Why Praj Industries Share Price Hasn't Peaked Yet

In the quest for sustainable energy, India is at a crucial juncture. The country is in a battle for cleaner alternatives, with a burgeoning need for power.

While solar, green hydrogen wind has been the talk of the town for some time now, a new player, Compressed Biogas (CBG), has entered the race.

CBG is a green and renewable automotive fuel, offering a viable substitute for CNG in automotive, industrial and commercial sectors.

It comes from treating waste and biomass sources, such as agricultural residue, cattle dung, sugarcane press mud, municipal solid waste, and sewage treatment plant waste.

On a global scale, an India-led grouping called the Global Biofuels Alliance (GBA) has come together to co-develop, accelerate technological advances in production processes and advocate the use of biofuels, particularly in the transport sector.

The three founding members, India, the U.S. and Brazil, were joined by Argentina, Canada, Italy, and South Africa.

As per the International Energy Agency, global biofuel production is set to triple by 2030, a crucial step for achieving net-zero emissions by 2050.

Government's Proactive Policy Reforms

Closer to home, the Indian government is proactively implementing policy reforms, advancing the ethanol blending target.

Instead of the earlier 2030 goal, the revised aim is to achieve 20% blending of petrol with ethanol by 2025. Noteworthy, the country has already achieved its 10% mark way before the timeline.

GAIL, the state-run oil and gas pipeline major, has already announced investments in collaboration with TruAlt Bioenergy, India's largest ethanol producer. And very soon, there will be more that follow.

The rush towards ethanol blending and the use of ethanol as a sustainable fuel source offers investors an excellent opportunity to ride the decade's investing megatrend with this little-known smallcap company, Praj Industries.

Praj Industries: A Pure Play on the Surging Demand for Ethanol

A pure play to the surging demand for ethanol in the coming years, Praj Industries designs, manufactures and supplies fermentation and distillation equipment for manufacturing ethanol.

The company has evolved from an ethanol plant supplier to a global powerhouse. It enjoys a first-mover advantage, being in the business for decades and commands over two-thirds of the market share.

It boasts a presence spanning over 75 countries and is at the forefront of environmental, energy and agri-process solutions.

Praj Industries actively engages in ethanol production, employing both the traditional first-generation method using sugary feedstock and the innovative 'second-generation' approach utilising starchy feedstock.

It operates in three distinct business segments, bioenergy (74% of total revenues in FY23), engineering (19%), and HiPurity Systems (7%).

The bioenergy segment manufactures machinery for ethanol production.

The engineering segment has many facets. Under this segment, the company manufactures critical process equipment & skids for various process plant projects, catering largely to the oil & gas and fertilizers sector.

This segment also caters to the new generation energy transition and climate action sectors such as blue and green hydrogen, carbon capture, waste-to-energy and low carbon fuels etc.

Apart from this, the company offers a comprehensive range of solutions for industrial effluent treatment, recycling and zero liquid discharge (ZLD) systems to customers across several sectors namely metals, power, specialty chemicals, fertilizers, refinery & petrochemicals, F&B, etc.

Praj Industries stronghold extends to the brewing & beverage industry, commanding a leading market share and collaborating with major global beer manufacturers.

Within the HiPurity Systems, the company specializes in high purity water systems (WS) and modular process systems (MPS) including fermentation-based solutions catering to pharma, wellness and semiconductor industries.

Praj Industries Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	11.5%	2.5%	17.8%	68.8%	60.6%
Operating Profit Margin (%)	10.4%	9.8%	10.5%	10.4%	9.9%
Net Profit Margin (%)	6.3%	6.4%	6.2%	6.8%	6.7%
Return on Capital Employed(%)	12.0%	11.8%	15.3%	24.2%	32.4%
Return on Equity (%)	9.3%	9.7%	10.7%	17.5%	24.1%

Data Source: Ace Equity

Between 2019-23, the business has done well, with revenues nearly doubling and net profit multiplying by 1.5 times.

While the margins have been rangebound, the expansion in profits in absolute terms has aided returns, with the Return on Capital Employed and Return on Equity propelling in the last 5 years.

Despite the robust growth in the business, the company has no debt on its books, which is highly commendable.

The order intake during the second quarter of financial year 2024 stood at Rs 10.63 bn (up 8% YoY), with 71% from the domestic market.

Of the total order intake, 68% came from bio-energy, 22% from engineering and 10% from PHS business.

Looking ahead, the company expresses confidence in replicating this growth shortly, backed by various catalysts for both the bioenergy and other business segments.

The company aims to expand its global footprint (constituting 18% of total revenues in the financial year 2023) across all segments to reach a 50% international revenue share over the long-term.

Recent Developments

Over the past year, the stock has surged by 50%, surpassing the broader market index, Sensex, by an impressive 32%.

This notable upswing is largely attributed to robust financial performance and the growing emphasis on biofuel as a promising future energy source.

In the quarter ending September 2023, the company delivered stellar quarterly results, with a remarkable 65% growth in operating income during the second quarter of FY24.

This surge was fuelled by a robust order book amounting to Rs 33.5 bn, a substantial increase compared to the same quarter the previous year.

Furthermore, the company achieved an outstanding 44.4% growth in net profit, reaching Rs 481 m in the reviewed quarter compared to the corresponding period in the previous year.

Presently, the stock is trading at a Price-to-Earnings (PE) ratio of 39 times, aligning with its 5-year historical median PE.

Conclusion

Praj Industries presents a compelling opportunity to tap into India's surging biofuel wave.

Its market dominance, diversified portfolio and strong financials inspire confidence. However, investors must remain prudent.

The renewable energy sector is evolving rapidly, with the competition increasing from every aspect.

In a rush to meet its climate goals, the government is fervently investing and encouraging all avenues of renewable energy.

Therefore, conduct a thorough analysis before selecting any investment in this space is very important.

Besides, despite favourable circumstances, it's crucial to align investments with your individual risk tolerance and financial objectives.

For more on Praj Industries, watch the below video where Richa Agarwal gives a bird's eye view on the company.

Happy Investing!

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