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Praj Industries: Muted performance - Views on News from Equitymaster

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Praj Industries: Muted performance

Jul 10, 2009

Performance summary
  • Praj Industries witnesses an 18% YoY drop in revenues during 1QFY10.
  • Operating margins contract by 5.3% YoY to 18.9% during the quarter. This is attributable to higher employee costs and other expenditures (both as a percentage of sales).
  • Net profits grow by 2% YoY during 1QFY10. The growth in profits was on account of extraordinary income recorded through forex gains and reversal in provision of doubtful debts. During 1QFY09, Praj recorded a forex loss of Rs 76 m. However, on excluding these adjustments for both the quarters, net profit for 1QFY10 is lower by 59% YoY.
  • Order backlog stands at Rs 8 bn, which is about 0.8 times its FY09 consolidated net sales.

Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net Sales 1,548 1,264 -18.3%
Expenditure 1,174 1,025 -12.6%
Operating profit (EBITDA) 374 239 -36.2%
Operating profit margin(%) 24.2% 18.9%
Other income 20 32 58.1%
Depreciation 17 24 38.7%
Interest - 2
Profit before tax 377 245 -35.0%
Extraordinary income/(expense) (76) 122
Prior period items - (60)
Tax 54 54 0.7%
Net profit 248 253 2.3%
Net profit margin (%) 16.0% 20.0%
No. of shares (m) 183.4
Diluted earnings per share (Rs)*# 7.9
P/E ratio (x)* 10.3
# Adjusted for extraordinary items;
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • Praj Industries’ (Praj) topline decreased by 18% YoY during 1QFY10. This drop in revenue does throw up a concern of the company going slow on its execution cycle. However, the company’s management has attributed it to the nature of the projects business, wherein revenues significantly vary in particular quarters. These may include reasons such as shipping delays, billing delays, amongst others. The share between domestic and overseas revenues was almost balanced during the quarter. Further, nearly 92% of the revenues were earned by supplying equipments, while the balance was from providing engineering services.

  • Praj’s operating margins took a major hit during the quarter. They fell by 5.3% YoY to 18.9% in 1QFY10 as compared to the same period last year. The reasons behind the same are higher other expenses and employee costs (both as a percentage of sales). It may be noted that the company has seen a sharp increase in employee costs in recent times. To put things in perspective, employee costs witnessed a 27% YoY jump in absolute numbers during FY09. As a percentage of sales, they increased from 7.1% of sales in FY08 to 8.2% of sales in FY09. During 1QFy10, employee costs stood at 11.9% of sales. The reasons behind this are an overall increase in bench strength – both in R&D facility and overall manpower (especially engineers) and salary hikes.

  • During the quarter, Praj’s net profits grew by 2% YoY. Performance at the bottomline level was influenced by extraordinary gains. These included a forex gain of Rs 38 m and a reversal in provisions of doubtful debts of Rs 84 m (the company made a Rs 200 m provision for doubtful debts in FY09). During 1QFY09, Praj recorded forex losses to the tune of Rs 76 m. As such, on excluding these extraordinary items in both the quarters, profits are lower by 59% YoY. The Rs 60 m prior period item recorded during the latest quarter was on account of payments of sales commissions for an earlier period.

What to expect?
At the current price of Rs 82, the stock is trading at a multiple of 10.3 times its trailing twelve month earnings (adjusted for extraordinary items). The company currently has an order backlog of Rs 8 bn, which is slightly higher than its FY09 standalone revenues, but stands at about 0.8 times its consolidated net sales. As such, concerns over revenue growth do arise considering that the company has an average execution cycle of about twelve months.

We believe that even if the company manages to attain a flat revenue growth during the current fiscal, it would be considered a good performance. It may be noted that the order book has remained stagnant for the past few quarters. The company’s management did add that the Rs 8 bn backlog is the net order book. This means that it has not included any of the projects that have been put on hold. During the quarter, the order inflow stood at about Rs 1.3 bn, of which a significant portion came from the domestic markets.

Giving its view on the market, the management did state that projects in regions such as South East Asia, Africa, Europe and India have started getting funds. Apart from crude oil, prices of other key commodities are still at relatively lower levels (which would indirectly bring down the cost of setting up plants). The management has discounted the world’s largest ethanol market, the US for anywhere between one to two years. The reason behind the same is excess capacity.

As far as the company's view on the recent measures to cut excise duty on ethanol blended or biofuel blended diesel is concerned, the management considers it to be a positive move. This would in turn help in encourage the usage of biofuels in transportation. Further, cuts in customs duty (from 7.5% to 2.5%) would lead to higher amounts of imports from countries in South East Asia. As such, it is likely that the South East Asian markets open up.

We are currently in the process of updating our research on the company. We shall positively update our view on the stock over the next week or so.

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