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Praj Industries: Sales crash, and so do profits - Views on News from Equitymaster
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Praj Industries: Sales crash, and so do profits
Jul 24, 2010

Praj Industries has announced its 1QFY11 results. The company has reported a sales decline of 26% YoY, and a profit decline of 59% YoY. Here is our analysis of the results.

Performance summary
  • Net sales decline by 26% YoY during 1QFY11.
  • Operating margins decline by a sharp 7.9% YoY during the quarter. This is largely on account of higher raw material and employee costs (both as percentage of sales).
  • Net profits fall by 59% YoY. Apart from a poor operating performance, lower other income and higher depreciation costs add to the woes.

Standalone financial snapshot
(Rs m) 1QFY10 1QFY11 Change
Net Sales 1,264 937 -25.9%
Expenditure 1,026 833 -18.7%
Operating profit (EBITDA) 239 103 -56.7%
Operating profit margin (%) 18.9% 11.0%  
Other income 116 60 -48.3%
Depreciation 24 27 11.7%
Interest 2 -  
Prior period items (60) -  
Forex gains/ (losses) 38 (17)  
Profit before tax 307 120 -60.9%
Tax 54 17 -69.4%
Net profit 253 104 -59.1%
Net profit margin (%) 20.0% 11.1%  
No. of shares (m) 183.5 184.7  
Diluted earnings per share (Rs)*   5.8  
P/E ratio (x)*   13.4  
* On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 1QFY11?
  • Praj reported a 26% YoY decline in net sales during the 1QFY11. On a quarter on quarter basis, i.e. in comparison to 4QFY10, sales were lower by 27%. Similar to what the company saw in the preceding quarter, order execution was slow in 1QFY11 as well. In addition, the company also faced slower execution on issues out of its control such as permits.

  • Praj currently has an order backlog of Rs 7 bn (similar to previous quarter), which is executable over a period of 12-14 months. This figure only includes the executable orders. The company has removed those orders that are likely to see deferment and delays. Of this backlog, about 55% are domestic orders and the balance are for export markets. A large portion of the domestic orders includes those for beverage alcohol as well as beer plants. The share of these types of orders in exports is relatively less.

  • Praj's operating profits were under tremendous pressure in 1QFY11, and declined 57% YoY. Raw material costs and employee costs increased as a percentage of sales during this period, thereby impacting margins.

    Cost break-up
    Rs m 1QFY10 1QFY11
    Expenditure Amount % of sales Amount % of sales Change
    Consumption of raw materials 630 50% 506 54% 4.2%
    Employee costs 154 12% 158 17% 4.7%
    Other expenditure 241 19% 169 18% -1.1%
    Total 1,026 81% 833 89% 7.8%

  • Praj's net profits fell by 59% YoY during 1QFY11. This drop was marginally higher than the fall in operating profits, and was on the back of lower other income. Further, the company also reported a forex loss during the quarter as compared to a gain last year. Adjusting for the same, profits are lower by 44% YoY.

What to expect?
At the current price of Rs 79, the stock is trading at a multiple of 13.4 times its adjusted trailing twelve month earnings. In terms of business update, the management has stated that orders inflow has been slow on account of delay in financial closure of projects. Also with the industry typically having a lag effect (to the economic cycle), margins are currently depressed as order inflows remain slow. As it is, the company earns lower margins in domestic orders, which have a higher share as of now. The focus in the short term will be towards project execution.

There have been quite a few developments in the world relating to increasing blending mandates. As per the management, the US is mulling increasing the current 10% blending level to about 12% or 15%. This would create additional requirement for ethanol. However, considering that the capacities in the US are not running at full levels, new investments towards the same would be less then envisaged. Apart from the US, countries such as Germany and Philippines are also planning to increase the blending mandates. This would be an opportunity for Praj. However, it must be noted that since competition for the company is global in nature, the possibility of margins to be lower is high (lower as compared to what the industry was earnings a couple of years ago).

The company plans to invest nearly Rs 500 m for setting up facilities for its new businesses - consumables business (products used in biotech industries, performance enhancers, nutritional products, products related to microorganism growth, etc.) and for its customised engineering and manufacturing business (for the process industry). Capex for the other new business that the company plans to enter - water and waste water management - is yet undecided. Funding this capex would not be a problem considering that it is sitting on cash of about Rs 3.9 bn. In addition, the management has not ruled out the option of acquisitions as well (mainly for the water business).

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