Equity Research: Praj Industries

The Praj Industries stock is currently trading at a P/E of 30.5x/24.1x on FY23/24E earnings. The company’s EBITDA improved from Rs687mn in FY17 to Rs1,938mn in FY22, owing strong traction in domestic business and better operational efficiencies. 

Incorporated in 1985, PRAJ emerged itself as a global leader in providing bouquet of sustainable solutions. The company’s business is mainly divided into three segments: 1) Bio Energy segment - 1G Bio Ethanol, 2G Bio Ethanol, CBG, Bio- diesel technology & Sustainable Aviation Fuel technology, 2) Engineering Businesses - Critical Process Equipments, Brewery plants & Wastewater treatment and 3) HiPurity Business- end-to-end integrated solutions such as, water treatment solutions, modular process systems etc. 

With more than 3 decades of experience in bio-processes, engineering and project development - PRAJ focuses on future technology to reduce carbon footprint, moreover is also known for its TEMPO capabilities (i.e. Technology, Engineering, Manufacturing, Project management, and Operations & Maintenance). The company is a market leader in 1G ethanol plant with ~60-65% market share, also pioneering 2G ethanol production technology. It’s well-equipped manufacturing facilities (1 at Pune, 2 at Kandla-Gujarat and 1 at Wada) consists of equipment engineering and fabrication in accordance to international standards and codes. 

PRAJ also has a state-of-art R&D center in Pune named PRAJ Matrix (built on 5- acre land plot with an invested capital of ~US$25mn) having experienced workforce conducting research in area of Bioenergy, Bio-Chemicals, Health & Wellness. The center provides customized research and services solution to customers. Over years of constant R&D, PRAJ has been able to obtain 84 patents against its name in various area of biofuels. 

Overall PRAJ has been a trusted partner for process engineering, plant & critical equipment and systems with over 1,000 references in more than 100 countries across five continents. PRAJ’s strong customer base includes players like Adani Solar, Indian Oil, Heneiken, Deepak Fertilizers, SAB Miller, Bajaj Hindustan, UB Group, Biocon, Procter & Gamble, Ranbaxy, Lupin, BASF etc. 

Currently Bioenergy segment contributes ~71% of total revenue as on FY22. PRAJ is considered to be a market leader in bio-fuel technology (~60-65% of market share in domestic ethanol market) with vast experience in setting up ethanol plants globally based on variety of feedstock such as sugary & starchy; also offering modernization of existing plants. PRAJ has been continuously focusing on developing technologies to offer high alcohol yields, higher profitability and lower water & power consumption. Accordingly, it has developed technologies such as 1) EcoCool (Water conservation for distilleries), 2) MAXIMOL (Increasing capacity of ethanol dehydration plants by 30%) and 3) Profiit (Process Optimized Flexible Integrated Incineration Technology, which helps distilleries create sustainable and profitable processes). 

While government of India accelerated its 20% ethanol blending target (EBP20) to 2025 from 2030 earlier, an additional capacity of ~10.2bn liters is still required to meet EBP20, off which, ~5bn liters of capacity is yet to be tendered out. Consequently, we believe PRAJ is likely to witness addressable market worth ~Rs70bn with combination of green field and brown field expansion, translating into likely order inflows worth ~Rs40-50bn (~60-65% market share) for over next couple of years. 

Likewise, India’s ethanol blending rate has also increased from 0.7% in 2013 to 10% in 2022 because of 1) demand & supply side mechanism, 3) enhanced scope of feedstock for ethanol production, 4) remunerative prices from different feedstock, 5) interest subvention scheme, 6) long term procurement policy and 7) reduction in GST rate from 18% to 5%. It is estimated that ethanol demand is likely to grow at ~31% CAGR between 2022-2025. 

The Indian cumulative ethanol demand is expected to be ~13.5bn liters by 2025 including EBP20 blending target (~10bn liters) and rising demand from chemicals & other industries (3.3bn liters). Consequently, to meet this demand, India would require total installed capacity of ~15bn liters for ethanol by 2025. Of this, sugar based capacity is expected to be 7.6bn liter while grain based capacity is expected to be 7.4bn liters. 

Diversified Business Segment will lead to organic growth of company:

HiPurity Systems:

PRAJ through its 100% owned subsidiary HiPurity Systems ltd. provides value added and end-to-end solutions to Pharma, Biotech and Wellness industry. It offers end-to-end integrated solutions such as 1) water treatment solutions, 2) modular process systems, 3) ozone systems & combi test kits, 4) special services like electro polishing, on-site training & Riboflavin test at site and 5) spares & consumables like membranes, chemicals, tubes & fittings, valves, instruments and pumps. We observed good progress in Complex injectable - a niche low volume high cost product segment that gained good traction across the globe. We expect segment to report ~19% revenue CAGR between FY22-25E. 

Engineering Segment: 

Segment comprises of Brewery Plants & Equipment’s, CPES and Water and Wastewater Treatment Solution. The segment contributed 20% of revenue as on FY22 and we expect segment to report a ~18% revenue CAGR between FY22- 25E. 

Brewing Plant & Equipments:

In brewing industry, Praj offers a complete range of solutions in conceptualisation, technology, design, plant engineering, project installation and commissioning. It has setup world class brewery plants capable of producing best quality beers with minimum water & energy utilization, besides also generates low carbon footprint. As on date the company enjoys ~70% market share in India with repeated orders from marquee clients, thereby strengthening its leadership position. Further, there is established presence in international markets of Africa and South East Asia too. PRAJ has also developed a novel process and product technology for processing spent Yeast and Grain from beer manufacturing plants to produce Nutritional Performance Enhancer (NPE), thereby adding new revenue stream for beer manufacturers.

Critical Process Equipment & Systems (CPES):

Established in 2008, Critical Process Equipment & Systems (CPES) offers range of static equipment’s like pressure vessels, reactors, shell & tube heat exchangers, columns and other proprietary equipment’s built to process industries such as Oil & Gas, Refining, Petrochemicals, Fertilizers, Chemicals, F&B, Pharma and Biotech. PRAJ also undertakes end-to-end projects for 1) modular process Skids & packages, supports clients with finite element analysis, process, thermal & piping Design & Stress Analysis, and 2) designing skids using software’s like Plant 4D and PDMS. The division has a dedicated state-of-art manufacturing unit with ~25,000ton/annum capacity. Going forward, given strong customer focus and delivery capabilities, the business is poised for robust growth. 

PRAJ has developed a unique technology called RENGAS that produces cost effective Compressed Biogas for automotive application from multi feedstock including agri waste such as Rice straw, Wheat Straw, corn stover, cotton stock, grass and other organic waste. The company has also successfully inaugurated CBG demonstration facility in its R&D centre, Pune in 3QFY21. The CBG plant also produces co-products, such as high value organic manure for farmers. It has already commissioned two CBG plants and expects third one to be commissioned by Dec-22. This includes prestigious order from HPCL in Mar’21 for setting up CBG plant at Badaun in UP with capacity of 5,250 tons/annum of CBG. The plant is expected to produce 23,000 tons of solid bio-manure and 3,50,000 tons of liquid bio-manure, that would result in saving 15,000 tons/annum of CO2 emission. 

PRAJ is aiming to combine ethanol with diesel and is creating a binder that would aid this blend in partnership with the Automotive Research Association of India (ARAI). Pre-covid period diesel use in India was 82 billion litres (taking 5-7% ethanol blending into account). When the opportunity arises, we predict it will most likely produce a capacity of 5–6 billion litres.

PRAJ and Gevo are planning to commercialise SAF. Its aviation fuel has been given the Indian Air Force's certification. For the purpose of converting renewable iso-butanol into Sustainable Aviation Fuel and premium gasoline through an ASTM-approved pathway of Alcohol-to-Jet, Gevo, Inc. will licence its technology, and PRAJ will supply technology, plant equipment, and EPC services to refineries (ATJ). The pre-covid era use of jet fuel in India was 8 billion litres. We anticipate a requirement of 400 million litres in capacity for the same, taking into account the 5-7% blending possibilities for SAF.

Improving export will lead to high growth:

With a presence in more than 100 countries, PRAJ has been a well-respected leader in the global bioenergy sector for three decades. It has more than 20 years of expertise establishing ethanol plants in countries around Europe, including the UK, Poland, Belgium, and others. 

By 2030 (31 million litres in 2017), there will be 50 units of 2G ethanol plants with a total capacity of 2.8 billion litres in Europe. These plants will use agricultural and forestry waste as a feedstock. Currently, Europe has 57 1G ethanol plants with an 8.2 billion capacity. Few firms in the world, including PRAJ, have tested 2G technology. t has also tied up with Sekab E-Technology AB (Sweden) for treating forest waste and soft wood along with mandate in Europe to make Ethanol out of 2nd Generation Ethanol, which will boost demand for PRAJ’s technology. 

Brazil is another country which is 2nd largest producer of ethanol, using sugar cane as feed stock. Recently it decided to install starchy based feedstock (Corn based), thereby translating into an opportunity size of ~5bn liters over next 5 years. 

Strong order inflows in FY22:

After muted ordering activity during FY13-20, PRAJ reported strong order inflow growth of 75.8% in FY22, backed by strong traction in Bioenergy segment with 119% growth, while EPC segment reported decent growth of 4%. Factors like 1) governments push to achieve 20% Ethanol blending target by 2025, 2) emphasis on setting up 2G Bio-refinery plant, 3) focus on alternate green transportation fuel (CBG) and 4) gaining traction in other Emerging business like Water and Wastewater Treatment, Brewery Plants, CPES augur well for PRAJ. 

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Conclusion:

PRAJ is well poised for growth in the coming years given 1) its strong leadership in domestic ethanol plants (~60-65% market share), 2) prominent global presence in more than 100 countries and 3) significant focus on future-ready technologies like 2G ethanol (orders for three 2G based ethanol plants), Compressed Bio Gas (CBG) (opportunity of 5,000 CBG plant) & Sustainable Aviation Fuel (SAF) and 6) diversification in Wastewater Treatment (ZLD), Critical Process Equipment’s & System (CPES) & HiPurity business. PRAJ reported robust revenue growth of ~79% in FY22 owing to healthy order inflows of 24% CAGR over FY18-21, as compared to muted growth of 5% CAGR witnessed between FY17-20. The stock is currently trading at a P/E of 31.5x/23.1x on FY23/24E earnings. The company’s EBITDA improved from Rs687mn in FY17 to Rs1,938mn in FY22, owing strong traction in domestic business and better operational efficiencies. 

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