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.

Europe gives second round of funding of € 529.53 billion or Rs. 34,94,898 Cr !!!

European Central Bank gave second 3 year discounted loans to the banks under LTRO.

LTRO stands for ‘Long-Term Refinancing Operation’ and is a monetary tool used by the European Central Bank to help pump liquidity into the banking system. The ECB offers European banks long term loans at the prevailing ECB interest-rate. The recent “LTRO” and “LTRO 2″ are 3-year loans at 1% interest rate. However, these operations have been carried out in the past with other, shorter maturies, such as 3-month loans back during the 2008 crisis. ECB offers LTRO during emergencies such as the funding crisis that hit European banks at the end of 2011. Usually when a particular bank gets into trouble and is in short of money to finance its operations, it has to go to the private market like private sector banks or financial institutions for those funds and when it cannot, due to the price to borrow is too high, or funds have pulled back from a particular bank (because of exposure to Euro-zone periphery debt) it needs to rely on funding from national central banks or from the ECB. The part of the purpose of the LTRO is to give banks a chance to participate again in the “Carry Trade” of European sovereign bonds. By being able to borrow at 3-year maturities banks can use those funds for buying shorter term government debts with higher yields. Carry Trade means borrowing in Euro € (any currency) converting them into US$ (or any currency) and route those $ into India (or any country).

European Central Bank allotted € 529.53 billion (Rs. 34,94,898 Cr) for 1,092 days under the refinancing tender were 800 banks asked for the three year loans. Since the expected range was around € 200 billion (Rs. 13,20,000 Cr) - € 1 trillion (Rs. 66,00,000 Cr), and just above the median € 500 billion (Rs. 33,00,000 Cr), this is clearly within the expectation. What is certainly scary is that the number of banks demanding a hand out was a whopping 800, well above the 523 banks from the LTRO 1 were ECB allotted € 489 billion (Rs. 32,27,400), this clearly points that many banks are capital deprived. LTRO will help out the entire country. Spanish and Italian banks, the biggest buyers in the last operation, used their holdings of their own sovereign bonds as collateral for the LTROs. This helped reduce sovereign bond yields, which were threatening to stay at unsustainable levels that would make debt repayments impossible.

Now, the ECB will collect 1 % on combined total of € 1.018 trillion (Rs. 77,88,000 Cr). It’s wished that these banks will find its way to monetize this in Carry Trade opportunities. Usually, equity markets tend to rally whenever there is any easing of liquidity directly or indirectly by the central banks. It is partly due to sentiment, and partly due to money actually flowing into risk assets like equity. Liquidity easing by central banks leads to lowering of bond yields, and also assures investors that the crisis has been averted. Besides, banks may use a chunk of the funds for 'carry trade'- as said above. At the peak of the 2007 Bull Run, many investors would borrow in yen, convert those into dollars, and then deploy the dollars in risk assets like emerging markets equities.

But LTRO should not be looked as the only solution for Europe. It will only improve the liquidity in the system, and reduce some of the problems that otherwise may have been aggravated by a liquidity problem. But it will not address the fiscal problems in weaker Euro zone economies like Greece and Portugal, among others. Most economists are of the view that Europe is headed for recession, irrespective of LTRO. 


As for our India , many experts believe that this money will not leak into emerging market. They believe that these monies is primarily to make sure that Europe doesn't have a credit crunch and stays primarily in Europe. The money flow to India will depend on India ensuring that it has friendly investment climate to attract those funds, India has to free up its economy more from deficits. Since the beginning of the 2012 the FII's have infused a total of Rs. 24,225 cr  (US$ 4 billion) into Indian stocks. In the first 17 days of the February 2012 they have infused about Rs. 13,867 cr way higher than that of the entire month of January 2012 which stood at Rs. 10,358 Cr.


Hope this time too they bring in such kind of money - the trigger they would be watching would be Budget    

VEDANTA RESTRUCTURING: Sterlite & SesaGoa to merge !!!

As per the plan, the Sterlite Industries will merge into SESA GOA, which will be form as combined entity named to be SESA STERLITE. Sterlite shares holders will be given 3 Shares of SESA GOA for every 5 Shares of Sterlite held.

Vedenta Aluminium (VAL) and Madras Aluminium will be 100 % consolidated into SESA STERLITE. Vedanta’s direct holding of 38.8 % in Cairn India will be transferred to SESA GOA, together with the associated debt of $5.9 billion (Rs. 29,500 Cr) at cost. After the transfer, SESA STERLITE will have 58.9 % shareholding in Cairn India. The new entity SESA STERLITE will be seventh largest global diversified natural resources major by Earnings Before Interest , Tax and Depreciation. According to the chairman of VEDANTA Mr. Anil Aggarwal, SESA STERLITE will be the principle operating company in the group and with its high quality assets, growth projects and strong management; it is well placed to create value for all shareholders. This merger would be cost saving of around Rs. 1,000 Cr a year.

After consolidation, Vedanta will own 58.3 % in SESA STERLITE. The group’s 79.4 % shareholding in Konkola Copper Mines will continue to be directly held by Vedanta. Post consolidation VEDANTA will own 58.3 % stake in SESA STERLITE with VEDANTA PLC’s debt service liability will reduce by 61 % from $9.65 billion (Rs.48,250 Cr) to $3.8 billion (Rs.19,000 Cr). Post consolidation SESA STERLITE will have market capitalization of $20 billion (Rs. 1 lakhs crore) and will join the elite league of resources firms like BHP Billiton, Vale and Rio Tinto. Post consolidation the new entity SESA STERLITE will have net debt of $7.38 billion (Rs.36,936 Cr) with 8 % of interest cost.  

For SESA GOA – it will issue 3 Shares for every  5 shares of Sterlite; will issue 7.2 Crores shares to VEDANTA for its 70.5 % stake in Vedanta Aluminum; will issue 7.9 crores shares to Vedanta for its 94.8 % stake in MALCO

What VEDANTA will do – It will transfer its 38.8 % stake in Cairn India to Sesa Goa along with $5.9 billion debt. However, Hindustan Zinc and Bharat Aluminum Company in which government has stake will not be a part of merger.

SESA STERLITE will be listed in India and on New York Stock Exchange as American Depository Shares (ADS).        

SESA STERLITE STRUCTURE AFTER CONSOLIDATION

YEAR ENDED DEC 2011	Rs. Crore	$ Million
REVENUE	66,431	14.23
OPERATING PROFIT (EBITDA)	24,953	5.35
GROSS DEBT	66,717	13.55
OUTSTANDING SHARES	296 Crore	----