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Is this the Best Biofuel Stock in the Market?

Oct 10, 2023

Is this the Best Biofuel Stock in the Market?

Recently, an interesting event caught my attention in the domestic aviation space.

I'm not referring to pilot shortage at Akasa, the cancelled flights, and irate passengers. Or the hikes in passenger fares following the news, within an hour.

As many budget airlines have gone under, it will definitely be interesting to see if the airline space witnesses a consolidation or not... and if it does, the implications for the companies that remain in the sector.

But that's a discussion for another day.

India flew its first 'green' commercial flight from Pune to New Delhi. This Air Asia flight was powered by an indigenously made sustainable aviation fuel, or SAF i.e. blended aviation turbine jet fuel.

'Blended with what?', you must be wondering.

Well, it was agri feedstock.

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

Even at just 1% blending will need about 140 million (m) litres of SAF.

Now SAF is a second stage fuel, produced from ethanol. This itself would create an additional requirement of 280 m liters per annum of ethanol.

So why should you bother as an investor?

While not a game changer in isolation, this is a big development when seen in context of developments in the green energy space.

The clean energy drive is not just limited to industries, offices, homes, and land. It has taken off to the skies.

And it's high time for investors to take the biofuel space seriously.

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

We all know how ethanol blending in petrol created a new investment theme in the stock markets and fuelled the rise of sugar stocks.

But that was just the beginning.

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With SAF in picture, this theme could get additional triggers. Already, the target to have 20% ethanol blending in petrol has been preponed from 2030 to 2025.

We have barely come halfway, targeting 12% blending by the end of this year. This alone requires additional ethanol volumes of around 6.43 billion (bn) litres by 2026.

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

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

And then there are plans to install 5,000 compressed biogas plants by 2030.

India is quite serious about its biofuel economy. And it's not just environmental concerns.

In a highly volatile geopolitical environment, the country cannot afford on external support for energy security.

Of course, economics is interesting too. As per industry estimates, the country could save US$ 4 bn per annum with just ethanol blending targets.

No wonder then at the G20 summit, biofuels was an important theme. It saw the creation of the Global Biofuel Alliance with India, Brazil, and the US as founding members. This will enable tech transfer and will mobilise investments and implementation of these projects.

Now, there are many sugar companies and OMCs that have taken up these projects seriously. Here's a list of some biofuel stocks.

But there is one specific firm, Praj Industries, I believe deserves a deeper discussion. The company is enviably placed in ethanol segment.

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 plants.

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1G plants use sugar and starch as raw material, 2G ethanol plant is a relatively new in-house tech with other raw materials like agri waste.

The company also offers 'HiPurity Water Systems' to produce high quality water for clients in pharmaceutical, biotech, cosmetics, and the wellness sector.

This 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.

The firm offers critical process equipment and skids for use in oil & gas, petrochemical, fertilizer, and chemical industries.

What's more, it offers technology and plant installation for the brewery and beverage industry too. Praj has over 70% of the market share in brewery market in India.

Now the company is not into the business of selling ethanol or these fuels. It's in the business of technology, process, and making plants and equipment 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's 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 equipment for zero liquid discharge or wastewater treatment.

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It also works with tech and EPC companies in the field of oil and gas, fertilizer, natural gas. Over 40% of the business is from repeat customers.

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

Apart from incremental ethanol opportunities, what interests me about Praj is its futuristic mind set.

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 5,000 such plants. Even a fraction of this investment could unleash huge opportunity for the company.

Another big opportunity for Praj is in Renewable Chemicals and Materials (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 commercialisation of bioplastics.

What's more, the company is setting up an ETCA (energy transition and climate action) facility with focus on clean technologies with Rs 1 bn capex.

This is likely to be ready by the end of FY24 and could generate revenue upto Rs 15 bn over a base of Rs 35 bn in FY23.

Its revenue and net profit have grown at 30% and 43% CAGR over the last five years.

It's a cash rich, zero debt company, with a return on equity of 24% and return on capital employed of 32%.

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.

This is not a stock recommendation. You must do your due diligence.

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.

Watch this space for more exciting opportunities.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Agora Research Private Limited (Research Analyst)

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