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Praj Industries: An 'extraordinary' year - Views on News from Equitymaster
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Praj Industries: An 'extraordinary' year
Apr 22, 2009

Performance summary
  • Sales grow by 10% YoY during FY09, fall by 2% YoY in 4QFY09.
  • Operating margins expand by 3% YoY during the year. This is largely on account of lower raw material costs as a percentage of sales. During 4QFY09, operating margins contract by 3.2% YoY.
  • Net profits decline by 16% YoY during FY09 on the back of forex losses (on advances received from customers) and extraordinary losses to the tune of Rs 343 m as compared to Rs 218 m forex gain in the previous year. On excluding these adjustments (for both the years), net profit for FY09 has grown by 25% YoY.
  • Order backlog stands at Rs 8 bn, which is slightly higher than the company’s FY09 net sales.


Standalone financial snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net Sales 2,126 2,086 -1.9% 7,016 7,719 10.0%
Expenditure 1,455 1,496 2.8% 5,589 5,924 6.0%
Operating profit (EBITDA) 671 590 -12.1% 1,427 1,795 25.8%
Operating profit margin (%) 31.5% 28.3%   20.3% 23.3%  
Other income 40 50 25.4% 167 242 44.7%
Depreciation 16 23 45.9% 55 82 47.7%
Interest - 3   0 4  
Profit before tax 695 614 -11.7% 1,539 1,951 26.8%
Extraordinary income/(expense) (10) (209) 2051.5% 218 (343)  
Prior period items (10) -   (12) -  
Tax 89 130 46.4% 208 311 49.1%
Net profit 587 275 -53.1% 1,536 1,298 -15.5%
Net profit margin (%) 27.6% 13.2%   21.9% 16.8%  
No. of shares (m)         183.4  
Diluted earnings per share (Rs)*#         8.9  
P/E ratio (x)*         7.6  
# Adjusted for extraordinary items; * On a trailing 12-months basis

What has driven performance in FY09?
  • Praj Industries (Praj) recorded a revenue growth of 10% YoY during FY09. Export sales contributed to nearly half of the revenues during the year. The company currently has an order backlog of Rs 8 bn, which is slightly higher than its FY09 sales.

  • Praj's operating margins stood at 23.3% during the year, higher by 3% YoY as compared to FY08. This was largely on account of lower raw material costs (as a percentage of sales). However, employee costs and other expenses increased on a YoY basis. It may be noted that the company has recorded a strong expansion in margins during the past few quarters, on account of a higher component of engineering services. However, the management did state in its conference call that it would be unlikely for the company to sustain margins at similar levels as it plans to pass on the benefits of lower raw material costs to its customers. In addition, a higher component of EPC projects will also bring down the margins as traditionally such projects garner lower margins. However, the management also added that the company will focus on value engineering in the future. During the year, the engineering services business contributed nearly 8% to 9% to the topline.

  • During FY09, Praj's net profits dropped by 16% YoY. As compared to the profit before tax growth of 27% YoY, the company's bottomline performance looks dreadful mainly on account of extraordinary losses, which include two items - a Rs 231 m forex loss (on advance received by customers), and a Rs 112 m diminution in the value of investment, made by the company in its US subsidiary. Against this, the company had recorded a forex gain of Rs 218 m in FY08. On excluding forex transactions in both the years (but including the diminution in value of investments) profits are higher by 16% YoY.

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of 7.6 times its trailing twelve month earnings (adjusted for extraordinary items). We had recommended Praj in June 2008 at Rs 183. Since then the stock has tumbled nearly 60%. The reason behind this is the sharp drop in the price of crude, which subsequently impacted the company’s order inflow as projects became less viable. In addition, due to the tight liquidity conditions faced globally, investments slowed down drastically.

During the conference call today, the management stated that as compared to the previous quarter (3QFY09), the trends are reversing as customers’ approach towards projects is improving. The reason behind this is lower commodity prices coupled with softer interest rates. In addition to this, there have been a handful of developments that have taken place in the biofuels space. In Europe, the EU Parliament has passed the package which mandates its member states for adoption of the Renewable Energy Directive, which in turn mandates 10% (by energy content) biofuels blending in all transport fuels by the year 2020, starting 2011. As per the management this development will entail an additional of 12 bn to 14 bn litres of bioethanol capacity. It may be noted that presently, Europe has a production capacity of nearly 3.5 bn to 4 bn litres.

The management also stated that the American Reconstruction Plan is also likely to offer incentives for second generation biofuels, which will enhance the usage of biofuels. In Mexico, the government has mandated a 10% biofuel blend in gasoline. As for Asia, countries such as Thailand, Vietnam and Philippines are showing interest. In the domestic segment, the past quarter was a good one for Praj. During 4QFY09, the company had an order inflow of nearly Rs 2 bn, of which a majority was from the domestic market. This helped the company cushion its order inflow slowdown to a certain extent. However, the management did mention that this trend would not sustain going forward. We shall soon update you with our view on the stock.

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