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Praj Industries: Tough times continue - Views on News from Equitymaster

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Praj Industries: Tough times continue
Jun 1, 2010

Praj Industries has announced its FY10 results. The company has reported a sales decline of 22% YoY, and a profit decline of 12% YoY for the year. Here is our analysis of the results.

Performance summary
  • Net sales fall by 22% YoY during FY10, 39% YoY in 4QFY10.
  • Operating margins decline by 5.9% YoY during the year. This is largely on account of higher raw material and employee costs (both as percentage of sales).
  • Net profits fall by 12% YoY during the year. Higher other income, lower tax charges and forex gains help aid the decline in profits. Extraordinary items indicate loss on divestment in company's wholly owned subsidiary in the US.


Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net Sales 2,086 1,278 -38.7% 7,719 6,023 -22.0%
Expenditure 1,495 1,157 -22.6% 5,923 4,974 -16.0%
Operating profit (EBITDA) 591 120 -79.6% 1,796 1,049 -41.6%
Operating profit margin (%) 28.3% 9.4%   23.3% 17.4%  
Other income 47 57 22.2% 238 329 38.2%
Depreciation 23 31 31.5% 82 105 28.6%
Interest 3 -   4 3 -15.4%
Prior period items - -   - (60)  
Extraordinary income/(expense) (110) (75)   (110) (75)  
Forex losses/ (Gains) 97 (15)   231 (96)  
Profit before tax 405 87 -78.6% 1,608 1,231 -23.5%
Tax 130 (112)   311 92 -70.4%
Net profit 275 198 -27.9% 1,297 1,139 -12.2%
Net profit margin (%) 13.2% 15.5%   16.8% 18.9%  
No. of shares (m)       183.4 184.7  
Diluted earnings per share (Rs)*#         6.1  
P/E ratio (x)*         13.1  
# Adjusted for extraordinary items; * On a trailing 12-months basis

What has driven performance in FY10?
  • Praj Industries (Praj) reported a decline of 22% YoY in its sales during FY10. Sales during 4QFY10 declined by 39% YoY. A key reason of this decline is slower execution of orders, especially for the overseas projects. For the full year, there have been various factors that led to a decline in sales. The keys ones were slower execution of overseas orders and as well as lower overall pricing by the company. In addition, the company's management has also been following tighter credit policies. Although this has led to an improvement in cash flows, a negative consequence of this is the slower revenue booking.

  • At present, the company has an order backlog of Rs 7 bn. However, this is after deducting the orders that are likely to see some deferment and delays. The company has deducted orders worth about Rs 1.7 bn, of which Rs 1 bn worth of orders were from the domestic markets, and the balance from the overseas markets. From the current order backlog of Rs 7 bn, nearly 60% are domestic contracts and the balance is international contracts. It must be noted that most of the contracts are on a fixed price basis. However, as per the management, Praj is able to protect itself from volatile shifts in commodity prices as it takes about 10% advance from customers to source the required materials.

  • Praj's operating profits declined by 42% YoY and 80% YoY during FY10 and 4QFY10 respectively. Its operating margins contracted by 5.9% YoY during the year. This was mainly on account of higher raw material prices. In addition, employee costs were higher as well (as percentage of sales). However, on an absolute basis, employee costs were lower during the year. This was on account of the company paying a bonus to its employees during the previous year.

  • Praj's net profits fell by 12% YoY doing FY0. This fall was lower as compared to the decline in operating profits due to higher other income as well as forex gains as compared to losses last year. In addition, the company also had a lower tax outgo on account of a write back. Praj also reported a loss on divestment of US subsidiary (Rs 75 m).

What to expect?
At the current price of Rs 78, the stock is trading at a multiple of 13.1 times its adjusted trailing twelve month earnings. The company has been facing problems both in international and domestic markets over the past few quarters. In international markets, the overall slowdown has gotten the best of the company. Orders in biofuel segment (the other being brewery) have been slow to come by in India on account of the issues over ethanol prices. However, with ethanol prices expected to increase to levels of Rs 26 to 28 per litre, the chances of orders pricking up from this segment remain good. As per the management, the regions that would drive growth in the medium term would be South East Asia, India and South America.

On the international front, the US market continues to remain subdued. European markets would see some pressure considering the relatively recent Euro crisis. However, at the same time it can be tricky considering that lower input costs and better yield do make investing in ethanol an attractive opportunity. Competition is likely to increase on account of the European firms working on low capacities. This could be a big threat for Praj. At present, nearly 10% of the order backlog is from the European region.

The company has recently entered the waste water and wastewater management segment. Considering that the opportunities in this sector are large, it could see some growth in business going forward. However, there is still time before things pick up in this department. As per the company, the addressable market size (and not the total market size) for the company in this business if about US$ 1.5 bn. As and when the company’s capabilities improve, it would be able to address a bigger market. The company is looking at focusing on municipal and industrial projects for now.

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