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Praj Ind.: Red all over the place - Views on News from Equitymaster

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Praj Ind.: Red all over the place
Oct 22, 2010

Praj Industries has announced its 2QFY11 results. The company has reported a sales decline of 46% YoY, and a profit decline of 78% YoY. Here is our analysis of the results.

Performance summary
  • Net sales decline by 46% YoY during 2QFY11, 38% YoY during 1HFY11.
  • Operating margins decline by a 14% YoY during the quarter. This is mainly due to higher employee and other expenses (both as percentage of sales).
  • Net profits fall by 78% YoY during the quarter, 70% YoY during 1HFY11. Apart from a poor operating performance, lower other income adds to the woes.


Standalone financial snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net Sales 2,016 1,088 -46.0% 3,272 2,024 -38.1%
Expenditure 1,611 1,021 -36.6% 2,637 1,854 -29.7%
Operating profit (EBITDA) 404 67 -83.5% 635 170 -73.2%
Operating profit margin (%) 20.1% 6.1%   19.4% 8.4%  
Other income 98 44 -54.8% 214 104 -51.3%
Depreciation 26 27 6.3% 50 54 8.7%
Interest 1 -††   3 -††  
Prior period items -†† -††   (60) -††  
Forex gains/ (losses) 5 19 310.6% 43 3 -93.4%
Profit before tax 480 103 -78.5% 779 223 -71.3%
Tax 84 14 -83.1% 138 31 -77.8%
Net profit 396 89 -77.6% 641 193 -69.9%
Net profit margin (%) 19.6% 8.2%   19.6% 9.5%  
No. of shares (m) 183.5 184.7   183.5 184.7  
Diluted earnings per share (Rs)*         3.8  
P/E ratio (x)*         19.5  
* On a trailing 12-months basis, adjusted for extraordinary items

What has driven performance in 2QFY11?
  • Praj Industries' (Praj) standalone revenues dropped by 46% YoY during the quarter ended September 2010. However, on a quarter on quarter basis, i.e., in comparison to the quarter ended June 2010, revenues rose by 16%. Similar to what the company has been witnessing over the past few quarters, revenues were impacted by the overall slowdown in investments in new ethanol projects globally. Although, it may be noted that during the earlier quarter, the companyís management had stated that Praj would be focusing on order execution over the short term. Revenues during the quarter were largely driven by the domestic market. The contribution of the same stood at 70%, which is way higher as compared to what the company has seen in the past.

  • Praj's operating profits were under tremendous pressure in 2QFY11. While these declined by 84% YoY, operating margins contracted by a whopping 14% YoY. Margins during the quarter stood at 6.1%. While the company did well to reduce the raw material costs (which decreased in tandem with revenues), margins were impacted by higher employee costs. Employee costs rose by 9% YoY and stood at nearly 17% of revenues as compared to 9% during the quarter ended September 2009. Other expenses, on the other, hand stood at 18% of sales as compared to 12.8% during 2QFY10.

    Cost break-up
    Rs m 2QFY10 2QFY11  
    Expenditure Amount % of sales Amount % of sales Change
    Consumption of raw materials 1,183 58.7% 636 58% -0.2%
    Employee costs 172 8.5% 187 17% 8.7%
    Other expenditure 257 12.8% 198 18% 5.5%
    Total 1,611 79.9% 1,021 94% 13.9%

  • Prajís net profits dropped by 78% YoY during 2QFY11. As compared to the decline in operating profits, the decline in net profits was lower on the back of higher forex gains. On excluding the same, net profits declined by 82% YoY.

  • During the six month period ended September 2010, Prajís revenues and profits declined by 38% YoY and 70% YoY respectively. Operating margins crashed by 73% YoY as margins contracted to 8.4% as compared to 19.4% during the corresponding period last year.

What to expect?
At the current price of Rs 72, the stock is trading at a multiple of 18.7 times its adjusted trailing twelve month earnings. While valuations seem high at the moment, the same is on the back of poor earnings over the past year.

Praj continues to face the heat in terms of its order backlog as the same declined to Rs 6 bn as compared to Rs 7 bn during the preceding quarter. Nearly 60% of the orders from the company are from the domestic markets, with the balance being contributed from exports. While order inflows stood at Rs 1.5 bn during the quarter, Praj also wrote off an order worth Rs 1.5 bn during the quarter. This is one major concern for the company as the slow order inflow could have an adverse impact on its operations going forward. Further, another concern is the impact on margins as competition as well as lower margins on domestic orders.

Broadly, the scenario has been favoring the company in terms of implementation of mandatory blending and higher ethanol prices, for the same to pick up would take time. Recognising the same, the company recently announced its plans to enter other segments such as waste water management, amongst others. With a handful of players entering such segments, competition in this segment will be another factor to keep an eye on.

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