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Praj Industries: Forex losses hurt bottomline - Views on News from Equitymaster
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Praj Industries: Forex losses hurt bottomline
Oct 23, 2008

Performance summary
  • Sales grow by 18% YoY during 2QFY09, 15% YoY in 1HFY09.

  • Operating margins sharply improve by 11.4% YoY, aided by lower raw material costs and other expenditure (both as percentage of sales).

  • Net profits increase by 11% YoY during the quarter. Growth impacted on account of forex losses during the quarter. Excluding the extraordinary adjustments, net profits have grown by 111% YoY during the quarter.

Standalone financial snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net Sales 1,704 2,002 17.5% 3,097 3,550 14.6%
Expenditure 1,528 1,567 2.6% 2,709 2,741 1.2%
Operating profit (EBITDA) 176 435 146.7% 388 810 108.8%
Operating profit margin (%) 10.3% 21.7% 11.4% 12.5% 22.8% 10.3%
Other income 39 55 42.1% 59 75 28.0%
Depreciation 14 19 36.9% 24 37 52.7%
Interest - - 0 - -100.0%
Profit before tax 201 471 134.1% 422 848 101.0%
Extraordinary income/(expense) 74 (113) 198 (189)
Prior period items (40) - (3) -
Tax (36) 56 63 109 74.9%
Net profit 271 302 11.4% 554 549 -0.9%
Net profit margin (%) 15.9% 15.1% 17.9% 15.5%
No. of shares (m) 183.4
Diluted earnings per share (Rs)*# 7.1
P/E ratio (x)* 10.2
# Adjusted for extraordinary items * On a trailing 12-months basis

What has driven performance in 2QFY09?
  • Praj Industriesí (Praj) sales grew by 18% YoY during 2QFY09. This can be attributed to stable performance in both the segments of products and engineering services. The domestic and export sales contributed almost equally to the topline. The company currently has an order backlog of Rs 9.5 bn (1.4 times its FY08 sales), which will be executed over the next 12 to 14 months. Of this, nearly 60% are export orders, while the balance is domestic. On a YoY basis, the backlog has grown by 12%.

  • Prajís operating margins expanded by an impressive 11.4% YoY during the quarter. This expansion in margins was achieved mainly due to lower raw material costs and other expenditures (both as percentage of sales). Also the fact that company provides engineering services to its clients has helped it in improving margins.

  • Prajís net profits grew by 11% YoY during the quarter, impacted on account of Rs 113 m of forex losses. In 2QFY08, the company had earned forex gains of Rs 74 m. Excluding these items, the net profits have grown by 111% YoY during 2QFY09. The companyís management in its conference call today mentioned that most of these losses have been on account of advance received from customers.

What to expect?
At the current price of Rs 72, the stock is trading at a multiple of 5.9 times our estimated FY10 earnings. Giving its view on global markets, Prajís management mentioned that the US markets continue to remain subdued (inspite of lower corn prices). In the US, the crush margins have dipped to about 70 to 75 cents as compared to US$ 1 a few months back. In South America, the management is seeing some traction. In South East Asia, it sees some opportunities as the mandates for blending ethanol with petrol vary from 2.5% to 10% in various countries such as the Philippines, Thailand and Indonesia (new entrant towards blending). It also mentioned that Japan is expected to increase its blending mandate from current levels of 3%. As for Europe, the management stated that the EU parliament is discussing the usage of renewable energy, which once passed through will provide strong opportunities. This decision is expected to finalise by early next year.

Coming to the domestic markets, with the governmentís announcement on the bio-fuel policy, the blending mandate is expected to increase to 10% in 2009 (from current level of 5% in selected states). And this will further increase to 20% by 2017. This as such is expected to bring in steady order inflow in the long term. Further, it is believed that the oil marketing companies (OMCs) will not be taxed on the ethanol blended, which will give them further incentive towards the usage of the same. In addition, the government has also allowed the movement from ethanol within states.

When commodities (including crude) were at their all time highs, the management had stated that biofuel production would be viable when crude prices were nearly US$ 60 per. Now, the management is of the view that as long as the price of crude is above US$ 40 per barrel, it will make it viable for sugar companies to produce ethanol. This US$ 20 per barrel drop is mainly due to overall reduction in cost of commodities.

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