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Praj Industries: Maintains the momentum - Views on News from Equitymaster

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Praj Industries: Maintains the momentum
May 8, 2008

Performance summary
  • Net sales grow by 16% YoY in FY08 and by 6% YoY in 4QFY08 largely due to capacity expansion and high utilisation.
  • Operating margins expand by 3% during FY08, aided by lower raw material costs (as percentage of sales), reduction in transportations costs and value engineering initiatives.

  • Net profits grow by 78% YoY during the fiscal on the back of expansion in operating margins, significantly higher other income and lower tax outgo.

(Rs m) FY07 FY08 Change
Net Sales 6,075 7,016 15.5%
Expenditure 5,026 5,591 11.2%
Operating profit (EBITDA) 1,048 1,425 35.9%
Operating profit margin (%) 17.3% 20.3%
Other income 89 387 333.1%
Depreciation 32 55 75.0%
Interest 3 0 -88.0%
Profit before tax 1,104 1,756 59.1%
Tax 238 208 -12.5%
Profit after tax/(loss) 865 1,548 78.9%
Prior period items - (12)
Net profit 865 1,535 77.5%
Net profit margin (%) 14.2% 21.9%
No. of shares (m) 83.9 183.2
Diluted earnings per share (Rs) 4.7 8.4
P/E ratio (x) 23.9

What is the companyís business?
Praj Industries in involved in equipment manufacturing and EPC (engineering, procurement and construction) projects for setting up bio-fuel and brewery plants. The company delivers know-how, licenses, engineering design, plant & equipment, project management, commissioning and customer care and turnkey projects. Its capabilities include offering solutions in bio-ethanol, bio-diesel and brewery plants and related wastewater treatment systems. During the period FY04 to FY08, Praj has grown its (standalone) net sales and profits at compounded annual rates of 59% and 107% respectively.

What has driven performance in FY08?
  • The 17% YoY growth in Prajís FY08 sales was largely on account of capacity expansion and high utilisation (the first phase of its Kandla, Gujarat facility ran at an utilisation rate of 60%). The companyís export sales contributed 50% to revenues during FY08 (30% in FY07). In its conference call yesterday, the management did state that margins are comparatively better in international markets as compared to domestic markets. They also mentioned that the company has enjoyed good business from the European region during the year.

  • Prajís operating margins expanded by 3.1% YoY during FY08 on account of lower cost of raw materials as percentage of sales (52.4% in FY08 as compared to 65.8% in FY07). As per the management, the company has been focusing on efficiency in raw material procurement and inventory control. Further, due to its new manufacturing facility at Kandla, the company has been able to reduce its transportation costs.

  • Prajís net profits grew by 78% YoY during FY08. This was on account of expansion in operating margins (for reasons mentioned above), higher other income (forex gains) and lower tax rates. The effective tax rates dropped to almost 12% in FY08 as compared to 22% in FY07. The decline in tax rate was on account of the benefit Praj started receiving during the fiscal on its Kandla SEZ unit.

What to expect?
At the current price of Rs 200, the stock is trading at a multiple of 23.9 times it standalone FY08 earnings. Prajís management has stated that even though the debate over food versus fuel goes on (with respect to the usage of farmlands to grow crops for producing ethanol), they expect food prices to stabilise in the near future, as they have been globally in the recent past. Also, as oil prices have been witnessing an upward trend, they expect companiesí globally to pump in large amount of investments into this (clean fuels like ethanol, bio-diesel) segment. Praj expects to spend as capex Rs 750 m during FY09 of which two-thirds will be invested in its R&D efforts. Its current backlog is Rs 9.5 bn with an average execution period of 12 months.

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