Are Praj Industries’ strong financials and order book a sign of long-term growth?

India stands at a critical crossroads in the exploration of renewable energy. The country is fighting for greener options as power demand grows. While solar and green hydrogen wind power have long been hot topics, compressed biogas (CBG) is a newcomer to the race.

In the commercial, industrial and automotive sectors, CBG is a competitively priced, environmentally friendly and renewable motor fuel that can replace CNG. It is produced by processing waste and biomass sources, including sewage treatment plant waste, animal waste, sugarcane press mud, municipal solid waste and agricultural residues.

The Global Biofuels Alliance (GBA), an India-led organization, has united to promote the use of biofuels, especially in the transportation sector, and to co-develop and promote technological advancements in production processes.

In addition to the original three member states (India, the United States, and Brazil), Argentina, Canada, Italy, and South Africa became members. The International Energy Agency expects biofuel production to increase globally by 2030, a critical step toward reaching net-zero emissions by 2050.

The Indian government is actively pursuing ethanol blending targets through legislative reforms. The revised target is to have a gasoline-ethanol blend of 20% by 2025, rather than the 2030 target. It is noteworthy that Korea achieved the 10% goal much faster than expected.

TruAlt Bioenergy, India’s largest ethanol producer, and state-run pipeline company GAIL had previously announced projects together. And there will be more to come soon.

Through this little-known small company, Praj Industries, investors have a great opportunity to ride the investment megatrend of the past decade as ethanol blends and their use as a sustainable fuel source grow in popularity.

All of these tailwinds have helped the company’s shares deliver multiple bagger returns. With COVID-19 at low levels, the company achieved a 769% return. Over the course of one year, the stock returned 33.34%.

However, the company has recently undergone a correction of around 30%, potentially presenting an investment opportunity. So, let’s take a closer look at the article to understand the business and find out what these adjustments mean for investors.

Corporate Overview of Praj Industries

Founded in 1983, Praj Industries (Praj) is a major player in the Indian ethanol industry and ranks among the world’s top 10 suppliers of ethanol facilities utilizing feedstock derived from sugar and cellulose.

Starting as a supplier to ethanol plants, we have expanded to provide high purity water, essential process equipment, breweries, bioenergy and industrial wastewater treatment solutions to the chemical, pharmaceutical, oil and gas industries.

With its global headquarters in Pune, India, Praj has expanded its reach to over 100 countries and over 1000 references globally.

With numerous new projects, Praj hopes to play a key role in the energy, environment and agro-processing sectors by providing creative and integrated solutions involving machines, plants and goods that improve people’s quality of life.

Matrix, Praj’s state-of-the-art research and development facility, supports the solutions offered by the company. In the Indian bioenergy market, Praj holds a market share of 60-70% and is the only major player.

Business divisions of Praj Industries

Praj Industries offers a wide range of products and services, including breweries, high-purity water systems, critical process equipment and skids, zero discharge systems, and bioenergy solutions. The three business segments that provide revenue to Praj are:

Bioenergy business

One name to watch in global biofuel technology solutions is Praj. Praj’s ethanol technology, which originated in India in the early 1980s, is used in many countries around the world.

The Bioenergy division provides a wide range of solutions to the global ethanol industry. The company, which generated 74% of consolidated revenue in FY23, is involved in the design, engineering, manufacturing and commissioning of ethanol plants.

HiPurity system

Praj HiPurity Systems provides end-to-end solutions to the biopharmaceutical, biotechnology, cosmetics, medical, food and beverage industries for sterilized water generation, water for injection, storage and distribution systems, CIP/SIP, critical process systems and more. to.

These solutions are used in the manufacture of a wide range of pharmaceutical products, including liquid oral dosage forms, parenterals, APIs, ointments/emulsions, and oncology formulations. Each solution is supported by the expertise of Praj Matrix R&D Centre, a leader in the biopharmaceutical field. This accounted for 7% of total revenue in FY23.

engineering business

The engineering business accounted for 19% of consolidated revenue in FY23. This division is divided into three sections: i) water and wastewater treatment (operating in industrial wastewater systems), ii) critical process equipment and skids (providing advanced equipment and systems used in oil and gas, petrochemical, fertilizer and chemical industries) and iii) brewery plants and equipment.

Finance of Praj Industries

In FY 2023, Praj Industries saw significant growth in its revenue, surging 51% to reach ₹3,528.04 crore compared to ₹2,343.27 crore in FY 2022. After analyzing four years from FY2020 to FY2023, the company recorded a compound annual growth rate (CAGR) of 47.37%.

At the same time, there has been a notable increase in net profit, with a 60% increase from ₹150.24 crore in fiscal 2022 to ₹239.82 crore in fiscal 2023. Cumulative net profit over the four years from fiscal 2020 to fiscal 2023 recorded a CAGR of 50.44%.

In FY23, Praj Industries maintained favorable financial metrics with Return on Equity (ROE) of 24.06% and Return on Invested Capital (ROCE) of 30.97%.

Does the recent correction present an investment opportunity?

The stock has corrected nearly 30% in the last four months from its high of ₹644.60 in early December last year. The explanation for this stock performance is that the Indian government has taken proactive steps to ensure sufficient sugar supply and price stability, including banning all sugar mills and distilleries from using sugarcane juice to make ethanol.

The supply chain dynamics of the sugar sector have changed with the government ordering an immediate ban on the use of sugar syrup in ethanol production for the 2023-24 supply year. The government later amended the order to allow the use of sugar syrup and B-rich molasses, but capped the diversion of up to 1.7 million metric tons of sugar for ethanol production.

The government followed suit by announcing an incentive of Rs 6.87 per liter to encourage ethanol production from C Heavy molasses. To promote other feedstocks, the government increased the price of ethanol produced from maize from Rs 5.79 to Rs 71.86 per liter.

Due to this sudden policy change, the company witnessed a highly unusual quarter with no confirmed orders for its sugar-based ethanol plants. However, the company strongly believes that this is a temporary situation. Praj has already created a way to solve the feedstock dilemma for its sugar customers.

The company is working with customers to convert existing single feedstock plants to multi-feedstock plants and believes these solutions will help them return to their potential in the coming year. Although sugar feedstock-based inquiries failed to translate into orders, Praj Industries has seen a steady flow of starch feedstock-based inquiries converting into orders.

The company also demonstrated a healthy order book, indicating revenue visibility. Order intake during the quarter was Rs. Of the $10.3 billion, 86% comes from the domestic market. Of the total orders, the bioenergy sector accounted for 81%, the engineering sector accounted for 12%, and the PHS business sector accounted for 7%.

As of September 2023, the order backlog is 10 million won. At $39.5 billion, domestic orders account for 75% of the total. Cash on hand as on September 30, 2023 is Rs. 6.4 billion.

conclusion

Praj Industries appears well-positioned to capitalize on the growing demand for renewable energy solutions with its strong order book, healthy financials, and leadership position in the bioenergy market. Although recent government policy changes have caused temporary disruptions, the company’s ability to adapt and its focus on diversifying its feedstock sources bodes well for future growth.

What are your thoughts on Praj Industries’ prospects in the evolving bioenergy landscape? Do you see it maintaining momentum and delivering long-term value to investors?

Written by Nalin Surya

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