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Praj Industries: Surviving in tough times - Views on News from Equitymaster
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Praj Industries: Surviving in tough times
Oct 12, 2009

Performance summary
  • Sales grow by 0.5% YoY during 2QFY10, fall 8% YoY in 1HFY10.
  • Operating margins contract by 1.8% YoY, due mainly to higher costs of raw materials (as percentage of sales).
  • Net profits increase by 31% YoY during the quarter, 18% YoY during the first half. Growth influenced by forex gains during the quarter (as compared to forex losses in 2QFY09). Excluding the extraordinary items, net profits have fallen by 6% YoY during the quarter.


Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net Sales 1,997 2,007 0.5% 3,545 3,272 -7.7%
Expenditure 1,567 1,611 2.8% 2,728 2,650 -2.9%
Operating profit (EBITDA) 430 396 -7.8% 817 622 -23.9%
Operating profit margin (%) 21.5% 19.7%   23.0% 19.0%  
Other income 60 107 76.6% 81 223 176.3%
Depreciation 19 26 32.6% 50 37 -26.4%
Interest - 1   - 3 #DIV/0!
Profit before tax 471 476 1.0% 848 805 -5.1%
Extraordinary income/(expense) (113) 5   (189) 43  
Prior period items - -     (60)  
Tax 56 84   109 138 26.4%
Net profit 302 396 31.3% 549 649 18.2%
Net profit margin (%) 15.1% 19.7%   15.5% 19.8%  
No. of shares (m)       183.4 184.5  
Diluted earnings per share (Rs)*         7.6  
P/E ratio (x)*         13.6  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • Praj Industriesí (Praj) sales remained flat during 2QFY09. This is due to the difficulties in funding of projects that has taken place during the period leading to delays in execution. The company currently has an order backlog of Rs 8 bn (less than 1 time its FY09 sales), which will be executed over the next 12 to 14 months. Of this, almost 40% are export orders, while the balance is domestic. On a YoY basis, the backlog has fallen by almost 16%.

  • Prajís operating margins contracted by 1.8% YoY during the quarter. This was mainly due to higher raw material costs (as percentage of sales). Also the fact that company has provided higher engineering services to its clients during the quarter has put further pressure on margins.

  • Prajís net profits grew by 31% YoY during the quarter, helped by a forex gain of Rs 5 m during the quarter. In 2QFY09, the company had booked forex losses to the tune of Rs 113 m. Excluding these items, the net profits have fallen by 6% YoY during 2QFY10. The companyís management, in its conference call, has mentioned that most of these gains have been on account of advance received from customers.

What to expect?
At the current price of Rs 103, the stock is trading at a multiple of 13.6 times its trailing 12 months earnings. While the impact of the drought on the company's India business is still not clear, the management has indicated that it is definitely seeing a change in sentiment. In the US, a progressively higher number of companies are looking to integrate ethanol in the oil that they use which is a positive for the company. Developments on this front in Europe and Japan have also been favorable for the Praj. The management sees the markets of South East Asia, South & Central America, and Africa as the ones that hold the most promise currently. As far as the domestic market is concerned, beverage alcohol demand is expected to offer good opportunities going forward. At the same time industrial use of ethanol has come down in the face of high prices of molasses.

Importantly, Praj is planning to get into the customized engineering business in areas other than ethanol production. Within this the company is looking to manufacture specialised equipment for segments like oil & gas, petrochemicals, chemicals, water treatment, as also fermentation equipment for pharma, biotech and other industries etc. Its capital expenditure for the current financial year (FY10) is slated to be about Rs 300 m, and includes the amount it intends to spend on the above initiatives.

The valuations of the stock look fairly placed at this point of time, though how the impact of the company's new ventures will pan out with respect to its profitability is still not clear at this point of time. We have a cautious view on the stock.

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