"Praj Industries" - Poised to Gain from Indias Strong Decarbonization Focus

- India is emerging as a sourcing hub for engineered products and Praj's critical process equipment and systems are strategically positioned to address that demand.
- Ethanol blending continues to make consistent improvement with each passing year.
- The nation's push to blended fuels is a huge tailwind for biofuel manufacturers like Praj Industries.
- Solid order pipeline, improving revenue diversification, and a strong capital structure are Praj's competitive advantages.

Praj Industries (NSE:PRAJIND) is a global leader providing end-to-end solutions for bioenergy, pure water, critical process equipment, distilleries, breweries, and industrial wastewater treatment. It ranked second in the list of the world’s 50 hottest companies in the global bio-economy for 2021 in the Low Carbon Fuels and Renewable Chemicals category. Praj is a bio-based technology and engineering company in India. Praj’s ethanol technology serves various applications in different parts of the world. It has manufacturing activities in four factories, two research centres, 65 project sites, totalling 73 national locations as of 31 March 2021. The company operates through six national and international subsidiaries. Praj caters to a wide industry base including customers in oil & gas, refining, biopharma, sterile formulations, topical & orals, cosmetics & personal care, and the nutraceutical industry.

Business Operations – The key products/services that the company manufactures are Bioenergy Plants (~60%-70% of consolidated revenue), Engineering Businesses (~20%) and High purity systems (~10%). It offers first- and second-generation ethanol and renewable biogas that can substitute fossil fuels and promote sustainable decarbonization through a circular bio-economy. It also offers critical process equipment & skids, brewery plants, water, and wastewater plants. Praj is the undisputed market leader in the domestic ethanol plant installation and equipment business.

The company has a large presence both nationally as well as internationally across five continents in more than 100 countries. It has an established market position in the domestic ethanol plant installation and equipment business and the domestic breweries installation segment. Exports account for ~30%-40% of Praj’s total revenues while domestic revenue is 60%-70%. Praj’s revenue in the second half of last year improved on the back of favourable government policies and increased demand for pharmaceutical grade alcohol for sanitization purposes. The company ended the year with a robust order pipeline of Rs. 2,605 crores as against Rs. 1,665 crore one year ago.

Praj is well-positioned to benefit from the increasing demand for cleaner fuels given its large footprint in the ethanol project and process engineering business. The ethanol technology is evolving rapidly and Praj is one of the few global companies to develop 2nd generation ethanol technology using agri-residue. Its water business also stands to gain from the increasing demand for fresh and pure water. The company is also offering a wide range of solutions for brewery plants producing beers at optimum costs.

Future Opportunities

India has announced investments worth Rs 2 lakh crore in setting up 5,000 plants to produce gas from bio and crop wastes by 2023-24. The Union Minister of Road Transport and Highways also announced that all vehicles in India could soon run on ethanol which will be expected to be less polluting compared to emissions from fossil fuels. The progressive National Biofuel Policy has an objective of reaching 10% ethanol blending by 2022 and 20% by 2030. India achieved its highest ethanol blending average of 8.1% with petrol in FY2021 with ~90% of the ethanol from sugar feedstock. This has further created a demand for an additional capacity of 1000 crore litres of ethanol. 

Praj will expand its existing ethanol manufacturing capacity to 600 KL per day from 400 KLPD, using sugarcane syrup. Currently, it is setting up India’s first batch of four commercial-scale second-generation biorefinery, and the first demonstration facility for multi feedstock compressed biogas systems having the lowest water footprint. It has also inked an MoU with Indian Oil to set up biofuel production facilities and explore opportunities in the Biofuels industry such as the production of alcohol to Jet (ATJ) fuels, CBG, as well as 1G & 2G ethanol.

Risks

Praj’s exposure to cyclicality in the capital goods industry and to project risks are its biggest risks. The company will also witness significant inflationary pressures from key raw materials such as stainless steel in FY22. However, the company is well-positioned to transfer most of the price increases to customers. Praj collects advance payment in most of the fixed price contracts which reduces the impact of any fluctuations in raw material prices.

Valuation

Praj Industries is almost debt-free and has a strong capital structure with adequate liquidity to support business growth. Praj Industries has a market capitalization value of more than Rs. 6,900 crores and is currently trading near Rs. 380 mark, just 14% below its 52-week high. The stock has returned ~345% since 2012 and has climbed ~106% in the last year. The promoter holding is low at ~32%. It has maintained a healthy dividend payout of ~40%-50% over the years. Praj delivered sales growth of ~18% in the last year, while its profits grew by ~15%. The stock is trading at 4.5x its PB which looks a little expensive.

Data source: Stocx.in

Conclusion

Ethanol stocks have witnessed a massive upward rally in the last year. Praj is favourably placed to leverage its leadership position in developing sustainable decarbonisation solutions and strong government’s focus on biofuels, ethanol and non-fossil-fuel based solutions for decarbonizing the Indian economy. It might be a good candidate for long-term investors looking to gain from growing decarbonization trends and a sustainable economy. 

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