PRAJ INDS - R&D gains to turn things around

PUNE-BASED Praj Industries is yet to overcome some of the problems encountered by it. Although the leading provider of engineering and technological solutions for ethanol manufacturing posted a 31% rise in its quarterly net profit to Rs 39.6 crore for September 2009, the driving force has been other income and foreign exchange gains, while operations continued a weak march.

The company’s net sales for the quarter stood at Rs 200.7 crore, which were marginally better than the corresponding quarter of last year. Still, the company witnessed a 10% jump in its raw material cost. Despite a 3% Y-o-Y fall in employee cost and a 17.7% reduction in other expenditure, the operating profit for the September 2009 quarter was 7% lower on Y-o-Y basis to Rs 40.4 crore.

Praj Industries booked a foreign exchange gain of Rs 50 lakh on account of restatement of advances received from customers in foreign currency against a loss of Rs 11.3 crore in the September 2008 quarter. At the same time, the other income that represented income on investments and a reversal of doubtful debt provision, posted a 77% jump to Rs 9.8 crore, thanks to both these factors. Pre-tax profits rose 34.4% to Rs 48 crore, which translated into a net profit growth of 31% despite a slightly higher effective tax rate of 17.5% compared with 15.6% last year.

The company had a tough year in FY09 — particularly its overseas subsidiaries — due to the economic turmoil. As a result, it wrote off Rs 11.2 crore last year towards permanent diminution in the value of its investments in subsidiaries. At the same time, the company’s standalone profits for the year, too, dipped 15.5% to Rs 129.7 crore. Praj is almost debt-free with a cash balance of around Rs 130 crore, according to the FY09 consolidated balance sheet.

-fuels are driven more by mandates resulting from the government policies for climate change mitigation. The year 2008 witnessed a strong 38% jump in ethanol consumption over 2007, mainly driven by the US. Several countries in Europe and South-East Asia are currently in the process of implementing bio-fuel consumption mandates, which can result in a steady flow of orders for Praj Industries in the coming months. With these numbers, the company’s per share earnings for the trailing 12 months now stands at Rs 7.6. At the current market price of Rs 96.5, the scrip is now trading at a price-toearnings multiple of 12.7, which appears to be fair valuation. Praj Industries, which annually doubled its net profits between FY03 and FY08, has hit a rough patch in the past 18 months. While an economic revival globally will lift the performance of its subsidiaries and improve the growth outlook, the next phase of high-speed growth can be seen only once its investments in the R&D start to pay off.