Praj Industries

About the Company

Praj Industries Limited operates in the field of bio-based technologies and engineering worldwide. It offers solutions for the ethanol industry, including multi-feed multi-product plants, modernization of existing plants, and renewable fuels comprising BioCNG, bio-butanol etc.; produces bio ethanol, bio butanol, bio chemicals, power, bio CNG, CO2, etc.; and operates bio-mobility platform that promotes the use of renewable resources to produce carbon neutral transportation fuel.

The company also provides high purity system solutions to the bio-pharmaceutical, biotech, cosmetics, healthcare, and F&B sector for sterile process water generation, water for injection, storage and distribution system, CIP/SIP, systems for core processes, wastewater treatment, etc.

Q2FY22 Updates

Financial Results & Highlights

Detailed Results:

1. The company witnessed phenomenal revenue growth of 103% YoY in consolidated terms in Q2.
2. The profits for the company were up for Q2 with a rise of 200% YoY in consolidated terms.
3. Order intake in Q2 was Rs 745 Cr vs Rs 405 Cr last year and Rs 661 Cr in Q1.
4. H1 was similarly up with order intake in H1 at Rs 1406 Cr vs Rs 715 Cr last year.
5. Current ethanol blending levels at “‘8.5% as of September 2021.
6. From October 2021 onwards, incentives to sugar industry have doubled for conversion to ethanol.
7. Ethanol production capacity of plants using Praj’s technology solutions across the globe has crossed 11 billion liters annually. This translates to around 10% of global ethanol production (excluding China).
8. The order backlog distribution in Q2 is:
   1. Bio Energy: 3%
   2. Engineering: 1%
   3. Hi Purity: 6%
9. Domestic orders form 82.7% of the total order book for Praj. The total order backlog as of the end of Q2 was at Rs 2235 Cr.
10. Q2 revenue split: Bioenergy: 74%; Engineering: 17%; HiPurity: 9%
11. EBITDA margin in Q2 was at 8.66% vs 6.7% last year.

Investor Conference Call Highlights:

1. The ethanol blending rate in India is expected to cross 10% in November 2021.
2. A total capacity of 118 Cr Litres was ordered to be built in India in Q2 from Praj with 94 Cr liters from starchy feedstock.
3. The average plant size is now up to 200 kiloliters per day.
4. France has also announced a program to improve the energy mix in favor of ethanol. Bioethanol consumption in France is expected to rise to close to 120 crore liters this year.
5. The company also commissioned its single largest pharma-grade alcohol plant having a capacity of 50 million gallons per year in the United States in Oct.
6. The company is expanding its offerings in the performance enhancer space in the ethanol and sugar sector. These consumable solutions help improve the yield and quality of the end product.
7. Praj is also currently executing projects for hydrogen plants for some of the leading players in the world.
8. The company’s execution of India’s largest apple juice concentrate plant is progressing as per the schedule and is expected to be commissioned by March ’22.
9. The company continues to see rising commodity prices, longer delivery cycles, and logistic challenges. The quarter witnessed a 15% increase in steel price and a further 10% in the last 15 days of the quarter.
10. The company is looking at solutions to blend ethanol into diesel but is not able to make the product according to the latest emission norms, but the management remains hopeful of achieving it in the future.
11. The major issue with ethanol blending of higher than 20% is that IC engines currently are not ready to handle this fuel mix and will need to be modified to be able to do so.
12. The starchy feedstock plant enables ethanol production even in non-sugar producing states and is expected to contribute to making ethanol production uniform across the country.
13. The seasonality seen in the company’s performance in the past should go down due to dependence on sugary feedstock going down.
14. The management states that it is taking measures to minimize the impact of raw material price inflation, and this should result in an EBITDA margin of 8% if raw material prices continue to remain high.
15. The management states that there isn’t any food vs fuel debate on starchy feedstock as most of the input grains for these plants are not fit for human consumption.
16. The management states that 2G ethanol technology is now in positive IRR territory from negative previously.
17. Despite the small share of exports in the total order backlog, the export order backlog is at its highest ever level for Praj.
18. The management states that the CBG or biogas space is still not becoming as big as the ethanol plant space because of challenges in gasification on the plant side.
19. The incentive for diversion of the sugar for higher production of ethanol has been doubled from last year’s incentive levels by the govt.
20. The company has signed a deal in Brazil for the transfer of technology.
21. The management states that the company has a 60% win ratio in its new project bids.
22. The company only has 16 customers globally in its engineering business who are focused on cleantech, green tech solutions, gas-based plants, industrial gases, & very high-specialty chemicals. All of these customers are in the top 2 of their segments globally.
23. The management states that the company’s earning share of a project is close to 1/3rd of the overall project value for setting up an ethanol plant.
24. The CBG opportunity is estimated to be at Rs 5000 Cr alone according to the management.
25. The company works on a fixed contract model where there isn’t any protection from raw material price inflation and thus margins remain vulnerable to RM inflation.
26. The company was planning to undergo capacity expansion in March 2023. It will now move up the schedule by 1 year to keep pace with the rising order book.

Analyst’s View:

Praj is one of the global market leaders in the bio-based technologies and engineering space. The company continues to see phenomenal growth of over 100% YoY in both revenues and profits and rising order book and margins despite pressure from rising raw material costs. It is seeing a drastic rise in starchy feedstock orders which would reduce the dependence on sugar for making ethanol and also reduce the seasonality from Praj’s revenues. The management has stated that the 2G ethanol technology is now IRR positive and it should become commercially viable soon. Ethanol-blended diesel is also now up to BSIV norms and should become commercially viable once it can meet BSVI norms. The management expects the CBG or biogas opportunity to be at Rs 5000 Cr but gasification at the plant level remains a challenge for the industry. It remains to be seen how long the momentum for Praj will continue and how long will it take for the 2G and ethanol-blended diesel to become commercially viable. Nonetheless, given the company’s strong track record, strong tailwinds of the industry, the ambitious govt target of reaching 20% blending by 2025, and the rising international acceptance of biofuels as a credible alternative for reducing emissions, Praj Industries remains a pivotal Pick & Shovel play on the ethanol and biofuel sector that every investor should watch out for.

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