Texas, Houston and Praj Far East Co. Ltd., Thailand. In October 2011, it formed a new wholly owned step subsidiary, Praj Industries (Sierra Leone) Ltd. In January 2012, the Company acquired 50.2 % of Neela Systems Limited. The company is compared with Alfa-Laval (India) Limited, SML Isuzu Ltd. and Federal-Mogul Goetze (India) Limited.

Investment Rationale:

Praj Industries ltd is a global Indian company that offers innovative solutions to significantly add value in bio-ethanol, alcohol, brewery plants, process equipment and water and wastewater treatment systems for customers, worldwide. Praj is a knowledge based company with expertise and experience in Bioprocesses and engineering. It has one of the largest resource bases in the industry with over 450 references across all five continents. The company has filed 11 patents in the recent time and 3 patents are related to various technologies. In domestic market, Praj has a market share of 75 % share in distillery and 65 % in breweries. In SE Asia and South Central America, the company has a market share of 50 %. The company is enjoying overall 10 % global market share in ethanol/ alcohol segment. The company has capex plan of Rs 250-300 crore over next three years that would be invested into high value products, and in-house land and expansion of premises. Management expects 12 % - 13 % margins in FY13E and 15 % - 16 % of margins in next 2-3 years. Management indicated that lignocellulosic ethanol development activity is in advance stage and demo scale plant with total capacity of 35,000 - 45,000 liters per day will commence operation in next 1-2 quarters. Praj acquired 50.20% stake with Rs 64 crore in Neela Systems Ltd, having business interest in niche area like water treatment and modular process systems. The acquisition cost looks at higher end at 3.1x to book value that we expect is discounted in state of art technology and higher margins. Further, Neela has an annual turnover of Rs 80.5 crore in FY11. Praj’s board has recently approved a Buy-back of its outstanding equity shares (FV Rs 2.0) to an aggregating amount of Rs 55.9 crore. The buyback price would not be more than Rs 90. It is expected that this move is the right utilization of cash and will bring stability in the share price. The utilization of cash for buy back purpose will lead to fall in other income by Rs 5.00 crore and fall in equity by 3.4 % resulting into fall in EPS by 2.08 %. However, the return ratios like ROE and ROCE will see the growth by 37 bps and 93 bps for FY13E. Buyback has improved ROCE’s by 100 bps for FY13E that is positive for the company.

Outlook and Valuation:

Alcohol/Ethanol vertical contributed majority of revenue (73%) and order inflow (58%) at the end of Q3FY12. We expect revenue CAGR of 16% over the period of FY11-FY13E on account of substantial order backlog in this segment. Management indicated that geographies like US, Europe & Brazil are silent in current period and growth will be contributed regions like South & Central America, SE Asia and Africa. Customized engineering vertical has commenced 3,000 tons facility in Kandla and this facility will generate revenue of Rs 70-100 crore over the period of FY13E to FY15E. Further, Jejuri Plant, GMP compliant manufacturing facility, for range of biotech products also operationalised and expected to generate revenue of Rs 60-70 crore over the period FY13E to FY15E. PRAJ, in Q3FY12, received an order inflow of Rs 220 crore (58%, international orders) inspite of challenging global environment that builds more confidence in the business. The order backlog is Rs 900 crore (1.2x to FY12 Sales), 84% from ethanol/alcohol plants. PRAJ reported Q3FY12 standalone revenues of 219.3 crore (up 47.9%, YoY) that is above to our estimates, primarily led by higher execution in alcohol/ethanol segment. Excluding Forex losses, EBITDA up by Rs 24.2 crore (up 151.5%, YoY), primarily led by lower O&M expenses. EBITDAM has improved by 455 bps and O&M Expenses fell by 295 bps and employ cost fell by 228 bps. PAT grew by Rs 21.5 crore (up 57.4%, YoY) and forex losses has fallen from -5.3 crore to -3.6 crore in Q3FY12. Revenue grew by Rs 219.3 crore (up 47.9%, YoY) primarily led by strong execution in ethanol segment. Excluding Forex losses, EBITDA up by Rs 24.2 crore (up 151.5%, YoY), primarily led by lower O&M expenses. EBITDAM has improved by 455 bps and O&M Expenses fell by 295 bps and Employ cost fell by 228 bps. PAT grew by Rs 21.5 crore (up 57.4%, YoY) and forex losses has fallen from -5.3 crore to -3.6 crore in Q3FY12. I am positive on account of improvement in margins secondly due to moderate order flow thirdly increases in Return on Capital Employed on account of cash utilization for buyback of shares. The stock is currently trading at P/E of 17.00 x FY2012E and 13.31 x FY2013E. Valuing the stock which is of ZERO debt the fair price of PRAJIND comes at Rs. 140. In my view PRAJ IND could report EPS in FY12E & FY13E of Rs. 4.70 per share and Rs. 6.00 per share, respectively. 

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	734.40	664.90	759.30	898.30
NET PROFIT (Rs. Crs)	120.10	57.80	84.10	113.20
EPS (Rs.)	6.50	3.10	4.70	6.00
PE (x)	13.00	25.50	17.00	13.30
P/BV (x)	3.00	2.60	2.20	1.80
EV/EBITDA (x)	15.10	31.10	18.80	13.20
ROE (%)	22.80	10.30	12.80	14.10
ROCE (%)	15.70	6.50	10.10	12.80

I would buy PRAJ IND LTD with a price target of Rs. 120 for Medium to Long term and Rs. 92 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 73.40 on every purchase.