S t o c k I d e a Date: 22-Feb -13 CMP: `43 TARGET: `62 Upside: 44% B U Y SENSEX 19317 NIFTY 5850 Eq. Cap. (` Crs) 35.49 Face Value (`) 2.0 M. Cap (` Crs) 763 BSE Code 522205 NSE Code Financial Year PRAJIND Apr-Mar 52-w H/L 86/40.4 Avg. Daily Vol. 64,516 FY13E EPS (`) 4.36 P/E (x) 9.86x BVPS (`) 33.91 P/BVPS (x) 1.27x Stock vs. Sensex Latin Manharlal Securities Pvt Ltd. 124 Viraj, S,V.Road, Khar (W), Mumbai 400 052 www.latinmanharlal.com PRAJ INDUSTRIES LTD. (Praj) Praj Industries Ltd (Praj), a global Indian company incorporated in 1985 with the objective of providing cutting edge solutions to the Distillery Industry. Praj is broadly into 4 businesses; Ethanol, Brewery equipments, Water and waste water and Critical process equipment systems. Indian Brewery/Beer industry: growing in double digits Currently, Praj serves the market for brewery plants in India. With annual per capita beer consumption at 2 liters, the Indian beer industry is growing at the rate of 11-12% CAGR for the past 5 years. Nationwide roll-out of Ethanol blend petrol: A major Boost The Cabinet Committee on Economic Affairs (CCEA) has made it mandatory for oil marketing companies (OMCs) - Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation - to blend 5% ethanol with petrol. This is likely to reduce the fuel import bill and lower India's dependence on fossil fuel as the ethanol prices are lower than petrol. The government has put the deadline for the nationwide roll-out from June 1, 2013. Accelerates 2nd Generation Ethanol Technology Development As global players continue to debate the use of food crops for the production of biofuel, Praj has chosen an alternative path. The company has started work on 2nd Generation biofuel, which does not require any specific crop as feed. After 3 years of technology development and plant engineering, Praj is now building a commercial scale demo plant to produce ethanol from biomass, which could be any form of agricultural waste, such as wheat and paddy waste, or wood chips. Solidifies Ethanol presence in Columbia Recently in Jan 2013, Praj has won a US$20 million (~Rs.110 Crs) contract to provide an ethanol plant in Colombia. The order comes from Riopaila Castilla SA - a large conglomerate with interests in sugar production, confectionary, food processing, etc. The order includes state of the art process plant for production of 400,000 liter per day of ethanol using sugar cane juice and molasses. Water and Wastewater treatment: strong prospects Water scarcity, environmental concerns and challenges in manufacturing processes in various industries and pressure on municipal services are the key drivers for this business. Over a period of time, with increasing industrial activities across certain regions, the need for reduction, recycle and reuse of treated wastewater and zero liquid discharge will clearly enhance technology play in the water space. Critical Process Equipment: seeing an uptick in the demand With more and more sourcing of process equipment from India, Praj is seeing an uptick in the demand for critical equipments and systems that adhere to specific standards required in oil & gas, chemicals, fertilizers and several other industries. Strong Balance Sheet Praj is virtually a debt-free, cash rich company. Currently it carries ~Rs.195.5 Crs cash + Rs. 283.2 Crs in Investments (translates to cash per share of Rs.22.3) on its balance sheet at the end of 3QFY13. At the CMP of `43, the stock is trading at 8.3x its FY14E consolidated EPS of `5.20. We recommend BUY on the stock with a 12-18 months target price of `62, providing an upside of 44% from the current levels. Please Refer DISCLAIMER on the Last Page
Company Profile Over 500 client references in 50 countries and planning to have 600 references in near future Praj Industries Ltd (Praj), a global Indian company incorporated in 1985 with the objective of providing cutting edge solutions to the Distillery Industry. Praj is broadly into 4 businesses; Ethanol, Brewery equipments, Water and waste water and Critical process equipment systems. The firm provides technology, engineering services and key equipment to its clients. Lately, the firm has forayed into customised equipment manufacturing and water and waste-water treatment businesses to diversify its business operations and reduce over dependence on ethanol. Of its 6 subsidiaries, 5 are operating outside India: the Netherlands, Brazil, Thailand, Johannesburg in South Africa, and Houston in the US. It has over 500 client references in 50 countries and planning to have 600 references in near future. Praj has 3 manufacturing facilities. The Pune plant caters to the domestic market, with fabrication capacity of 6,000 TPA, while its Jejuri plant (Pune) is dedicated for bio-consumables additives for ethanol industry. Its 3 rd plant based in the Kandla SEZ in Gujarat has 2 units, manufacturing customized equipments with combined fabrication capacity of 5,000 TPA. The company produces process equipment required by industries such as oil and gas, petrochemicals, pharmaceuticals and dairy. It is leading company in ethanol equipment. On cumulative basis, its plants accounts for 10% of the world s ethanol production. Well equipped multilocational manufacturing facilities Praj has well equipped multi-locational manufacturing facilities. The units are accredited with ASME 'U' and 'H' stamp, an ISO 9000:2008, OHSAS 18001 2007 & an ISO 14001 2004 certification. The facilities are equipped to adhere to international standards including TEMA, DIN 8777, AD Merk Blatter, ANSI (SNT-TC-IA),CE, BS 5500 and IS 2825. Business Model Praj gets ~71% of its revenue from sales of ethanol and ethanol-related equipment and this figure will fall as it diversifies into other areas including water and waste-water treatment. Others 9% Revenue Mix - 9MFY13 Brewery 20% Ethanol 71% Praj Industries Ltd. 2 22-Feb-2013
INVESTMENT POSITIVES Indian Brewery/Beer industry: growing in double digits Indian beer industry is growing at the rate of 11-12% CAGR for the past 5 years Currently, Praj serves the market for brewery plants in India. With annual per capita beer consumption at 2 liters, the Indian beer industry is growing at the rate of 11-12% CAGR for the past 5 years. Growing disposable income, improvements in the quality of beer, steadily growing Beer-consuming population base, changing climatic factors and evolving life style are the factors that have an impact on the growth of the beer industry. The company has been investing into serving the changing expectations of beer producers. Recently, Praj commissioned the largest brewery in India with the brew length of 300 hectoliter and total capacity of 1 million hectoliter per year. Praj is considered to be an integrated brewery plant supplier and is also working towards forging partnerships in this space to bring the best of the brewery experience to its customers in India and other emerging markets. Untapped Opportunities in Indian Ethanol industry Exponential increase in number of automotives and industry applications combined with high fuel prices is driving high domestic demand for ethanol Increasing worldwide demand for ethanol creates significant export potential Indian Govt has started actively promoting ethanol production through favorable regulations. Projected overall demand for Ethanol is far outpacing supply. Govt had postponed the deadline for the nationwide roll-out from earlier date of December 1, 2012 to June 1, 2013 Nationwide roll-out of Ethanol blend petrol: A major Boost In the National Policy on Biofuels announced in 2008, the Govt. of India mandated phased implementation of a programme of ethanol blending with petrol. Recently the government had postponed the deadline for the nationwide roll-out from earlier date of December 1, 2012 to June 1, 2013. The Cabinet Committee on Economic Affairs (CCEA) has made it mandatory for oil marketing companies (OMCs) - Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation - to blend 5% ethanol with petrol. This is likely to reduce the fuel import bill and lower India's dependence on fossil fuel as the ethanol prices are lower than petrol. The CCEA has also allowed import of ethanol if OMCs face any shortage of the biofuel in the domestic market for blending purpose. The Govt having cleared the import of the commodity, the public sector OMCs was reported to be moving jointly to float a Rs. 3,500-Crs global tender to source ethanol. The annual requirement is estimated to be ~1,000 million litres for a pan-india roll-out of 5% blended petrol, which is already available in some States (Karnataka). While getting started at 5% has been such a slog for India, countries like the United States now Praj Industries Ltd. 3 22-Feb-2013
have established doping programmes that involve up to 20% ethanol. It is expected that 5% bio-ethanol will be blended with petrol sold in all the states and Union Territories (UT) of the country. The Ethanol Blended Petrol (EBP) programme is presently being implemented in a total of 13 States with blending level of about 2% against a mandatory target of 5%. Ethanol production in India was expected to rise by 29 % to 2.1 billion litres in 2012 India stands to save a huge amount of foreign exchange through the blending programme, provided it gets ethanol at a viable price. There is also an environment dividend. Unlike in the case of ethanol derived from food crops such as corn, which could have an adverse impact on prices, as it happens in the U.S., India s ethanol source is sugarcane. Ethanol production in India was expected to rise by 29 % to 2.1 billion litres in 2012 in a year of high sugar production, therefore higher production of molasses, from which ethanol is made. Domestic ethanol consumption rose by 4.5 % to 2.08 billion litres. However, only an estimated 400 million litres were available to be blended with petrol. Accelerates 2 nd Generation Ethanol Technology Development As global players continue to debate the use of food crops for the production of biofuel, Praj has chosen an alternative path. The company has started work on 2 nd Generation biofuel, which unlike first generation biofuel does not require any specific crop as feed. After 3 years of technology development and plant engineering, Praj is now building a commercial scale (10 mn litres p.a ) demonstration plant to produce ethanol also called cellulosic ethanol from biomass, which could be any form of agricultural waste, such as wheat and paddy waste, or wood chips. Praj globally shared it s advancement in the development of Commercial Demo Plant for Lignocellulosic Ethanol. This is a major game changer for Praj, which has been pursuing the 2 nd Generation Program at Praj Matrix-the innovation center, its R & D facility. It is also a significant step forward in transport biofuels. Successful demonstration of various parameters at the demo- plant will put Praj at the forefront of the biobased economy Praj has developed extensive proprietary technology and gained significant experience and expertise in each of the unit operations required for the successful development of an integrated, commercialscale bioethanol plant. We believe the successful demonstration of various parameters at the demo-commercial plant will put Praj at the forefront of the biobased economy and in the race for commercial scale 2 nd generation biofuels. The Demo plant will seek to demonstrate technical and commercial viability as well optimization of water and energy integration and its impact on the capex and opex of the commercial financial proposal. The plant will also develop the entire value chain including feed handling (post harvest) and feedsock characteristics and its impact on the operations. The Engineering Package is ready and Praj has signed an MOU with a customer for the location. Praj is in discussions with other strategic investors/partners for participation. The Company expects the project cost to be in the region of US$ 25 30 mln and expects to break ground in early 2013. Praj Industries Ltd. 4 22-Feb-2013
Solidifies Ethanol presence in Columbia Praj has retained market share of 100% in Colombia Recently in Jan 2013, Praj has won a US$20 million (~Rs.110 Crs) contract to provide an ethanol plant in Colombia. The order comes from Riopaila Castilla SA - a large conglomerate with interests in sugar production, confectionary, food processing, etc. The order includes state of the art process plant for production of 400,000 liter per day of ethanol using sugar cane juice and molasses-b at their sugar plant at La Paila in the Valle del Cauca region of Colombia. The delivery is expected to be completed within 1 year. The plant will use Praj's cutting edge technology including vacuum distillation & thermal integration with vinasse evaporation to use very low pressure vapor from the cane juice evaporators for producing ethanol with a very low production of vinasse of ethanol. With this order, Praj has retained market share of 100% in Colombia. This is the 7 th ethanol plant being installed by Praj. The Colombian Ethanol program has been one of the most successful in South, Central America (outside Brazil). The entire program is being supplied by plants based on Praj's ethanol technology. Colombia current ethanol mandate of 10 % will eventually go up to 20% blending. Successfully commissioned Corn-to-Ethanol plant in Argentina Argentina has announced a mandate to blend fuel ethanol with gasoline. Recently Praj has successfully commissioned a 150,000 liters per day corn-to-ethanol plant for Vicentin SAIC. This plant located in the Santa Fe province of Argentina is one of the first new generation plants to be commissioned for fuel ethanol production in Argentina. Vicentin's plant incorporates thermally integrated vacuum distillation and the low pressure steam enables co-generation simultaneously. This ensures lowest energy foot print for the plant. Argentina has announced a mandate to blend fuel ethanol with gasoline. Praj is partnering companies in developing projects that will make Argentina self-reliant in their energy consumption. Water and Wastewater treatment: strong prospects Water scarcity, environmental concerns and challenges in manufacturing processes in various industries and pressure on municipal services are the key drivers for this business. Over a period of time, with increasing industrial activities across certain regions, the need for reduction, recycle and reuse of treated wastewater and zero liquid discharge will clearly enhance technology play in the water space. Praj has already demonstrated its capabilities by offering critical technologies and systems for wastewater treatment to a number of industries including the Zero Liquid Discharge System for textile effluent at Thirupur textile belt. This plant is successfully commissioned. Also, the company plans to build sizable overseas opportunities and has identified regions of interest beyond India wherein it can offer value added services. With the acquisition of Neela Systems Ltd (in Jan 2012), Praj can now be looked upon as a significant player in niche segments like pharmaceuticals, food and beverages, biotech and cosmetics. Praj Industries Ltd. 5 22-Feb-2013
Neela Systems Ltd The subsidiary has good growth potentials Clients include Johnson & Johnson India, ITC Ltd., Dr. Reddy's Lab, Jain Irrigation, L'Oreal India, Aurobindo Pharma, and Strides Arcolab. Praj has acquired 50.2% stake in water treatment systems maker - Neela Systems Ltd for Rs.64 Crs in Jan 2012. Later in Sept 2012, Praj has acquired a further stake of 9.8% for Rs.12.5 Crs making it a 60% subsidiary. Neela Systems Ltd will continue to operate as an independent entity. The company supplies water treatment and modular process systems to biotech, pharma and personal care industries. It has a manufacturing facility at Wada. Neela Systems caters to clients such as Johnson & Johnson India, ITC Ltd., Dr. Reddy's Laboratories Ltd., Jain Irrigation Systems Ltd, L'Oreal India, Aurobindo Pharma Ltd., and Strides Arcolab Limited. The company has a turnover of ~ Rs.90 Crs including exports. Critical Process Equipment: seeing an uptick in the demand Serves customers in South East Asia and Middle East with possible future expansion into South and North America With more and more sourcing of process equipment from India, Praj is seeing an uptick in the demand for critical equipments and systems that adhere to specific standards required in oil & gas, chemicals, fertilizers and several other industries. The company has been certified for ASME U, U2 & H stamp and CE marked equipments. Praj also has the capability to handle various metals and global design specifications and has moved up the value chain to offer bundled solutions which go beyond mere fabrication. It now serves customers in South East Asia and Middle East with possible future expansion into South and North America. Praj has also set up another manufacturing unit at Kandla (SEZ Unit II) which can fabricate high-thickness vessels for industries with such requirement. This has augmented Praj's position as a competitive supplier in the international market. Biotech Products: potential to deliver recurring revenue This business was introduced for its potential to deliver recurring revenue. Currently, the company is supplying biotech based consumables like 'fermentation performance enhancers' for the distillery industry. A GMP (good manufacturing practice) based manufacturing facility has been commissioned for this purpose. Located near Pune, this facility will look to scale up with other biotech products that will expand the portfolio and can serve industries outside the ethanol and sugar sector. The company has identified Animal Feed Additives including amino acids and probiotics as an area of interest and is in the process of charting out a marketing plan. Apart from this, Praj's R & D Center, Praj Matrix, is also working on other biotech products which can either be manufactured and marketed by it or licensed for production to the industry. The biotech production unit will be aligned for these product lines as well. In time to come, company expects a bouquet of bio-based products for various applications. Praj Industries Ltd. 6 22-Feb-2013
3QFY13 Results: Margins Improved + Strong Order Book Order backlog (excluding Nila Systems) as on date is Rs 850 Crs. Revenue for 3QFY13 stood at Rs 187.2 Crs (vs Rs. 219.3 Crs in 3QFY12). However with EBITDA margin expanded marginally by 10 bps to 9.5%. PAT was eventually higher by 8.2% y-o-y to Rs 23.3 Crs with PAT margin being 12.4%. In 3QFY13 there is some improvement in margins and going forward the company looks to improving sales and the operating parameters together. Revenue for 9MFY2013 stood at Rs 538.7 Crs with the share of ethanol being 71%, brewery 20% and new businesses such as water and waste water etc at 9%. The domestic and export mix stood at 58:42. The PAT for 9MFY2013 stood 8% lower y-o-y at Rs 51.3 Crs with PAT margin being 9.5%. Sales of Nila Systems Ltd for the quarter stood at Rs 22 Crs and the PAT at Rs 3.2 Crs. Order intake in Q3FY13 was ~Rs 240 Crs including one large Rs.109 Crs order from Colombia. Of the order intake for the quarter the share of domestic orders was 21% and balance are international. The Ethanol : Brewery : Emerging Biz stood at 65:7:28. Order backlog (excluding Nila Systems) as on date is Rs 850 Crs. Of the order backlog the share of domestic orders stood at 43% and the balance 57% was accounted by international. Similarly the Ethanol : Brewery : Emerging Biz mix of order backlog is at 72:12:16. The company Emerging Businesses (new business lines including water & process equipment) are showing traction with 30% of the order intake during 3QFY13. Strong Balance Sheet Cash per share at Rs.22.30 Praj is virtually a debt-free, cash rich company. Currently it carries ~Rs.195.5 Crs cash + Rs. 283.2 Crs in Investments (translates to cash per share of Rs.22.3) on its balance sheet at the end of 3QFY13. The company has maintained ~84% average dividend payout ratio and 2.07% dividend yield over the last 9 years. 160% 140% 120% 100% 80% 60% 40% 20% 0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 40 35 30 25 20 15 10 5 0 Dividend (Rs. In Crs) Dividend-% Praj Industries Ltd. 7 22-Feb-2013
CONCERNS Lack of feed stock availability may impact new ethanol plant. Exposed to Exchange Rate risk as 30-50% of the company s business comes from overseas market. Biofuels/Distillery and Brewery businesses are governed by the legislations of different geographies served by the company. VALUATIONS At the CMP of `43, the stock is trading at 8.3x its FY14E consolidated EPS of `5.20. We recommend BUY on the stock with a 12-18 months target price of `62, providing an upside of 44% from the current levels. Profit & Loss A/c - Consolidated - ` Crs FY08 FY09 FY10 FY11 FY12 Net Sales 738.0 954.2 734.4 664.9 1003.1 Y-o-Y 29.3% -23.0% -9.5% 50.9% Total Expenditure 603.0 824.3 640.9 613.3 910.7 Raw Materials 359.3 435.6 349.7 364.9 569.8 Stock Adjustments 14.7 0.0 0.0 23.4-1.7 Power & Fuel Cost 2.4 2.7 3.5 3.3 4.9 Employee Cost 61.2 85.4 69.8 75.6 95.6 Other Manufacturing Exp. 64.8 45.8 53.0 55.9 68.4 Selling and Adm. Expenses 76.6 181.8 145.7 76.0 147.5 Miscellaneous Expenses 23.9 73.1 19.3 14.2 26.3 EBITDA 135.0 129.9 93.5 51.6 92.4 Margin 18.30% 13.61% 12.73% 7.76% 9.22% Depreciation 5.8 8.9 10.7 11.2 16.4 EBIT 129.2 121.0 82.8 40.4 76.1 Interest 0.1 0.6 0.4 0 1.2 Other Income 43.6 24.8 45.7 25.3 44.3 PBT 172.7 145.3 128.1 65.7 119.3 PAT 151.3 117.5 119.8 57.0 70.3 Minority Interest (after tax) -1.6-3.7 0.3-0.8 2.4 Net Profit after Minority 152.9 121.2 119.6 57.8 67.9 Extraordinary Items 4.1-4.3 4.4 2.2 12.1 Adjusted PAT 148.9 125.5 115.2 55.5 55.8 Margin 20.2% 13.1% 15.7% 8.3% 5.6% EPS (Rs.) 8.39 7.07 6.49 3.13 3.14 Source: Company, Capitaline Praj Industries Ltd. 8 22-Feb-2013
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