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Praj Industries: Research meeting extracts
May 21, 2009

We recently had a chance to have a brief research meeting with the management of the Pune based Praj Industries. The discussion revolved around macro environment and the companyís strategies going forward. As suggested during the conference call post the declaration of the annual results , 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. This process is likely to start 2011. As per Prajís management, this development will entail an additional of 12 bn to 14 bn litres of bioethanol capacity.

It may be noted that Europe currently has a production capacity of nearly 3.5 bn to 4 bn litres of fuel ethanol. As per the management, this additional capacity could roughly bring in investments to the tune of Ä 10 bn (around Rs 650 bn). This throws a strong opportunity for Praj as it already has a good foothold in the region. Currently, it earns nearly 30% of its revenues from Europe. Another plus point for the company is that it has a strong reference base in Europe. The management also added that some of the recent projects it commissioned in the EU region were compliant with the norms.

Share of energy from renewable sources as a percentage of final energy consumption
Members of EU 2010 target Recent growth Progress made
Austria 5.8 III III
Belgium 5.8 III I
Bulgaria 5.8 III III
Cyprus 5.8 I I
Czech Rep. 2.5 II I
Denmark 5.8 II I
Estonia 5.8 II I
Finland 5.8 II I
France 7.0 III II
Germany 5.8 III III
Greece 5.8 III I
Hungary 5.8 II I
Ireland 5.8 II I
Italy 5.8 I I
Latvia 5.8 I I
Lithuania 5.8 III III
Luxemburg 5.8 III II
Malta 1.3 II III
Netherlands 5.8 III II
Poland 5.8 II I
Portugal 5.8 III II
Romania 5.8 II I
Slovakia 5.8 III II
Slovenia 3.5 II I
Spain 5.8 II I
Sweden 5.8 III II
UK 5.0 II I
Source: Company;
Recent growth - I = = 0 percentage point change, II = > 0 to 1 percentage point change,
III = > 1 percentage point change. Progress made - I = 0% - 33%, II = 34% - 66%, III = 37% to 100%.

The US, which contributes nearly 10% to 15% to the topline, is a region which the company is discounting for the time being. The reasons behind the same are exceeding capacities, reduction viabilities (due to lower crush margins on corn based ethanol) and the economic slowdown.

Further, the management stated that South East Asia is a good market. Countries such as Thailand, Philippines and Vietnam are showing interest. The strategy for this region (apart from attaining new clients) is to increase the wallet share from the existing clients. On an average, Praj executes around 10% to 15% of the total projects that it receives from clients. This largely includes supplying equipment to them. Going forward, the company plans to increase the share by doing some EPC (engineering, procurement, construction) work. It may be noted that this would tend to bring down margins as technology and equipment related work garner higher margins.

Crude prices, amongst others factors, determine Prajís order inflow to a large extent. As you may be aware, Praj has been facing problems of lower order inflow due to the slowdown in investments across the world. However, there is a certain price at which projects in different parts of the world would make the usage of ethanol viable. For Brazil, crude oil at the price of US$ 40 to US$ 50 a barrel would be viable, while for the US, the price would be around US$ 60.

Conclusion
At the current price of 102, the stock of Praj is trading at a price to earnings of 11.4 times its trailing twelve month earnings. Praj recorded quite strong (standalone) results during the year gone by. The company was impacted by forex losses of Rs 343 m as against a gain in the earlier year. As compared to our estimates the companyís topline and bottomline were lower by 18% and 19% respectively.

From crude prices reaching their all time highs of US$ 140 a barrel to crashing to levels of US$ 40 a barrel in a matter of months, a lot has changed for the company over the twelve months. We will soon update our numbers after incorporating the companyís FY09 results.

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