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Praj Industries: Slow yet steady - Views on News from Equitymaster

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Praj Industries: Slow yet steady
Jan 24, 2009

Standalone results performance summary
  • Sales grow by 16% YoY during 3QFY09, 15% YoY in 9mFY09.
  • Operating margins decline by 1.8% YoY during the quarter. This is largely on account of higher raw material and employee costs (both as percentage of sales).
  • Net profits increase by 20% YoY during the quarter, aided by forex gains. Excluding the extraordinary adjustments, net profits have grown by 15% YoY during the quarter.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net Sales 1,802 2,088 15.9% 4,890 5,633 15.2%
Expenditure 1,424 1,687 18.4% 4,134 4,428 7.1%
Operating profit (EBITDA) 378 401 6.2% 756 1,205 59.3%
Operating profit margin (%) 21.0% 19.2% 15.5% 21.4%
Other income 59 111 87.0% 127 192 50.8%
Depreciation 16 22 41.9% 39 59 48.5%
Interest - 1 0 1 166.7%
Profit before tax 422 489 16.1% 844 1,337 58.5%
Extraordinary income/(expense) 30 55 83.9% 227 (134)
Prior period items - - (3) -
Tax 57 71 24.9% 120 181 51.0%
Net profit 395 473 19.9% 949 1,022 7.8%
Net profit margin (%) 21.9% 22.7% 19.4% 18.2%
No. of shares (m) 183.4
Diluted earnings per share (Rs)*# 9.5
P/E ratio (x)* 5.2
# Adjusted for extraordinary items; * On a trailing 12-months basis

What has driven performance in 3QFY09?
  • Praj Industries (Praj) recorded a revenue growth of 16% YoY during 3QFY09. Export sales contributed two nearly two-thirds of the revenues. The company currently has an order backlog of Rs 8 bn, which is nearly 0.9 times its FY08 revenue. Of this, exports contribute to nearly 60%, while the balance is domestic orders. The overall order intake during the quarter stood at Rs 1.5 bn. During the quarter, the company won orders from countries such as Mexico, Thailand and Vietnam.

  • Prajís operating margins contracted by 1.8% YoY during the quarter. This was on account of higher raw material and employee costs (as percentage of sales). During the nine-month period, the company has been able to improve margins on the back of higher portion of engineering services n its total revenues.

  • Prajís net profits grew by 20% YoY in 3QFY09. As compared to its operating profits, the company was able to grow its profits faster as it earned higher forex gains of Rs 55 m during the quarter. Excluding these items, net profits grow by 15% YoY. The companyís management, in its conference call, mentioned that these gains are on account of restatement of advances received in foreign currency from customers against orders placed by them.

What to expect?
At the current price of Rs 49, the stock is trading at a multiple of 5.2 times its trailing twelve month earnings. In the past three months, there have been quite a few interesting developments that have taken place for the industry. The European Union has announced a biofuel mandate of 10% in all transport fuels by the year 2020. According to the company, this will entail to capacity addition of nearly 12 bn to 14 bn litres, which is nearly 5 times the current capacity. In addition, the US has pre-poned its renewable fuels target of 11 bn gallons (40 bn litres) from 2012 to 2009. Additionally, Mexico has mandated 10% blending of bioethanol. Furthermore, the company has successfully commissioned the first of its kind evaporation plant in India which is part of the zero-wastewater solution for distillery involving an incineration boiler. In simple terms, this process helps in reducing evaporation cost per litre. Last and most importantly, crude prices have fallen by over 50% since 1st October 2008.

Prajís management has gone on to say that it attributes the overall slowdown in demand for biofuels to the economic slowdown and not the fall of crude prices. The price of crude has dropped by nearly 66% from its peak of US$ 147 a barrel, while price of bioethanol has reduced by only 10%. As such, with the blending mandates coming in and the interest cost dropping, the company expects investments to pick up in the long run.

Giving its view on global markets, Prajís management mentioned that there has been a considerable amount of reduction in gloom as compared to the previous quarter (2QFY09). While enquiries continue to flow in, it is the clientsí decision making and finalisation time that has increased. That may be quite understandable considering the ongoing liquidity crunch. Banks have been quite stringent in their lending as well. However, the management did add that cash rich companies are showing interest. It believes that with the overall reduction in costs of setting up a plant (due to lower commodity prices) and lower interest rates, orders will eventually start coming in.

As for the domestic markets, the management stated that the sugar industry is currently facing shortage of sugarcane of up to 30%. As such, the availability of molasses will be on the lower side. However, countering the same, the management added that there is bumper grain available in India. This is mainly on account of lower consumption of industrial alcohol. As such, alcohol production from grains is likely gain momentum going forward. In fact, the government is believed to be encouraging this development as well.

On an average, Praj takes about 12 months to execute domestic contracts and about 14 months to complete international contracts. However, the management now expects the execution rate to increase to some extent on account of the slowdown. In the previous quarter (2QFY09), Praj had an order backlog of Rs 9.5 bn. Currently it has an order backlog of Rs 8 bn. Apart from the slow order intake, the management also pointed out that it has stopped showing orders which are currently on hold or deferred. As such on a quarter on quarter basis, we can see a fall in order backlog.

The management does believe that currently the company is going through a challenging phase and as such it has to take certain measures. These include cost control and efficient procurement of raw materials. The management believes that the blending mandates taking place on a global scale along with concerns over the environment will help in driving growth for ethanol usage in the long run. Given the companyís nine-month performance, we shall soon be revising downwards our forward estimates.

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