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Praj Inds.: Revival in order inflows - Views on News from Equitymaster

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Praj Inds.: Revival in order inflows

Jan 25, 2011

Praj Industries has declared its 3QFY11 results. The company has reported 0.6% YoY growth in sales while its net profit has declined by 54% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Sales growth was flat during 3QFY11, but declined 24% YoY for 9mFY11.
  • Operating margins fell from 22.6% during 3QFY10 to 7.6% during 3QFY11. This was because of larger revenue share from domestic market where it enjoys comparatively low margins, increased R&D expenditure and manpower costs due to ramp-up in operations in new businesses.
  • Net profits fall by around 54% YoY during the quarter.
  • Order inflows for the quarter stood at Rs 2.5 bn. There was a growth in international order intake. The revival of international orders was a positive for the quarter. The international orders accounted for 60% of the total order inflow during the quarter.

Standalone financial snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net Sales 1,474 1,482 0.6% 4,745 3,501 -26.2%
Expenditure 1,141 1,369 20.0% 3,735 3,221 -13.8%
Operating profit (EBITDA) 333 113 -66.1% 1,010 280 -72.3%
Operating profit margin (%) 22.6% 7.6%   21.3% 8.0%  
Other income 49 67 35.6% 272 177 -34.8%
Depreciation 25 27 8.8% 75 81 8.7%
Interest -†† -††   3 -††  
Profit before tax 357 152 -57.3% 1,204 376 -68.8%
Extraordinary income/(expense) -†† -††        
Prior period items -†† -††   †††††††††††††† (60) -††  
Tax 65 17 -74.4% 204 46 -77.2%
Net profit 291 136 -53.5% 941 329 -65.0%
Net profit margin (%) 19.8% 9.1%   19.8% 9.4%  
No. of shares (m)       184.7 184.8  
Diluted earnings per share (Rs)*#         3.3  
P/E ratio (x)*         25.2  
# Adjusted for extraordinary items; * On a trailing 12-months basis

What has driven performance in 3QFY11?
  • Praj Industries (Praj) registered a flat revenue growth during 3QFY11. The ethanol business continues to dominate the revenues. During the quarter the brewery segment accounted for nearly 10-11% of the revenues. The company intends to increase the share of non-ethanol business substantially in the near future. It expects the new businesses especially the water and waste water segment to contribute significantly to the revenues in the next 2 years. Currently the new businesses account for just 5% of the total order backlog. The exhibit shows the continuous lackluster performance reported quarter after quarter in the previous 8 quarters.

  • Prajís operating margins contracted to 7.6% during 3QFY11 as compared to an operating margin of 22.6% during 3QFY10. This was on account of a larger share of domestic revenue which have comparatively low margins, increase in man-power cost because of ramp-up in new businesses, increase in R&D expenditure. During the nine-month period the operating margins of the company stood at 8%.

  • At the end of December 2010, the company had an order backlog of Rs 7 bn, which is about 1.4 times trailing 12-months sales. The international orders have a 45% share in the total order backlog.

What to expect?
At the current price of Rs 82, the stock is trading at a multiple of 25 times its trailing twelve month earnings. The revival in international orders with an increase in new order inflows was a positive for the quarter. The company has made initial breakthroughs through small orders from food, chemicals and beverages industry for the recently ventured water and waste-water management business.

The management seemed very optimistic in the conference call about the water and waste-water management vertical and plans to scale up the vertical to nearly 25-30% of the order book within the next 2 years. The new businesses are still in the initial stages. Though the management expects the margins in the new business to be similar as in its core business of ethanol plants, however the uncertainty will prevail at least until significant orders for the new verticals start flowing in. The management is also upbeat on the joint development programme with Qteros to commercialize the cellulosic ethanol production technology. We believe it is too early to comment on the new initiatives and new businesses as the company is yet to bag significant orders for the new businesses. However, considering that the company failed to display the intended performance over our investment horizon of 2-3 years we discontinue our coverage on the stock.

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