THE CURRENT market meltdown has drastically reduced the valuations of several companies. However, in quite a few cases, the market has been too harsh on companies which have a promising future. This has created an excellent opportunity for long-term investors. One such company is Praj Industries, which has long been the market’s darling, due to its growth prospects in the ethanol industry.
The company has lost over half its market capitalisation in the past two months, without any corresponding change in its fundamentals or future outlook. Given that the company is in an expansion mode and is sitting on a healthy order book, it is expected to post a good performance next year. Long-term investors can consider the stock at current levels.
BUSINESS:
Pune-based Praj Industries is an engineering company and is the market leader in ethanol technology. It provides turnkey project implementation services to set up ethanol distillation units. The company has developed technologies to produce ethanol from a variety of feedstock such as sugarcane, sweet sorghum, corn etc and is trying to develop a commercially viable method to convert cellulose into ethanol. Besides ethanol — which accounts for over 80% of its revenues — the company also carries out distillation for breweries and plans to enter the bio-diesel space.
Praj has executed projects in over 35 countries. Over the past couple of years, it has taken steps to strengthen its global presence. These include an acquisition in the US and tie-ups with foreign companies in Europe and Brazil. With this, the company has established its presence in key markets across the world.
Over the past couple of years, the company’s shareholding pattern has witnessed a peculiar trend. The shareholding of the promoters and public has fallen, while institutional holding is on the rise. This indicates that the company is gradually becoming a professionally-dominated organisation, from a promoter-driven one. This augurs well for the long-term growth sustainability of its business model. Some of the most successful companies such as Larsen & Toubro,
ITC, HDFC and Infosys are majority owned by institutions.
GROWTH DRIVERS:
Ethanol and bio-diesel are gaining acceptance worldwide as eco-friendly fuels. Ethanol blending has already become mandatory for petrol in a number of countries, including its largest consumer, the US. The proportion of blending is slated to go up, with governments in the US and India mandating 10% blending over the next 2-4 years. The European Union is also contemplating to replace 10% of petrol consumed with ethanol. This is likely to create strong demand for turnkey solutions providers such as Praj Industries. The company already has an order book of Rs 900 crore, which will be executed over the next 12 months.
Praj is gearing up to cater to the fastpaced growth in future by expanding its capabilities. It has increased its manpower and set up its second manufacturing unit at Kandla SEZ. It has also established a full-fledged research centre for bio-fuels to develop new technologies in this field.
FINANCIALS:
Praj’s net profit has witnessed a cumulative annual growth rate (CAGR) of 43.2% over the past 10 years, while its net sales have grown by 27.3%. Although its dividend per share has increased over the past four years, dividend payout ratio has fallen, thanks to rapid spurt in net profit. The company has already disbursed 33% of its reported book profits for April-December ’07 via interim dividends.
Praj’s performance during the quarter ended December ’07 was lacklustre as it is in an investment phase currently. Its profit grew by 17.2% to Rs 39.4 crore, while net sales rose by just 1.3% to Rs 180.2 crore. But employee costs and other expenses rose significantly.
VALUATIONS:
At the current market price of Rs 132.10, the scrip is trading at a price-to-earnings multiple (P/E) of 19.8 based on its earnings in the past 12 months, which is nearly half its P/E just a couple of months ago. Considering Praj’s current order book, ability to win new orders and investment in research & development, we expect the company to maintain its EBIDTA margins above 20%. For FY09, we expect Praj to report earnings per share (EPS) of Rs 10.1. This discounts the current market price by 13.1 times, which appears attractive for long-term investors.
RISKS:
Despite staying debt-free, the company has expanded its equity capital on several occasions to raise funds. This has resulted in dilution of earnings. If this trend continues in future, it will be detrimental to the interest of retail investors.
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