Praj Industries back on growth track with ethanol business revival, Ganga project and margin play

Once regarded as a high-growth potential company in a sunrise industry, ethanol plant maker Praj Industries ran into trouble when the global demand for ethanol dried up, post the global economic crisis. The company, once worth over Rs 3,000 crore, steadily lost value and dropped below Rs 600 crore by August last year. Nevertheless, its efforts to diversify into areas such as waste water treatment and biotech products started to pay off in FY14, helping it gain 50% market value in the past one year.

“We have already put the wheels of transformation into motion by realigning businesses to launch the company on the growth track. The strategy involves external and internal levers,” said Pramod Chaudhari, executive chairman, in his address to investors. “Externally, Praj will realign business model, business mix and geographical diversity. It will optimise project and services mix in its revenues, and at the same time, scale up revenues from emerging businesses. It will enhance exports through greater geographical penetration, including that of emerging businesses.”

From its traditional business of building ethanol-producing plants, the company moved to water and waste water treatment, critical process equipment and systems and high purity systems. For FY14, these emerging businesses contributed 28% to the company’s consolidated revenues, from just 8% in FY13.

Although markets remain subdued at present, the company remains hopeful of a revival of its traditional ethanol business globally. “In South-East Asia, Indonesia is considering a mandate for ethanol blending. In Vietnam, the E5 policy will be implemented in seven provinces this year and nationwide by 2015. The EU Energy Council has recommended 7% blending of first generation biofuels and 0.5% blending of advanced biofuels, which include second generation ethanol. The EU parliament will conclude on it by October 2014,” said Gajanan Nabar, managing director of Praj Industries. “However, a lot of action on the ground is getting delayed due to a variety of reasons.”

The company carried an order backlog of Rs 730 crore at the end of June 2014, which is equivalent to nearly 9 months of sales. Till the new orders start coming up, the company has started actively seeking upgradation and retrofitting orders.

Similarly, with the government expected to move decisively on the Ganga cleaning project, it expects to win orders in water treatment space. Besides, it’s setting up a first of its kind second generation ethanol plant for a client to commission by December 2015.

In spite of its difficult phase, the company remains debt-free and cash-rich with a dividend-paying track record of 12 continuous years. Its consolidated revenues grew at a cumulative annualised growth rate (CAGR) of 14%, although its net profit stagnated, indicating a pressure on margins.

The company is trading at 19.5 times its earnings for the past 12 months. Growth in its margins will play a key role in boosting its valuations from here on.