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Praj Industries: Dull performance continues - Views on News from Equitymaster

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Praj Industries: Dull performance continues
Jan 20, 2010

Performance summary
  • Sales fall by 29% YoY during 3QFY10, 16% YoY in 9mFY10.
  • Operating margins improve by 0.8% YoY during the quarter. This is largely on account of lower raw material and other expenditure (both as percentage of sales).
  • Net profits fall by 38% YoY during the quarter, primarily due to a significant fall in other income as well as a higher effective tax rate.
  • Declares interim dividend of Rs. 1.44 per share.


Standalone financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net Sales 2,088 1,474 -29.4% 5,633 4,745 -15.8%
Expenditure 1,632 1,141 -30.1% 4,562 3,736 -18.1%
Operating profit (EBITDA) 456 332 -27.2% 1,071 1,010 -5.7%
Operating profit margin (%) 21.8% 22.6%   19.0% 21.3%  
Other income 111 50 -55.3% 192 272 42.1%
Depreciation 22 25 13.6% 59 75 27.5%
Interest 1 -   1 3  
Profit before tax 544 357 -34.4% 1,203 1,204 0.1%
Prior period items -   -     (60)  
Tax 71 65 -8.3% 181 204 12.7%
Net profit 473 292 -38.4% 1,022 941 -8.0%
Net profit margin (%) 22.7% 19.8%   18.2% 19.8%  
No. of shares (m)       183.4 184.7  
Diluted earnings per share (Rs)*#         7.2  
P/E ratio (x)*         13.4  
# Adjusted for extraordinary items; * On a trailing 12-months basis

What has driven performance in 3QFY10?
  • Praj Industries (Praj) recorded a fall in revenue of about 29% YoY during 3QFY10. One of the reasons that contributed to this dismal sales performance was the fact that lower raw material prices during the quarter led to lower overall pricing by the company, leading to the fall in revenues in value terms. Further, many of the company’s overseas projects are seeing slower execution currently. Also, as expressed by the management, the company has begun following tighter credit policies. Although this has led to an improvement in cash flows, a negative consequence of this is the slower revenue booking. The company currently has an order backlog of Rs 8 bn, which is about 1 times its FY09 revenue.

  • Praj’s operating margins expanded by 0.8% YoY during the quarter. This was largely on account of lower raw material costs as also lower other costs (as percentage of sales). During the nine-month period too the company has been able to improve its margins by a robust 2.3%. YoY.

  • Praj’s net profits fell by 38.4% YoY in 3QFY10. This fall was higher than the fall in its sales due to lower other income as also higher fixed costs in the form of depreciation (as a percentage of sales).

What to expect?
At the current price of Rs 96, the stock is trading at a multiple of 13.4 times its trailing twelve month earnings. The company’s management has mentioned that it is exploring the water & wastewater treatment business where it believes that the company could have opportunities due to its current capabilities and experience in distillery and brewery wastewater treatment systems.

At the UN Climate Change Conference in Copenhagen in December 2009, Praj and Europe based ‘Novozyme’ announced a collaborative research effort on advanced biofuels technology. During the quarter, the company also entered into an agreement in Ethiopia with ‘Eco Energy’ to provide consultancy on the development of 62,000 acres for jatropha and castor oil production.

The management seems quite upbeat about the fact that the Indian Government is working hard to revive the mandatory blending of 5% ethanol with petrol. The government is gearing up to rework the formula for pricing ethanol. It may be noted that there have been suggestions from different quarters that the new price will be in the range of Rs 26 – 28 per litre of ethanol from the current price of Rs 21.50 per litre, which will provide a fillip to ethanol production in the country. This will in turn be a big positive for the company as investment in ethanol production capacity will increase. The final formula for pricing mechanism of ethanol from the government’s side will be keenly awaited. Globally, ethanol production margins in US and Europe have been improving in recent times as also the capacity utilization.

As for the present situation, the management has expressed that things are looking good on domestic front, however the recovery in the developed markets may be prolonged.

The valuations of the stock look fairly placed at this point of time. However, there are some things to which Praj’s fortunes are tied that bring in a lot of uncertainty into the picture. One is the pricing policy for ethanol and its final implementation by the Indian government. The second is the recovery in the markets of developed countries, which is expected to be prolonged. The third is the impact of the company’s new ventures as discussed by us in our previous update. We continue to have a cautious view on the stock.

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