Praj Industries - Charging Biofuel Economy Beyond Ethanol 

Dear Viewers

Recently, something interesting has happened in the aviation space.

The country flew its first commercial flight from Pune to New Delhi. It was powered by Sustainable Aviation Fuel, or SAF blended Aviation turbine jet fuel.

You see, as India becomes signatory to CORSIA - or Carbon Offsetting and Reduction Scheme for International Aviation. It calls for compulsory blending of SAF from 2027.

Even at just 1% blending of SAF, the requirement for SAF will be 14 crores litres.

Now SAF is a second stage fuel, and it is produced from ethanol. This itself would create an additional requirement of 28 crore liters per annum of ethanol.

So why is this interesting and relevant for an investing related video.

That's because today I'm going to talk about a specific company in the biofuel economy that has enabled this feat and could be a big beneficiary of this mandate.

Now this is just one of the opportunities emerging in bioenergy economy space.

We all know how ethanol blending in petrol has created a new investment theme in the stock markets.

With SAF into picture, this theme could get additional triggers. Already, the target to have 20 percent ethanol blending in petrol has been preponed from 2030 to 2025. And we have barely come halfway to that target, targeting 12% blending by the end of this year. This alone requires additional ethanol volumes of around 643 crore litres by 2026.

The government also targets to have a 5 % biodiesel blend in diesel sales by 2030.

The raw materials for these biofuels are plant based - sugar, starch, grains, even forest residue, and recycled grease, vegetable and animal oil and fats.

And then there are plans to install 5000 compressed biogas plants by 2030.

India is quite serious about its biofuel economy. Not just because of environmental reasons, but also for the sake of energy security and self-reliance. The country could save dollar 4 bn per annum with just ethanol blending targets.

At G20, it announced formation of Global Biofuel Alliance with India, Brazil, and the US as founding members. This will enable tech transfer and will mobilize investments and implementation of these projects.

Now, there are many sugar companies and OMCs that have taken up these projects seriously. Do check out the link below the video for these names.

But there is one specific player - Praj Industries, that I want to cover in detail today, that could be a great enabler and beneficiary of biofuel theme and deserves to be on your watchlist.

Its business can be divided into 5 segments -

First, Bioenergy (which is primarily ethanol). It has 10% market share in global ethanol production plant industry, excluding China. In India, it has a 50%-55% market share in ethanol plants. This is further divided into 1G and 2G ethanol plants1G plants use sugar and starch as raw material, 2G ethanol plant is a relatively new inhouse tech that uses other raw materials like agri waste.

Second, Hi Purity System wherein company provides systems and tech to produce high quality water for clients in pharmaceutical, biotech, cosmetics, and wellness sector. It also finds applications in semiconductor industry. In fact, the company booked its first order in the semiconductor sector for ultra-high purity water in FY23.

Third - critical process equipments and skids for use in oil & gas, petrochemical, fertilizer, and chemical industry,

Fourth- waste water treatment plants for industrial sector and

Fifth - technology and plant installation for brewery and beverage industry

Praj has over 70% of the market share in brewery market in India and experience of installing projects in Africa and Southeast Asia.

Do note that the company is not into the business of selling ethanol or these fuels, but in the business of technology, process and making plants and equipments that can produce these fuels in commercially viable manner while meeting the clean energy targets.

It has 300 patents, and its R&D team has over 90 technologists. In fact, it is the knowledge partner in developing National Biochemical policy.

For financial reporting purposes, it divides business into 3 segments - 74% of its revenue comes from the bioenergy segment, 19% from engineering and 7% from HiPurity Water Systems.

Its customers range across industries, those who are putting up ethanol or biofuel capacities, or upgrading them. These include sugar companies, breweries, OMCs, or any industry interested in installing equipments for zero liquid discharge or wastewater treatment. It also works with tech and EPC companies in the field of oil and gas, fertilizer, natural gas. Over 40pc of the business is from repeat customers.

The company has a presence in over 100 countries. Its latest reported orderbook stands at Rs 38 bn, of which 22% is from export markets vs Rs 34 bn at the end of FY23.

Apart from incremental ethanol requirement that will lead to fresh capital outlays and business opportunities for the company, what interests me about Praj is its futuristic mindset.

The order book I just mentioned does not include 5 CBG projects with a potential value of Rs 5 bn. Remember by 2030, the plan is to install 5000 such plants. Even a fraction of this investment could unleash huge opportunity for the company.

Apart from ethanol blending in petrol, diesel and aviation fuel, and compressed biogas, hi purity water systems in the semiconductor industry, the next big opportunity is in Renewable Chemicals and Materials (RCM). The company is working on developing technologies for production RCM. A key focus area is bioplastics and specialty products with usage in automotive, packaging, furnishing, construction, agriculture, and food sectors. The company is setting up a demo plant for Polylactic Acid (PLA) to accelerate the commercialization of bioplastics.

What's more, the company is setting up an ETCA (energy transition and climate action) facility with focus on clean technologies with 100 crore capex, that is likely to be ready by the end of FY24 and that alone could generate revenue upto Rs 15 bn over a base of Rs 35 bn in FY23.

Coming to Financials...

Its revenue and net profit have grown at a CAGR or average annual growth rate of 30% and 43% over the last five years. The debt to equity is nil. The cash and liquid assets at the end of the first quarter were at Rs 8 bn. The receivable days have been coming down and return ratios have shown a significant improvement with return on equity and return on capital employed at 24% and 32% at the end of FY23.

The stock is trading at a PE of 41 times, versus a 5-year median of 39 times. And at a PEG of 0.8, which is less than one.

All in all, I think Praj Industries deserves to be on your watchlist if you believe in the theme of clean energy and biofuel economy.

Now do not that this is not a stock recommendation. You must do your own research wrt risks and valuations.

Some of the key risks in my view are regulatory risks if the government goes slow on clean energy and blending targets, alternative technologies coming up that could be more viable and effective, and most importantly, a slowdown in the capital investments or capex by the end customers. Do note that Praj does not provide these fuels but the plants and technology to get these fuels. Hence, the business fortunes are linked to capex plans of the end customers.

So, on that note, I would like to conclude this discussion. Let me know your feedback. If you find it useful, do press the like button and share it.

Thank you for watching.

Goodbye.